A loan to buy land that has not been developed, repaid from other income or from a later sale or development loan.
The OCC handbook describes land acquisition loans as financing for undeveloped land, often made together with development and construction loans. When they are made with no plan to develop soon, it calls them among the riskiest types of commercial real estate loans. The reason is simple: undeveloped land produces no cash flow in most cases, so the payments have to come from somewhere else.
That shapes what a lender asks for. The handbook says the borrower’s or guarantor’s ability to service the debt and the plan for repayment are key parts of the analysis, and that land loans made for speculative purposes should require considerable equity and be extended infrequently. It also says funding interest from an interest reserve is not appropriate for speculative purchases of raw land.
The supervisory loan-to-value limit for raw land is 65 percent, the tightest in the table. Example: on land appraised at $1,000,000, that is a loan of up to $650,000.
How it shows up in the data here
Bank call reports put land loans in the other construction and land line, together with commercial construction, so land alone cannot be separated. The combined balances held are ranked at construction books, and state lists are at construction lenders. Farmland is reported on its own line and is not counted here. No loan-level land loan records exist for banks.
Go further
- Construction lenders by state: Lenders with construction and land balances, state by state.
- Loan-to-value and loan-to-cost calculator: Check a land loan against the 65 percent limit.
- LTV and LTC calculator: Loan to value and loan to cost, the equity a lender will ask for, and the federal supervisory limit for the property type.
- Supervisory loan to value limits and HVCRE, explained: Two federal rules shape how much a bank will lend against real estate: a table of loan to value ceilings, and a capital rule that makes some construction loans cost the bank more to hold.
- Residential development loan package checklist: Lots and houses are repaid one sale at a time. A lender on a subdivision or a group of homes is underwriting how fast those sales will come and what happens to the loan if they slow down.
Related terms
- A&D loan: One loan that pays to buy land and to develop it into finished lots.
- Entitlements: The government permissions a site needs before it can be built on, such as zoning, plan sign-offs and permits.
- Horizontal development: The work that turns raw land into buildable lots: grading, streets, sewer and water lines and utilities, before any building goes up.
- As-is value: The market value of a property in its actual physical condition, use and zoning on the appraisal's effective date, with no credit for planned work.
- Supervisory LTV limits: Loan-to-value ceilings in the federal real estate lending guidelines, from 65 percent for raw land to 85 percent for improved property, that a bank's own limits should not exceed.
- Farmland loan: A loan secured by farm or ranch land and its improvements, usually made to buy or refinance the land and repaid over many years from farm income.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.