Commercial land loans

A land loan finances ground with no building on it: farmland on the edge of a growing metro, an entitled pad waiting for a construction loan, or acreage being subdivided with roads and utilities. The lender has no rent roll to underwrite. It is lending on your balance sheet, your income and your plan.

That is why the first question from any land lender is not “what is it worth” but “what happens next, and when.”

The supervisory limits by stage

Federal bank regulators set loan-to-value ceilings by how far along the land is. Bank policies must sit at or below them.

Stage	What it means	Federal ceiling for bank policy
Raw land	Unimproved, no entitlements or improvements under way	65% maximum LTV for raw land1
Land development	Site work under way: grading, roads, utilities, subdivision	75% maximum LTV for land development1
Construction	A building under a construction loan	80% maximum LTV for commercial, multifamily and other nonresidential construction1

Two measurement rules matter on a purchase. On an acquisition, LTV uses the lower of the purchase price or the appraised value². And LTV is measured at origination and counts all senior liens on the property¹, so a seller carryback or second loan counts against you.

Entitlements usually change the conversation more than the table does. A site with zoning, a signed-off site plan and utility capacity in hand is a step from a construction loan, and lenders treat it as less speculative than a field with a plan.

Worked example: what a land loan really costs (illustration)

You buy a commercial site for $1,500,000; it appraises at $1,600,000. The bank sizes on the lower purchase price and offers 50% LTV, interest only at an illustrative 8.50%, for 24 months.

Item	Amount
Loan (50% × $1,500,000)	$750,000
Cash at closing (before costs)	$750,000
Annual interest ($750,000 × 8.50%)	$63,750
Property tax and insurance (illustrative)	$25,000 a year
Annual carry paid from your other income	$88,750
Two-year carry	$177,500

The bank’s underwriting question: does your global cash flow cover that carry with room to spare, and can your liquidity fund it if the plan slips? Some banks will let you build an interest reserve into the loan; that raises the loan amount, which the ceiling still limits.

How the loan ends

Every land loan needs a defined exit. Lenders accept three:

1. A construction loan that pays off the land loan at closing. The land becomes your equity in the project, and for bank construction loans its appraised value can count toward the contributed capital the HVCRE rules require: 15% of appraised as-completed value³. See construction loans.
2. A sale of the site or of finished lots, with release prices per lot on a development loan.
3. A refinance into a longer land loan, which is the weakest exit and the one lenders like least.

What land lenders check

• Zoning and entitlements: current zoning, entitlements in hand, and the path and timeline to the rest.
• Access and utilities: legal access, water, sewer and power capacity, and who pays for extensions.
• Environmental: a Phase I report, and wetlands or flood zone review on undeveloped sites.
• Survey and title: easements, encroachments and any restrictions that limit what can be built.
• Your plan: a budget and schedule to start construction or sell, and who your construction lender will be.
• Your income and liquidity: enough to carry the loan through delays.

Common deal killers

• No plan or timeline. Banks rarely finance land held for appreciation alone.
• Open entitlement risk such as a needed rezoning or a disputed access easement.
• Leverage requests above the ceiling, often from a buyer expecting land to finance like a building.
• Concentration. Banks near the supervisory screen for construction and land (100% of total capital⁴) may decline regardless of the deal.
• Environmental findings on former farm, industrial or fill sites.

Alternatives

• Seller financing is common on land and can fill the gap a bank leaves.
• Private and hard money lenders fund faster, at higher leverage and much higher cost, usually for short terms: hard money commercial loans.
• Owner-users building their own facility should price SBA 504, which can cover land and construction together for an occupied building: owner-occupied commercial mortgage.
• Credit unions lend on land in some markets under their own board policy limits: credit union commercial loans.

Model the carry and payment options with the interest-only vs amortizing calculator.