Why Are Rates Higher for Land Loans?

When it comes to commercial real estate loans, higher risk, means a higher rate. It’s one of those ‘unwritten laws’ of business. One that’s followed because even experienced, professional developers can have trouble getting new development projects started. Which is why traditional lenders like banks tend to run away from land deals. And when you add in questions like will the borrower have enough money for the next phase of development, and whether essential infrastructure outside of the developers control will arrive as promised, it’s no wonder the risk/rate equation often comes out high.

“Sometimes people looking for land loans aren’t aware of the risks involved and that risk has a big impact on rates,” said Kevin Wolfer, President and CEO, of Kennedy Funding LLC. Wolfer’s firm recently closed on a $1.1 million loan for a 58.8-acre development site in Cedar City, Utah.

“Rates are just one expense when you’re looking to turn a piece of raw land into a profitable development and though they may seem high, the opportunity cost might be higher,” adds Wolfer. “A bridge loan can get things moving and that can have a huge impact on the ultimate value of the project,” he adds.

Bridge loans can put stalled land deals into motion. Kennedy Funding’s creative financing expertise enables the closing of equity-based loans of up to a 75% loan-to-value ratio, from $1 million to more than $50 million, sometimes in as little as five days, including just two days for commitment and just days to subsequently close. The principals of the company have closed more than $2.5 billion in loans to date.

When all the considerations are factored in, the ‘high’ rate for a bridge loan can be an expense that’s not only affordable in the grand scheme of things but essential to making a project happen.