A land development loan provides the capital that developers need to transform raw, unimproved land into buildable lots complete with roads, utilities, and grading. Whether you are planning a residential subdivision, a commercial park, or a mixed-use community, understanding how these loans work is the first step toward structuring a deal that pencils out.
Unlike a traditional mortgage that finances an existing structure, a land development loan funds the infrastructure work required before any vertical construction can begin. Lenders evaluate these projects differently, interest rates tend to run higher, and draw schedules are tied to site-improvement milestones rather than framing or roofing stages. Below, we break down every element of the land development loan process so you can approach lenders with confidence.
If you are exploring a land development project and want to understand your financing options, contact the team at Clearhouse Lending for a no-obligation consultation. Our advisors specialize in horizontal construction loans and can help you structure the right capital stack.
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What Is a Land Development Loan?
A land development loan is a short-term financing product designed to cover the costs of converting raw or unimproved land into finished, buildable lots. The loan typically pays for grading, road construction, utility installation, stormwater management, and other site improvements that must be completed before vertical construction begins.
These loans are sometimes called "A&D loans" (acquisition and development) when they bundle the land purchase with the development budget into a single facility. According to the Office of the Comptroller of the Currency, land development lending falls under the commercial real estate (CRE) category and carries elevated risk weightings because the collateral does not yet generate income.
Borrowers include residential subdivision developers, commercial land developers, homebuilders acquiring and improving lots, and investors who plan to sell finished pads to end-user builders. The loan amount is based on the as-completed appraised value of the finished lots rather than the current value of the raw land. Lenders structure these loans with milestone-based draws, meaning the developer receives funding in increments as work is completed and verified by an independent inspector.
How Does a Land Development Loan Differ from a Construction Loan?
A land development loan funds the horizontal work that happens before any building goes up, while a construction loan funds the vertical work of erecting structures on those prepared lots. Understanding this distinction is critical because each loan type carries different underwriting criteria, draw schedules, and exit strategies.
With a horizontal construction loan, the focus is on earthwork, grading, roads, curbs, gutters, storm drains, water lines, sewer lines, and electrical conduit. With a vertical construction loan, the focus shifts to foundations, framing, roofing, and interior finishes. Many projects require both loan types in sequence, and some lenders offer combined facilities that roll the development phase into the construction phase.
The risk profile also differs significantly. Land development loans are considered higher risk because the collateral is unimproved land that may have limited resale value if the project stalls. Construction loans, while still risky, benefit from the fact that partially completed structures have more recoverable value. As a result, land development loans typically carry higher interest rates, lower loan-to-value ratios, and stricter borrower qualification standards. Lenders also scrutinize the developer's exit strategy more carefully because there is no income-producing asset to fall back on during the development period. For a deeper comparison, see our guide on horizontal vs vertical construction loans.
What Are the Requirements for a Land Development Loan?
Lenders require a strong combination of borrower qualifications, project feasibility, and adequate equity to approve a land development loan. Most lenders look for a credit score of 680 or higher, a proven track record of completed development projects, and liquid reserves sufficient to cover cost overruns.
On the project side, you will need to provide detailed engineering plans, environmental assessments, a market study demonstrating demand for the finished lots, and all entitlements or zoning approvals. According to United Capital Source, documentation typically includes personal and business financial statements, two years of tax returns, a detailed project budget, and a comprehensive business plan outlining the development timeline and exit strategy.
The down payment is one of the most significant requirements. The FDIC recommends a maximum 75% loan-to-value ratio for land development loans, meaning borrowers should expect to bring at least 25% equity. For raw, unentitled land, that ratio drops to 65% LTV, requiring 35% down. In practice, many lenders require 25% to 50% equity depending on project risk and borrower experience. Developers who already own the land can use their existing equity toward the down payment requirement, which significantly reduces the out-of-pocket cash needed at closing.
How Much Can You Borrow with a Land Development Loan?
The maximum loan amount depends on the appraised as-completed value of the finished lots, the total development budget, and the lender's LTV policy. Most land development loans range from $500,000 to $50 million or more, with LTV ratios between 50% and 75% of the as-completed value.
For example, if a developer plans to create a 50-lot subdivision with finished lots appraised at $100,000 each, the as-completed value would be $5 million. At a 65% LTV, the maximum loan would be $3.25 million. The developer would need to contribute the remaining $1.75 million from equity, either in cash or through land equity if the parcel was already owned.
Development costs vary widely by location and project scope. According to HomeGuide, land development costs average $20,000 to $100,000 per acre, while per-lot infrastructure costs can range from $15,000 to $60,000 depending on the density, terrain, and local requirements. Major cost categories include grading, road construction, water and sewer line installation, storm drainage, electrical and gas conduit, landscaping, and permitting fees. In markets with high impact fees, those costs alone can add $10,000 to $25,000 per lot. Use our commercial mortgage calculator to model different loan scenarios and see how the numbers work for your project.
What Interest Rates Do Land Development Loans Carry?
Land development loan interest rates typically range from 7% to 12% in the current market, though rates can reach 15% or higher for riskier projects involving raw, unentitled land. These rates reflect the elevated risk lenders take when financing unimproved property that does not generate income during the development period.
Rates are usually variable and tied to the prime rate or SOFR (Secured Overnight Financing Rate) plus a spread of 2% to 6%. According to Finance Lobby, the exact spread depends on the borrower's creditworthiness, project risk, loan size, and local market conditions. Borrowers with strong track records and projects in high-demand markets will typically secure rates at the lower end of the range.
Most land development loans feature interest-only payments during the development period, with interest calculated only on the drawn balance rather than the full commitment amount. This structure helps developers manage cash flow since they are not paying principal or interest on unused funds. Origination fees typically run 1% to 3% of the loan amount, and lenders may also charge inspection fees, draw fees, and extension fees. When budgeting for interest carry, developers should account for 12 to 24 months of interest on the average outstanding balance, which usually represents 50% to 70% of the total commitment as draws ramp up over time. For more on how construction interest rates work, see our construction loan interest rate guide.
Want to estimate your monthly interest costs? Try our commercial bridge loan calculator to model different rate scenarios.
What Are the Stages of Land Development Financing?
Land development financing typically unfolds across three to five distinct stages, each with its own funding source and risk profile. Understanding these stages helps developers plan their capital needs and negotiate better terms with lenders.
The process begins with pre-development, which includes feasibility studies, environmental assessments, surveying, and entitlement work. Many developers fund this stage with personal capital or a pre-development loan because most traditional lenders will not finance speculative work before entitlements are secured. Pre-development costs typically run 3% to 8% of the total project budget and can take anywhere from three months to over a year depending on local approval timelines.
Once the land is entitled, the developer secures a land acquisition loan or uses the acquisition component of an A&D loan to purchase the parcel. This is followed by the development phase, where the A&D loan funds the actual horizontal improvements. Draws are released as milestones are completed, with the lender sending an inspector to verify work before each disbursement. A typical land development project may have four to eight draw milestones, including clearing and grading, road base installation, utility rough-in, storm drainage, curb and gutter, final paving, landscaping, and final inspection. For more on the acquisition phase, read our land acquisition financing guide.
The final stages involve either selling the finished lots to builders or transitioning into a vertical construction loan. Developers who plan to sell lots typically begin marketing them during the development phase so that sales close shortly after infrastructure is complete. Those who plan to build vertically will need to arrange a separate construction facility or negotiate a rolling conversion with their existing lender.
How Do Lenders Evaluate Land Development Projects?
Lenders evaluate land development projects through a comprehensive underwriting process that examines the borrower, the market, and the project itself. The goal is to assess whether the finished lots can be sold or built upon quickly enough to repay the loan within the term.
Borrower evaluation focuses on experience, net worth, and liquidity. Most lenders want to see that the developer has completed at least two to three similar projects, maintains a net worth equal to or greater than the loan amount, and has liquid reserves covering 10% to 20% of the total project cost. Credit scores of 680 or higher are standard, though some private lenders may work with lower scores at higher rates.
Market evaluation includes a demand analysis for the finished lots, comparable sales data, absorption rate projections, and an assessment of competing developments in the area. Lenders want evidence that the lots will sell within the loan term, typically 12 to 36 months. They will also examine local employment trends, population growth, school district ratings, and housing permit data to gauge the strength of demand in the target market.
Project evaluation covers the development budget, engineering plans, entitlement status, environmental reports, and the contractor's qualifications. Lenders will order an independent appraisal based on the as-completed value and may also require a Phase I environmental site assessment. The total cost of the project, including land, soft costs, and hard costs, must support the requested loan amount within the lender's LTV guidelines. Many lenders also require the developer to provide a detailed project timeline with Gantt charts showing each phase of the work, along with a contingency budget of at least 5% to 10% of total hard costs.
If you have a land development project ready for financing, reach out to Clearhouse Lending to discuss your options. We work with experienced developers on horizontal construction and subdivision projects nationwide.
What Happens After the Land Is Developed?
Once the horizontal improvements are complete and the lots are finished, the developer has several exit strategies available. The most common are selling individual lots to homebuilders, refinancing into a longer-term loan, or transitioning into a construction loan to build vertically on the finished lots.
Lot sales are the fastest exit. The developer markets the finished lots to regional and national builders, and as each lot closes, the proceeds pay down the development loan. Most lenders require a release price for each lot, typically 110% to 130% of the pro-rata loan balance, ensuring the loan pays down faster than the collateral is released. Savvy developers begin pre-selling lots during the development phase by executing takedown agreements with builders, which gives the lender confidence in the exit strategy and can result in more favorable loan terms.
For developers who plan to build homes or commercial buildings on the finished lots, the next step is a vertical construction loan. Some lenders offer a rolling option that converts the land development facility into a construction line, allowing the developer to draw funds for vertical building without closing a new loan. This can save significant time and closing costs. The rolling structure works especially well for phased subdivisions where the developer is building and selling homes in stages across different sections of the project. Our home builder construction loans guide covers the transition from finished lots to vertical building in detail.
What Are Common Mistakes to Avoid with Land Development Loans?
Developers who are new to land development financing often make costly errors that can derail a project or erode profit margins. The most common mistake is underestimating the total development budget, especially for soft costs like engineering, permitting, impact fees, and legal work, which can add 15% to 25% on top of hard construction costs.
Another frequent error is failing to secure entitlements before seeking financing. Most institutional lenders will not fund a land development loan until zoning, platting, and engineering approvals are in place. Attempting to close a loan before entitlements are complete typically results in higher rates, lower LTV, or outright rejection.
Overestimating absorption rates is equally dangerous. If finished lots do not sell as quickly as projected, the developer faces extension fees, additional interest carry, and potential default. A conservative absorption analysis that accounts for market slowdowns should be a core part of every project underwriting.
Choosing the wrong lender is another pitfall. Banks and credit unions may offer the lowest rates but require lengthy approval processes and rigid draw structures. Private lenders close faster but charge more. Matching the lender type to the project's timeline and risk profile is essential. For more on structuring development deals, see our ground-up development financing guide.
What Are the Most Common Questions About Land Development Loans?
Can I get a land development loan with no experience?
It is possible but challenging. Most institutional lenders require at least two to three completed projects of similar scope. First-time developers can improve their chances by partnering with an experienced developer, hiring a seasoned general contractor, or working with private lenders who place more weight on the project's merits than borrower history. Expect to pay higher rates and provide a larger down payment.
How long does it take to close a land development loan?
The timeline varies by lender type. Bank loans typically take 45 to 90 days due to committee approvals and regulatory requirements. Private and bridge lenders can close in 15 to 30 days if the project has clean entitlements and a strong borrower. Preparing a complete loan package with all engineering plans, environmental reports, and financial documentation before approaching lenders can significantly speed up the process.
What is the difference between raw land, unimproved land, and improved land?
Raw land has no improvements or utilities and is often not yet zoned for development. Unimproved land may have some basic access or utilities nearby but lacks site-specific improvements like roads or grading. Improved land, also called finished lots or developed pads, has all infrastructure in place and is ready for vertical construction. Each category carries a different risk level and LTV limit.
Can I use land equity as my down payment?
Yes. If you already own the land free and clear or have significant equity in it, most lenders will count that equity toward the required down payment. For example, if you own a parcel worth $1 million and need a $2 million development loan at 65% LTV, your land equity satisfies the equity requirement. This is one of the most common ways experienced developers avoid large cash outlays.
What happens if my project takes longer than the loan term?
Most land development loans include an extension option, typically for six to twelve months, with an extension fee of 0.25% to 1.00% of the outstanding balance. If extensions are not available or have been exhausted, the developer may need to refinance with another lender, bring in additional equity, or negotiate a modification with the current lender. Building a time cushion into your original project timeline is strongly recommended.
Are land development loans available for commercial projects?
Absolutely. Land development loans finance infrastructure for commercial subdivisions, industrial parks, retail pad sites, and mixed-use communities. The underwriting process is similar, though commercial projects may face additional scrutiny around market demand, pre-leasing or pre-sales activity, and the developer's commercial track record. Clearhouse Lending offers horizontal construction financing for both residential and commercial land development projects.
Ready to move forward with your land development project? Contact Clearhouse Lending today to discuss financing options with a development loan specialist. We offer competitive rates on horizontal construction, bridge, and A&D loans for qualified developers.