The real estate industry can be incredibly lucrative for entrepreneurs, but the development process can be costly. This is where seeking capital like real estate development loans comes in. Finding lenders that offer a good loan program, a significant loan amount, and sometimes, a smaller down payment may be your way to go. So whether you’re breaking into commercial real estate, land development, or any other development projects, this article will detail what financing options are available to you.

What are real estate development loans?

Small business owners will rely on real estate development loans for either buying land that they will build on in the future or for ‌tearing down an existing building to build a new one. Real estate development loans are much-needed capital issued to borrowers that need money to build, break ground on a project, and hold the finished product through the leasing stage. 

Types of real estate development loans

The most popular types of real estate development loans include:

Acquisition loans

Acquisition loans are used to fund the purchase of land that isn’t developed. Unlike other financing options, these are strictly funds for the purchase of the property and do not include funding for any renovations or repairs which may be required. 

You can use them for:

• Single-family homes
• Townhouses
• Condo conversions
• Commercial properties
• Multi-family properties
• Shovel-ready land
• Mixed-use properties

Development Loans

These types of loans are used to make necessary improvements, including running water lines, leveling, or anything that’s necessary to turn land into a site for building. 

Acquisition and Development Loans

Commonly referred to as an A&D loan, these loans use a part of the proceeds to buy the property. Typically, a portion of the loan is used to purchase the undeveloped land, while the rest is allocated towards improvements. These improvements can include grading, installing sewer lines, subdivision of lots, and road construction.

Construction Loans

A construction loan is a short-term loan that covers the costs of custom home building. It fits in the bucket of specialty financing that is also referred to as a “self-build loan.” The builder typically takes out a construction loan to cover the costs of the project. These often come with higher qualifying standards and interest rates compared to traditional mortgage loans. 

The best development loan options

SBA CDC 504 Loans for Real Estate (U.S. Small Business Administration): These are longer-term (10-20 year) loans and are highly sought after for commercial real estate. They’re designed to spur economic development for fixed assets that can ‌acquire, modernize, or expand a business, as well as to refinance costs associated with such expansion.

The SBA 7 (a) Loan for Real Estate: ​​This is a popular lending option for small business owners who want to finance construction, renovations, modernizations, or long-term equipment purchases.

Conventional Bank Loan: Commercial lenders, including JPMorgan Chase, Bank of America, and US Bank offer commercial loans to qualified borrowers. Loan requirements, restrictions, and commercial real estate loan rates often vary based on the lender.

Microloans: Microloans are smaller loans often made by non-profit organizations (such as Community Development Financial Institutions (CDFIs) and other lending institutions with the goal of helping underserved entrepreneurs get access to capital.

Private Lender Loans: These loans can be from anyone with access to necessary capital and a willingness to invest it in your business venture. A specific institution does not back private lenders and they don’t carry a license to lend money. Private lender terms are typically easier to meet, and the duration in which they will lend will be much shorter because they are looking to make a quick profit from their investment.

How to qualify for a real estate development loan

Real estate loans may have varying qualifications depending on if you are looking to gain funding from financial institutions or private lenders. These differences include the type of business structure you have, like a nonprofit, sole proprietorship, C-corp, etc. However, here are some standard qualifiers for real estate development loans:

• Your business and/or your personal credit score.
• Cash flow and any capital that has been invested in your company.
• The appraised value of the property used to secure the financing to determine its current market value.
• A successful track record in business and development, which is used to project if you and your business can repay the loan, as well as the intended use of a loan.

Building business credit can be as vital as your personal credit, so Nav provides resources to help you jumpstart the process and monitor its progress.

How to apply for a development loan

It’s important to have the full picture of what’s required to receive a real estate development loan. The application process for each lender ‌varies, but these are some of the general requirements to know before you proceed:

1. Details about your business: 

• The start date of your business. 
• Your business address and phone number. 
• Your Employer Identification Number (EIN). If you are an unincorporated business (sole proprietorship) you may use your Social Security Number or Taxpayer Identification Number (TIN).
• Identification. If you don’t have a prior relationship with the lender, you will probably need to give them a driver’s license or passport to verify your identity. 

2. Undergo a credit check. Not all financing options will involve a personal credit check, but many will. Often, a personal credit check is a “soft” pull that doesn’t affect your personal credit score. Some lenders will also check business credit score. 

3. Verify your business revenue. This may include copies of recent bank statements or business tax returns with up-to-date financial statements. Some online lenders will ask you to link your business bank account so they can analyze your business revenues electronically and determine if you meet their requirements. 

4. You may also have to go through an appraisal process, especially if you are applying for a real estate development loan through a federally regulated financial institution.

What to look for in a real estate development loan

Consider all the factors of the loan you’re looking into — from the repayment terms to the fees to the type of loan — before applying. The best loan for you: 

• Fits with your needs
• Gives you enough funding
• Is manageable financially for your small business 

Before entering ‌any contract, make sure you understand the fine print and what the total cost will be over the life of the loan.

Also, consider the right repayment term for your business. A loan with a balloon payment may offer lower monthly payments, but it can cause problems down the road if you can’t make the last payment and can’t refinance the debt.

Nav offers small businesses an assortment of commercial loan products, small business loans, and commercial bridge loans. There, you can be matched with the best possible real estate development loan options based on the information you provide.