Up until that point, the financing is basically bare land mortgage financing on property to be developed.
In many cases, the land financing leading up to development and the funding for development of the land and installation of services is provided through private mortgage loans.
Going one step further, subdivision development mortgage financing is a very narrow slice of the overall private mortgage lender market place. The lenders that will fund these types of deals are going to either be highly knowledgeable of the subdivision development business, or developers themselves.
One of the reasons that a developer would provide this type of financing is to potential gain access to the development in the event that the existing owners fail to bring it to a state of completion. This would then provide the developer with an opportunity to acquire the property in exchange for the outstanding mortgage or another form of capital.
The lending is very specialized due to the fact that in the event of default, the lender has to be able to know how to recoup the mortgage funds advanced. Without being able to understand how to manage the risk of mortgage lost, its very unlikely that suitable land servicing financing will be located.
The key to subdivision development loans is the strength of the exit strategy to repay the debt.
For instance, if the developer expects to partially build out the serviced lots, and sell the remaining lots to other builders, then the potential absorption rate of housing inventory in that area along with the financial stability of any presold buyers of lots, whether to consumers or builders, is going to be important to the risk assessment of any potential lender.
If the developer plans to build out lots themselves, the funding for the above ground construction is typically arranged as a separate type of construction financing versus a land servicing loan.
The cost of financing is going to vary with the strength of the overall project and the exit strategy for the lender.
If the subdivision development is going to be completed over a series of years, the financing may have to be arranged in phases and take into account lot sales milestones so that lender risk can be better managed.
If you have a subdivision development loan financing requirement in Ontario and would like to better understand your options for either a land servicing loan or a construction loan, I suggest that you give me a call so we can go through your requirements together and discuss potential subdivision development financing solutions available to you.