Why land loans size at 50% loan-to-cost
Land does not produce income, so it does not get underwritten like a building. A plain-English walk through how a land lender thinks about basis and exit.
A stabilized apartment building generates rent. Rent covers debt service, and a lender can underwrite the property's ability to pay. Land generates nothing but a tax bill, so a land loan cannot be underwritten on cash flow. It gets underwritten on two other things: cost, and the exit.
That is why the headline number for entitled land is 50% loan-to-cost rather than a debt service coverage ratio.
What 50% loan-to-cost means in dollars
Take a parcel with a $10M purchase price and a $2M entitlement budget — engineering, legal, impact fees, carrying costs. Total cost is $12M.
At 50% loan-to-cost, the land loan is $6M. The sponsor funds the other $6M, and that equity does not get paid back at closing. It sits in the deal until the parcel is sold or refinanced into a vertical construction loan.
That is the trade. The lender accepts zero cash flow during the term and takes collateral position on an asset that can only be monetized through a sale or a take-out. In exchange, the borrower accepts a lower leverage point and a more expensive rate: currently 12% interest and 3 points.
Why not 70%?
Because the exit is not guaranteed to anyone. Entitled land trades on a multiple of finished-lot value, and finished-lot values move. If leverage runs at 70% of cost and the exit softens by 20%, the lender is suddenly under-secured on an asset it cannot operate, rent, or easily sell in pieces.
Fifty percent gives the lender room to sell the collateral in a bad market and still get whole. It is not a comment on the borrower's credibility. It is a comment on the liquidity of dirt.
Filling the other half
Most sponsors do not want to write a $6M check. That is where the rest of the stack comes in:
- Mezzanine debt sits behind the senior land loan and can stretch total capitalization to about 80%, at a coupon that reflects the extra risk — currently around 14%.
- Preferred equity from a capital partner who wants a fixed return and no involvement in the entitlement.
- JV equity, where a GP brings capital and takes a promote on the back end instead of a fixed coupon.
Each one solves a different problem. Mezz buys speed and preserves sponsor ownership. Preferred equity buys certainty for the capital partner. A JV buys capability — someone to actually run the approvals.
When the number moves
Leverage is a function of how certain the exit is. A parcel with a signed purchase contract from a national homebuilder at a fixed price is a different loan than a parcel with a broker's opinion of value. Expect the leverage point to move up as certainty moves up: recorded approvals, executed utility agreements, and a written land take-out will all help.
The question worth asking first
Before arguing about the rate, ask what the loan is actually sized against. If the answer is 50% of a cost budget you control and can document, you know exactly where you stand — and you can plan the equity before you sign the purchase contract instead of after.
Rodney McIlroy
Have a land deal that needs an answer, not a brochure?
Entitled land loans from $5M to $50M, mezzanine up to 80% of capitalization, JV equity and bridge capital — reviewed personally.
