Editor’s Note: this is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to [email protected] and we will try to answer it.
Tom S. wrote in asking, I am a hard money lender and have loaned on all sorts of collateral, but I’ve never loaned on raw land before. A builder wants to pledge some land as collateral. What special risks does raw land collateral pose to a lender?
Raw land is often inventoried by developers and is usually in some form of transition.
Your borrower will probably have applied for one or more of the following: zoning modifications or variances, platting, PUDs, utility permits, easements or agreement with neighboring owners, TIF or redevelopment funds and recapture and infrastructure agreements. These rights and agreements are generally referred to as “entitlements.”
The entitlements may be granted just to the borrower or may run with the land. The entitlement process necessarily involves interaction with local governmental authorities, and possibly state and federal authorities in some projects. Because entitlements are issued throughout the development timeline, it is nearly impossible for a lender to enter the project only after all entitlements are obtained.
Therefore, before you loan against raw land, you should understand: (1) what entitlements are critical for the development, (2) the likelihood that they will be obtained and (3) how to obtain the benefit of them once they are obtained. The ownership and existence of these entitlements is often the critical factor in turning otherwise limited-use raw land into a developable, financially lucrative commercial project.
Your question asked about special risks having to do with land. Keep in mind that if your borrower ultimately files for bankruptcy protection to forestall any foreclosure action by you, you need understand the additional roadblocks that will create.
This 90 Second Lesson is based, in substantial part, on material reprinted from “Commercial Bankruptcy Litigation 2d” and “Strategic Alternatives For and Against Distressed Businesses,” with permission of Thomson Reuters. If you are a Westlaw subscriber, you can read more about this particular subject here.]
The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.
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