Commercial land loans: vacant and development land

Zoning and permitted uses, because the value depends on what can be built. Services: power, water, sewer and road access, and the cost to connect if absent. Approvals: a development approval in place lifts the value and the LVR substantially. Location and demand for the end use. Environmental issues, flooding and contamination. And the borrower's plan: a business buying land to build its own premises with a construction loan lined up is a different proposition from an investor holding land speculatively.

A business buying land to build a warehouse or showroom is financed as a land loan followed by a commercial construction loan, often approved together. The land settles at 60 to 65 per cent, the construction component is added once the building contract and approvals are in place, and the combined facility converts to a standard commercial loan at completion on the strength of the business as tenant. Lenders with small business units handle this well.

Land held for development is financed on land bank terms: 50 to 65 per cent LVR, interest capitalised, twelve to twenty-four month terms, with the exit being the development itself. Land held for resale or long-term appreciation is treated cautiously by banks and often financed privately. Subdivision projects move into development finance once the works start.

GST applies to commercial land sales by registered vendors, recoverable by a registered buyer but funded at settlement. Stamp duty at commercial rates. Holding costs: land tax, rates and interest, with no income to offset them, which lenders include in the assessment. A land loan is expensive to hold for long, which is why lenders want to see the build or sale timeline.