Land Banking's Role in Builder Success
As the "land-light" model continues to gain traction, and as traditional sources of land development loans remain scarce, land bankers’ creative off-balance sheet strategies are becoming increasingly significant.
What is Land Banking?
Land banking involves acquiring and holding land for future construction, providing builders with capital and an off-balance sheet vehicle. Land bankers act as capital partners, offering a debt-like instrument with two primary purposes:
Acquiring paper lots and funding land development
Holding finished lots
Typically, the builder sources land for future development, securing zoning and entitlement. Prior to or upon closing of the land parcel, the builder and land banking partner agree on a development budget, takedown schedule, and price per finished lot. The land banker holds title to the land and earns fees until all finished lots are purchased.
Benefits of Land Banking
Capital Efficiency: Land banking offers greater advance rates compared to traditional A&D loans. It allows builders to control land positions with less capital, freeing up funds to invest in additional land opportunities. Financing is non-recourse, and the takedown obligations are not considered debt by banks, nor are they typically included in credit ratios.
Risk Mitigation: The flexibility of land banking reduces builder risk in fluctuating market conditions. Builders can opt out of the deal by forfeiting the deposit placed with the land banker, minimizing exposure.
Reliable Homesite Delivery: Predefined schedules and pricing ensure cost transparency with lot takedowns matching planned starts.
It’s critical to find a land banker whose strategy aligns with your company’s goals. Key factors include geographic market, project and product design, profitability, and production velocity and duration. The cost of capital is important, of course, and rates are improving with the increasing number of land bankers driving more competition than ever before.
The Whelan Advisory team remains actively engaged with land bankers to facilitate introductions for our private builder clients as they seek capital to support their growth plans and capital needs. We also see land bankers involved in M&A transactions; the lot financing terms and structure are similar, as this three-way agreement allows the buyer to control the new lot positions with less initial cash outlay and improved capital returns. Please contact us to start the conversation.
