Will the bank approve my loan?
A popular investment strategy is to buy vacant commercial land to subdivide and develop or to hold on to the land and sell at a higher price in a few years time.
It sounds like a great idea on paper but will the banks go along with your strategy?
It all depends on the location, access to utilities and services, zoning and land size.
How much can I borrow?
You can borrow between 50-70% of the land value but this will vary depending on the lender and the size and nature of the property:
- This general rule applies to land over 60 hectares in size
- For land between 2.2 hectares and 60 hectares and zoned residential, you may be able to borrow between 80% all the way up to 95% of the land value
- For land up to 50 hectares with a house on the block, you may be able to borrow up to 95% of the property value
- For vacant farmland, you’re generally restricted to 60% but you may be able to borrow up to 70% if you have a strong situation.
Despite this, if you have a guarantor or enough equity in a residential property that you own, you may be able to borrow up to 100% of the land value and qualify for a longer loan term (25 years) than the standard loan terms offered with commercial finance (10-15 years).
You may also still get the same commercial interest rates as if you were buying a commercial building.
Call us on 1300 889 743 or complete our free assessment form to speak with one of our mortgage brokers.
What do banks assess?
As with vacant residential land, lenders generally want to know whether they can easily sell the land in the event that you default on your vacant commercial land.
That’s why they take into consideration the following:
Purpose
Some lenders may require you start developing the commercial land within the next one to two years and will want to see evidence of this prior to approving your loan.
However, some lenders will allow so-called “land banking”, which can potentially pay significant dividends when you later decide to sell the land to a property developer.
Location and zoning
Commercial land can either be zoned com for commercial use (either industrial, commercial/retail or for agricultural use) or will allow for residential development.
Depending on the location and local demographics, this can either increase or reduce the potential market for the land.
Banks are risk-averse so they want to know whether there is a market for the property.
However, if your intention is to buy the land as a Greenfield site to sell later at a higher price to developers, some lenders may consider this depending on the size of the land and your overall financial situation.
Land size
This is usually the first thing banks will consider.
Generally, the larger the land size, the less you can borrow but there are exceptions if there is a house on the property. This is usually the case with farmland.
Services
The property must be able to connect to the electricity grid without excessive costs.
The ability to access town water and sewerage are usually also required although, for farmland, which falls under the agribusiness side of lending, this may not be necessary since tank water and septic tanks can be installed instead.
Access
This requirement is even more essential when it comes to commercial loan.
Access means that the land must have direct access using an all weather road.
Dirt roads are acceptable as long as they’re well maintained and the property can be accessed by a standard vehicle, not a 4WD.
Why do banks allow land banking?
When it comes to residential land, banks are highly against land banking, which is a form of speculative investing.
This is because you’re relying on zoning changes or, in the case of residential buyers, you’re buying on the pretence that the land will eventually be subdivided.
In the meantime, land prices can fluctuate dramatically, particularly in rural areas which is a risk lenders aren’t willing to take.
When it comes to vacant commercial land, some lenders will allow land banking since you’re borrowing at a lower Loan to Value Ratio (LVR).
You also generally need to have a strong income and asset position in order to qualify for this type of lending.
Then again, some other banks may require you to start developing within 1-2 years.
It all depends on the lender and the strength of your application. We can help!
Please give us a call on 1300 889 743 to speak with one of our mortgage brokers about the type of investment you’re looking to make.
What about contaminated land?
Soil, land and groundwater contamination is common with commercial land but it’s often overlooked by investors.
Contamination can affect all types of commercial land and some typical examples include properties that were previously used by a factory, petrol station or for farming.
Common contaminants include:
- Oil and fuel
- Chemical and toxic waste
- Pesticides and fertilisers (related to agribusiness)
- Biodegradation
- Lead
- Arsenic
- Asbestos
Will the bank accept contaminated land?
It really depends on what you intend to do with the land.
For example, you may come across vacant land that was previously used as a landfill or garbage dump and you find out that the land or the water supply is contaminated.
If your intention was to taking advantage of zoning changes and develop a block of units, the bank may not accept your application since your development project would be denied without the all clear from the Environmental Protection Agency (EPA).
As of their valuation of the property, the bank valuer may indicate that a specialised environmental site audit should be undertaken.
It’s crucial that you don’t down a deposit down until you get pre-approved for the commercial loan.
Otherwise, you could be sued by the vendor (seller) for not having the finances need to proceed with the sale, not to mention the fact that you’ll lose your deposit.
What due diligence should I undertake before purchasing?
Like buying a commercial property, you should be asking why the vendor is selling the land in the first place.
What’s the history of the land and what was it previously used for?
Be wary of vendors that refuse to disclose this information and prior to making an offer check, with the local council or EPA if you believe there is a contamination issue.
You can even be really cautious and make it a requirement that the Heads of Agreement (Contract of Sale) become null and avoid should you later find the soil to be contaminated.
If the vendor does disclose that the land is in fact contaminated, ask what has been done to rectify the contamination and the warranties in place for the site clean-up measures that were undertaken.
You should also ask for an indemnification clause to be included in the contract, supported by guarantees, where the vendor indemnifies you for any loss or damage if contamination is found after completion.
Can I get a development loan?
We can help you qualify for a:
- Commercial development loan: If you’re building a block with more than 4 units or a standard commercial property, you may able to borrow up to 75% of the land and construction costs (hard costs).
- Residential development loan: For blocks of units less than 4, you may be able to borrow up to 95% of the hard costs.
Will I pay CGT or GST when selling the land?
Since the purpose of buying vacant commercial land is to either build residential or commercial property or to subdivide the land and sell, sales proceeds will be considered ordinary income and will be subject to the Goods and Services Tax (GST).
However, if you plan to buy the vacant land, develop property (either commercial property or residential) and the rent it out, the land would be considered a capital investment and would be subject to Capital Gains Tax (CGT) instead.
You should speak to your accountant before making a decision on tax-related matters.
Do you need a commercial loan?
Get in touch with one of our experienced mortgage brokers by calling 1300 889 743 or by completing our free assessment form.
We can let you know if you qualify for a vacant commercial land loan!