Every skyscraper, subdivision, or apartment complex began as empty land. Turning that dirt into income-producing real estate requires vision, capital, and a lot of patience. Ground-up development loans fund these projects — but they’re among the riskiest forms of real estate lending. They cover not just sticks and bricks, but also entitlements, infrastructure, and timelines that can stretch years.
What Makes Development Different?
Fix & flips might run 6–9 months. New construction might run 12–18 months. Ground-up development? It can take 2–5 years, depending on scale and approvals. The risks multiply: zoning battles, environmental studies, market cycles, cost inflation. Lenders know this, which is why terms are stricter and equity requirements higher.
Phases of Development
- Land Acquisition: Buying raw or entitled land.
- Entitlement: Zoning, permits, approvals.
- Site Work: Utilities, grading, roads.
- Vertical Construction: Actual buildings.
- Stabilization/Exit: Lease-up, sale, or refinance.
Investor Story: The 24-Unit Gamble
David, a mid-level developer, secured financing for a 24-unit townhouse project. His lender required 30% equity and full site plans. When lumber spiked mid-build, his contingency saved him. Despite a 20% cost overrun, rents had risen enough to cover debt. He refinanced into agency debt and netted a solid long-term hold.
Investor Story: The Permit That Never Came
By contrast, Lily acquired land for a boutique condo building but underestimated neighborhood resistance. The zoning board dragged approvals for 18 months, then denied her variance. Her interest reserves ran dry. The project collapsed before it began. Lesson: entitlement risk can kill deals before the first nail is hammered.
Typical Terms in 2025
| Term | Range |
|---|---|
| Loan Length | 12–36 months, with possible extensions |
| Rates | 10–14% (private) or 7–9% (bank) |
| Equity | 25–40% required |
| Draws | Multiple stages, heavy oversight |
| Collateral | Land + improvements |
Risks Unique to Development
- Entitlement Risk: City, county, or community opposition.
- Market Risk: Long timelines make you vulnerable to cycles.
- Cost Risk: Inflation in labor/materials compounds.
- Execution Risk: Multiple contractors, subs, and phases to manage.
Checklist Before You Build
- Do you have zoning and entitlements locked in?
- Is your equity committed and seasoned?
- Do you have contingency (15–20%) baked in?
- What’s your exit (sell, hold, refinance)?
- Have you stress-tested for interest rate or rent changes?
FAQs
Can I finance land and development together? Some lenders allow this, but many want land purchased first, then construction financed.
Do I need experience? Almost always. Ground-up development is rarely financed for first-timers without a strong team.
What’s the role of interest reserves? Lenders often require an upfront reserve to cover 12–18 months of payments during construction.
Bottom Line
Ground-up development loans fund projects with massive potential — and massive risk. They’re not for casual investors. If you can navigate entitlements, secure equity, and manage multi-year projects, the payoff can reshape your portfolio. But walk in unprepared, and the dirt may be the only thing you own when it’s over.
