When an investor purchases land to build on, the next step is land development and financing. “Land development” cannot be precisely defined; generally, it refers to the physical, legal, and engineering processes needed to convert raw land to land (or lots) on which buildings can be placed.

Land development can be classified into the following six stages:

  • Annexation. Taking the necessary steps to have land included within the boundaries of a municipality so that it can be eligible for municipal services.
  • Zoning. Taking the necessary steps to obtain a zoning classification that permits the proposed use of the land.
  • Surveying. Preparing an accurate and detailed survey of the land, showing not only the boundaries but also grades, drainage, topography, and other features of the land.
  • Land planning. Drawing up a plan for the use of the land that is consistent with its physical characteristics, applicable zoning and land use regulations, and projected demand for types of land use.
  • Subdividing. Platting (mapping) the land into blocks and lots in compliance with local laws and subdivision control ordinances.
  • Physical improvements. Changing or improving the land by grading; landscaping; installation of streets, sidewalks, and sewer, water, electric, and other utility lines, drainage and retention basins, and similar physical improvements.

Loans for land development are usually obtained from the same institutional sources that provide land acquisition loans. One important source of financing for land loans, the seller that takes back a purchase money mortgage or sells on an installment basis, is unavailable for development loans because these require the provision of actual cash rather than merely the extension of credit on the sale of the land. Thus, if institutional financing for land development is not available, the developer must seek other noninstitutional sources. One possible source is a syndicate of private investors that puts up capital either in the form of equity or a participating mortgage. Another source is a loan from a real estate investment trust or pension fund, which sees land development financing as a way of providing above-average returns from real estate investments.