Land banking is the process of purchasing fully entitled but undeveloped or underdeveloped land that a builder has identified for imminent development, preparing it for construction (i.e., horizontal development), and selling it to a builder for construction of the buildings (i.e., vertical development).
Land banking programs have become a popular alternative to traditional financing for home builders as bank lenders tightened lending practices on vacant land after the Global Financial Crisis. Additionally, land banking allows home builders to keep vacant land off their balance sheet for longer so they only take ownership when it is time to build.
While land banking can take multiple forms, here is an illustrative example of how it could work for a single-family residential community:
- A home builder identifies land parcel(s) where they would like to develop a new single-family residential community or subdivision.
- The home builder works with a land banker that acquires the land. Contractually, the home builder provides a non-refundable deposit (typically 15-20% of the total cost basis) to the land banker, and in turn, the land banker takes ownership of the land.
- Additionally, for the option to acquire the developed land from the land banker at a fixed price on a future date, the homebuilder pays an ongoing option premium to the land banker.
- After the land banker takes ownership, they will often complete horizontal development — or land development. This involves work such as clearing and grading the site, installing roads and utilities, and adding building pads.
- As horizontal development is completed, the home builder purchases the developed land from the land banker at a predetermined price and frequency. From there, the home builder constructs the homes (i.e., vertical development). Vertical development is typically not included in a land banking agreement.
At any time during the term, if the homebuilder terminates the contract to acquire the land, they forfeit their initial deposit and any option premium paid to the land banker which provides credit enhancement to the land banker.
Consider investing in a land banking and development strategy that targets quarterly income with Yieldstreet’s Raleigh Single-Family Residential Land Financing.
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