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The Acquisition And Development Loan: What It Is, When You Should Use It, And What You Need To Know About It

When it comes to commercial construction loans, there are an assortment of different products for builders and potential developers to choose from. The recommended product varies based how you plan to use the land, any existing infrastructure on the land, and your company's financial well-being. An acquisition and development loan is one common option; take a few moments to learn what it is and when you need to use it so that you can make an informed decision when applying for potential loans.

What Is An Acquisition and Development Loan?

An acquisition and development loan is a commercial product offered to developers who are ready to build on raw loan that already has some type of existing infrastructure. Usually, the land is outfitted with some of the items needed to build on it, such as electricity, sewer lines, or an accessible road.

However, the land does not have to have every single bit of infrastructure required to build on it. It is also common for the land to have existing infrastructure that requires significant improvements.

In contrast, a land development loan is the product used for land that is completely raw and has minimal or no infrastructure.

When Should You Use an Acquisition and Development Loan?

You will use an acquisition and development loan when the property has some infrastructure or most of the infrastructure needed to build on it. If the land is completely lacking any type of infrastructure, you would instead use a land development loan.

One of the benefits of an acquisition and development loan is that you can use funds from the loan to finish developing the infrastructure or to replace the existing infrastructure. Keep this in mind if you are interested in a parcel that requires significant upgrades to bring the current systems (such as the sewer lines and electrical lines) up to code.

Note that the acquisition and development loan is only used to purchase the land and add infrastructure. In order to finance your building project, you will need to apply for an additional loan to cover constructions costs.

What Else Do You Need to Know About Acquisition and Development Loans?

When deciding whether or not to extend an acquisition and development loan to your company, the lender will look at your company's credit worthiness, your cash flow, and your assets. If you are lacking in a certain area, you may still be able to procure loan approval. However, the terms for the loan will be less favorable.

For example, if your company has a a high debt to income ratio, this makes it risky for a lender to loan you money. The lender may decide to fund the loan anyway if you have ample assets or a history of positive cash flow, but be prepared to pay a higher interest rate to compensate the lender for the additional risk. Contact a lender, like LCNB National Bank, for more help.