For commercial real estate investors, securing financing for horizontal construction can be challenging. Most traditional lenders do not fund horizontal construction. They prefer to fund vertical construction, which is primarily putting up buildings, because with vertical development the value increase to a project is more immediately visible and calculable.
Enact Partners recognizes how crucial horizontal construction—which includes infrastructure improvements such as roads, utilities, and landscaping—is to preparing land for development. Our specialized horizontal construction loans help bridge the gap from the acquisition of raw land to vertical construction by helping borrowers develop buildable lots.
Understanding Horizontal Construction
Horizontal construction refers to the development activities that prepare a piece of land for vertical construction. This can include:
- Grading and Site Preparation—Leveling the land and preparing the site for construction.
- Roads and Utilities—Installing roads, water lines, sewer systems, and other utilities necessary for future buildings.
- Landscaping—Adding landscaping features that enhance the property’s appeal and functionality.
Such improvements are essential for transforming undeveloped land into plots that are ready for building. Despite their importance, borrowers often struggle to secure financing for horizontal construction due to perceived risks and the lack of immediate value appreciation.
What’s So Challenging?
Banks and other traditional lenders tend to shy away from horizontal construction loans for several reasons:
- Perceived Risk—They view horizontal construction as riskier because the value increase is not as immediate or significant as with vertical construction. After completing horizontal improvements, the property is still essentially vacant land, albeit with added infrastructure. The added infrastructure does not drastically increase the land’s value, making it harder to secure against the loan.
- Market Volatility—The time between horizontal and vertical construction can be subject to market changes, which makes some lenders nervous. If the market declines after horizontal improvements, the land may not be worth the anticipated value.
- Unfinished Product—Even with horizontal improvements, land without a tangible building or structure offers little collateral for lenders. This lack of a finished product increases lender risk.
- Smaller Loan Amounts—Horizontal construction projects typically require smaller loan amounts compared to vertical builds, making them less attractive to large lenders.
- Lack of Experience—Many lenders simply lack the expertise to evaluate and manage the risks associated with horizontal construction, which leads them to avoid these kinds of projects.
Enact Partners Fills the Financing Gap
The Enact Partners team has extensive experience in both developing commercial real estate and lending. Our expertise allows us to confidently assess and fund these kinds of projects. We see the value of horizontal construction and understand the critical role it plays.
Here’s how we support real estate investors and developers with funding for horizontal construction:
- Expertise and Understanding—Our background in real estate development gives us the insight needed to evaluate horizontal construction projects confidently. We understand the challenges and risks involved and work with borrowers to manage them effectively.
- Flexible Financing Solutions—We offer flexible loan structures tailored to the specific needs of horizontal construction. This includes short-term construction loans or even milestone-based draws, where funds are released at key project stages leading into the vertical construction phase.
- Quick Turnaround—We know that time is often of the essence in real estate development. Our streamlined loan approval process ensures that qualified developers receive the funds they need promptly, helping them stay on schedule and meet critical deadlines.
- Market Credibility—Partnering with an experienced private lender like Enact Partners who understands the complexities of horizontal construction can enhance a developer’s credibility in the marketplace, making it easier to attract investors and buyers.
Making the Case for Horizontal Construction Financing
Here’s a real-world example of what working with Enact Partners could do for your project:
- The Challenge—This repeat borrower who specializes in residential communities acquired a parcel of land in an area of Texas adjacent to a rapidly growing area. He needed financing for horizontal improvements, including roads, utilities, and landscaping but traditional lenders were unwilling to fund the project.
- Our Solution—The developer approached Enact Partners for a horizontal construction loan. Our team quickly assessed the project, recognizing its potential, the developer’s expertise, and our history with him. We were able to fund a construction loan to complete horizontal improvements (streets, sidewalks, sewer, and other underground utilities) on a multi-acre fully entitled parcel.
- Outcome—The timely financing and flexible loan structure provided by Enact Partners were crucial to the project’s success, allowing the borrower to successfully complete the horizontal improvements on time and within budget. Additionally, upon commencement of the horizontal construction phase, our borrower was able to present the overall project to his bank and request financing for the vertical construction of more than 20 single-family homes. Subsequently, as the project progressed and associated risks diminished, our borrower was able to secure a significantly higher loan with the bank, which enabled successful completion of the entire project.
Why Choose Enact Partners for Horizontal Construction Loans?
Despite the importance of horizontal construction in laying the groundwork for successful vertical projects, securing financing for it can be daunting. Our deep understanding of horizontal construction allows us to offer tailored funding solutions that meet the unique needs of borrowers and their specific projects. Plus, our streamlined approval process and quick turnaround give developers access to funding promptly, helping them keep their projects viable and on track.
We strive to build long-term relationships with borrowers. We’re not just a lender; we’re a partner committed to helping borrowers achieve their commercial real estate development goals. We invite you to contact Enact Partners today to explore a horizontal construction loan to transform your raw land into a valuable, build-ready property.
(760) 516-7776 | [email protected] | www.enactpartners.com
