Land Development Venture Capital
Land development is one of the areas that have benefited from venture capital. Land has always been considered one of the primary and most secure of all investments, yet land development has been attended with risk in the past.
Land development is defined as just about major change to property with the intention of increasing its value. It could range from landscaping changes to subdividing into lots and constructing individual homes. Land development might even include major alterations to existing structures such as the conversion of an old factory into a shopping mall. Any change to the existing land or the structures on it that is intended to increase its value is considered land development. Land development is an ideal target for venture capital.
What makes land development an attractive option for venture capital financing is its inherently risky nature. Although profit potential in land development projects is often very high, the risk of loss exists as well. Conventional financing for land development is sometimes problematic. Lending institutions are more apt to finance land purchases because the land becomes collateral. This is the same idea for pre-existing structures that can be secured with mortgage type loans. It is when major changes are going to take place that the conventional lenders become nervous.
The problem stems from the idea of collateral and the desirability of non-recourse loans for land development projects. The existing land and existing structures can be given an assessed value and that value can serve as collateral. The value of the developed land can only be estimated. Its true value can not be accurately determined until the completion of the project and in some cases not until the results of the development concept are fully realized. So, conventional financing would usually not consist of a non-recourse loan.
Yet, the land developer, despite his support and confidence in the project is often unable to provide outside collateral or is unwilling to risk it. This is what makes the deal attractive to the venture capitalist. They would be much more willing to make a non-recourse type of loan to fund the project simply because assuming more risk in exchange for a greater profit potential is their stock in trade.
Some venture capital firms specialize in land development ventures and have associates that are extremely knowledgeable in development costs. Some of the greatest success stories in financial investment have come from land development ideas that have increased land values beyond expectations. Venture capital has made many of these projects possible. The results have provided value to the developers, the venture capital investors, and the public that is served by the improved use of the land.