Pricing a participation in a land loan where the borrower's subdivision plat is not approved yet

Take a 310,000 dollar first position private mortgage on 46 acres, structured as a 100,000 dollar participation for the investor considering it, with the borrower's plan to split the parcel into five lots. Understanding how the loan behaves if that plan does not go through matters more than owning the dirt directly. The file as presented: purchase price 391,000, borrower putting in 81,000, loan at roughly 79 percent of purchase. Appraisal came back at 402,000 as bulk acreage and 560,000 as five finished lots, a discounted retail total the appraiser called out separately. Two year term, interest only, one point in, borrower covering survey and plat costs out of pocket. Three things worth weighing. First, which value the loan is really against. At 310,000 against the 402,000 bulk figure, that is 77 percent of as-is value, high for raw land. Against the 560,000 finished figure it is 55 percent, comfortable on paper but describing a property that does not exist yet. If approvals stall, the collateral reverts to the bulk number, and 77 percent of a bulk appraisal in a market with very few buyers for a foreclosed 46 acre parcel is thin cushion. Second, the release schedule. A pro rata draft that releases each lot at 62,000 with no premium leaves 186,000 outstanding against three unsold lots after two releases, and the last lots to sell are usually the ones with the worst access or soils. A front loaded release, say 75,000 for the first two lots and the balance spread after, keeps the loan better covered by the weaker remaining collateral, though it changes the borrower's year one cash flow materially. Third, the piece that is hardest to price at all. With no preliminary approval yet, and a county checklist that triggers a stormwater review past four lots, the gap between a four lot and five lot outcome is an engineering study and possibly a detention basin, while the whole deal was underwritten on five lots. At four lots the borrower's gross drops sharply and his equity gets thin fast. A reasonable ask is a funding condition tied to preliminary plat approval, with the loan sized to 65 percent of bulk value until then, which likely leaves the borrower short at closing and may kill the deal outright. The remaining question is whether to pass, or fund at 310,000 with front loaded releases and a personal guaranty, pricing entitlement risk into the rate. There is no consistent market quote for that premium on a five lot split. Terms and any rate structure should be confirmed in writing with the lead lender's counsel, and independent counsel on the participation agreement matters since how a participant's interest is protected in foreclosure varies by state.