Infill Construction Loans vs. Traditional Construction Loans
If you’re wondering what makes an infill construction loan stand out from a traditional construction loan, you’ve come to the right place. Kiavi can help you quickly and seamlessly secure financing to support the unique challenges of infill construction projects.
What is infill construction?
Infill construction projects use parcels of land that have already been developed, usually in urban and suburban neighborhoods with access to amenities like transportation hubs, larger school districts, shopping and retail opportunities, cultural institutions, and sporting arenas.
Infill construction offers benefits for real estate investors and the community, from providing much-needed housing to revitalizing struggling neighborhoods and providing new commercial spaces and opportunities, including:
- Single-family homes
- 2-4 plexes
- Accessory dwelling units (ADUs)
- Planned Unit Developments (PUDs)
Infill construction provides real estate investors with opportunities to get creative and expand their portfolios while also solving existing problems like housing shortages and underdevelopment lots.
Traditional construction loans
Traditional construction loans are designed to provide funding for new buildings and homes on undeveloped land. While there are similarities between traditional construction loans and infill loans, traditional loans may not meet the specific needs of an infill construction project.
Distinguishing infill construction loans
Infill construction poses unique challenges for real estate investors, which will affect your financing options:
Regulatory compliance
Infill projects often have stricter zoning regulations, building codes, and community guidelines. This can make the approval process more complex and may require additional due diligence as opposed to traditional construction loans.
Site preparation
Infill construction often involves repurposing of existing structures, which can make the project more expensive. Investors also have to deal with utility upgrades, environmental concerns, or historic preservation requirements, depending on the location.
Risk assessment
- Many lenders consider infill construction projects as riskier compared to traditional construction projects due to potential challenges such as existing infrastructure issues, neighborhood characteristics, and unexpected regulatory hurdles.
- Lenders may require more intensive risk assessments and higher equity contributions from their borrowers.
Market demand
- Infill projects usually address specific market demands for more residential housing in densely populated locations.
- Lenders may be more stringent with infill construction than traditional construction loans as a result.
Construction timeline
- Infill projects may face tighter construction timelines due to factors like limited space, proximity to existing structures, and potential disruptions to the surrounding community.
- Lenders may scrutinize the proposed construction timeline and project management plan more closely to ensure their feasibility and ability to meet construction deadlines.
Environmental considerations
- Depending on the location, size, and scope, the permitting process and regulations for infill construction buildings can be more extensive than with traditional construction.
- Environmental impact studies and land appraisals are sometimes needed before an infill construction project receives the green light, which can affect financing.
Community engagement
- Infill projects often require active engagement with the surrounding community to address issues like traffic, noise, and aesthetics.
- Lenders may consider the borrower's ability to navigate community relations and obtain necessary approvals as part of the loan evaluation process.
Loan structuring and terms
Kiavi’s infill construction loan process has been streamlined to help experienced real estate investors easily navigate the process from start to finish. Like traditional construction loans, the specific loan structure and terms for your infill construction loan will depend on the specs of your building plans, including size, budget, purpose, and location.
The actual loan amount is determined by the total project cost, including land acquisition, construction expenses, “soft costs” like permits and administrative fees, and contingency cash reserves.
Lenders usually finance a percentage of the total cost, known as the loan-to-total-cost (LTTC) ratio. For infill projects, Kiavi offers LTTC ratios up to 85%, which includes the purchase price + construction costs.
Like traditional construction loans, infill loan funds are disbursed in stages and the interest rate can be fixed or variable. The typical term for an infill construction loan can range from one to three years.
Benefits and challenges
Infill construction has the potential to benefit real estate investors and the community at large by adding housing, improving underused or outdated infrastructure, raising property values, and driving new business and commerce to depressed areas.
That said, infill construction proposals can also be met with pushback from the community and regulators, depending on your plans for the property.
As with any real estate investment, it’s important to perform comprehensive due diligence and understand your market before making a decision. Working with a team of professional real estate advisors and lenders can help you get your project off the ground and avoid pitfalls and setbacks.