How commercial land loans work: raw vs improved land, LTV limits, down payments, SBA options, terms, risks and what Colorado buyers should check first.
A commercial land loan is financing to buy vacant land for business use, secured by the land itself. Because land earns no income and is harder to resell than a building, lenders ask for more equity and offer shorter terms than on other commercial property.
This guide explains the types of land loans, how lenders size them, the federal limits behind the down payment, typical terms, the steps to apply and the Colorado details that affect a deal. Before financing, the land itself needs checking, as covered in what to check before buying commercial land in Colorado.
What a Land Loan Is
A land loan pays for the ground only. There is no building to value, no tenant paying rent and often no utilities yet.
If the borrower defaults, the lender owns a parcel that may take years to sell. Lenders price and structure land loans with that in mind.
Land loans fall into three broad groups, based on how far the land is from being usable:
| Land type | What it looks like | How lenders see it |
|---|---|---|
| Raw land | No roads, utilities or approvals; often agricultural or open ground | Highest risk, lowest loan amount |
| Improved or entitled land | Zoned, with road access and utilities at or near the line | Lower risk, easier to finance |
| Land under development | Streets, water, sewer and utility lines being installed before buildings | Financed as a development project with a budget |
The closer a parcel is to a building permit, the easier it is to finance. A lender sees a shovel-ready pad site very differently from a pasture that still needs rezoning.
Types of Commercial Land Loans
Several kinds of lenders finance land, each with its own rules.
Bank and Credit Union Land Loans
A local or regional bank is the most common source. The bank lends against the appraised value of the land, usually with a personal guarantee from the owners.
Community banks in mountain towns often know local land values better than national lenders.
Land Development Loans
A land development loan pays to improve land before any building goes up. Federal guidelines define it as credit to improve unimproved real property, such as installing sewers, water pipes, utility cables and streets.
These loans are funded in draws against a budget, much like a construction loan. They suit a developer creating lots or pads to sell or build on. The wider sequence of approvals and site work is covered in the land development process.
Combined Land and Construction Loans
When the buyer plans to build right away, one loan can fund the land and the building. Federal guidelines say the loan uses the limit for the final phase it funds. A loan covering land development and an office building, for example, follows the 80% limit for nonresidential construction.
Draws, interest reserves and conversion to permanent financing are explained in how a commercial construction loan works.
SBA Loans for Owner-Users
A business that will build and occupy its own facility can use SBA financing. SBA 504 loans can pay for land, buildings and improvements such as grading, streets, utilities, parking lots and landscaping. They cannot be used for speculation or rental investment property.
For new construction, the business must occupy at least 60% of the building. The SBA 7(a) loan also covers real estate, with terms up to 25 years and a maximum loan of $5 million. The 504 structure, fees and occupancy rules are set out in SBA 504 loans in Colorado.
Seller Financing
In seller financing, the landowner acts as the lender. The buyer pays part of the price at closing and the rest over time, secured by the land.
Terms are negotiated and often help when a bank will not lend on raw ground. A real estate attorney should draft the note and deed of trust.
Private and Bridge Lenders
Private lenders move faster and accept more risk, but they charge more and lend for shorter periods. They fit a buyer who needs to close quickly and refinance once the land is entitled. See how commercial bridge loans work.
Why Land Loans Are Harder to Get
Lenders treat land as one of the riskiest kinds of real estate collateral, for three reasons.
- No income. Repayment depends on the borrower’s other income, a future sale or a future building, not on rent from the land.
- Thin resale market. Land can sit unsold for a long time, especially rural or oddly shaped parcels.
- Regulatory pressure on banks. Banking agencies watch banks whose construction, land development and other land loans reach 100% or more of total capital. A bank near that line may simply stop making land loans.
Federal capital rules add another layer. A bank must hold extra capital against acquisition, development and construction loans classed as high volatility commercial real estate (HVCRE).
A bank can avoid that class when the loan stays within the supervisory loan-to-value limit and the borrower has contributed capital of at least 15% of the project’s as-completed appraised value. That capital must go in before the bank advances funds. Land the borrower contributes counts at its appraised value.
How Lenders Size a Land Loan
Lenders size a land loan mainly on loan-to-value (LTV): the loan divided by the land’s value. Income tests matter less, because land produces little or no income.
Maximum loan = Land value × Lender’s maximum LTV
Supervisory LTV Limits
Federal banking agencies publish supervisory LTV limits that banks use as ceilings in their lending policies:
| Loan category | Supervisory LTV limit |
|---|---|
| Raw land | 65% |
| Land development | 75% |
| Commercial, multifamily and other nonresidential construction | 80% |
| Improved (finished) property | 85% |
These are ceilings, not targets. Many banks set lower limits for raw land.
The same guidelines define value for a purchase as the lesser of the price paid or the appraised value. If you overpay, the loan shrinks to fit the appraisal. The ratio itself is explained in loan-to-value for commercial property, and the appraisal behind it in how a commercial real estate appraisal works.
Worked Example: Raw Land Purchase
Assume a buyer agrees to pay $1,200,000 for five acres of commercial land near Grand Junction. All figures are illustrative.
- The appraisal comes in at $1,100,000.
- The value used is the lesser of price and appraisal: $1,100,000.
- Supervisory ceiling for raw land: $1,100,000 × 65% = $715,000.
- The bank’s own policy allows 60%: $1,100,000 × 60% = $660,000.
- Buyer’s cash: $1,200,000 − $660,000 = $540,000, plus closing costs.
The buyer puts down 45% of the price: the appraisal gap and the bank’s lower limit both added cash.
If the same parcel were already zoned, platted and served by utilities, the lender may lend more. That is why entitlement work often comes before the loan.
Using Land You Already Own as Equity
Land you own free and clear can count toward the equity in a later project. Under the HVCRE rule, contributed land counts at its appraised value, not the price you paid years ago.
Suppose a parcel bought for $300,000 now appraises at $700,000. On a project valued at $4,000,000 when finished, the 15% test is $600,000, so the land alone covers it.
Typical Land Loan Terms
Terms vary by lender, but the common features are consistent.
- Down payment: Higher than on buildings. For raw land, the 65% supervisory ceiling alone means at least 35% down at a bank, often more. How this compares with other property types is covered in commercial real estate down payments.
- Term: Short, often a few years with a balloon payment, since lenders expect the land to be built on, sold or refinanced.
- Rate: Usually higher than on an income-producing building, often variable.
- Payments: Interest-only is common during the holding period.
- Guarantees: Personal or corporate guarantees are standard.
- Release provisions: On subdivided land, the loan sets a payoff amount for each lot sold, so lots can be released from the lien one at a time.
Land Financing Options Compared
| Option | Best for | Equity | Term | Watch for |
|---|---|---|---|---|
| Bank land loan | Investors and developers with strong finances | At least 35% on raw land under federal ceilings, often more | Short, often with a balloon | Personal guarantee, refinance risk |
| Land development loan | Developers creating lots or pads | Hard equity before draws | Tied to the build-out | Budget overruns, slow lot sales |
| Land and construction loan | Buyers building right away | Set by the final-phase limit | Construction period, then convert or refinance | Delays during approvals |
| SBA 504 | Businesses building their own facility | Usually 10%, up to 20% | 10, 20 or 25 years | 60% occupancy on new construction, no speculation |
| SBA 7(a) | Owner-users needing flexibility | Set by the lender | Up to 25 years with real estate | $5 million cap |
| Seller financing | Raw land banks will not finance | Negotiated | Negotiated | Balloon dates, due-on-sale terms |
| Private or bridge lender | Fast closings, short holds | Varies | Short | Higher cost, exit plan needed |
How to Get a Commercial Land Loan
- Define the plan for the land. Lenders lend on a plan: build, hold, subdivide or sell. Write down the use, the timing and how the loan gets repaid.
- Check zoning and utilities first. Confirm what can be built and what it costs to serve the site. Entitled land finances on better terms.
- Talk to two or three lenders early. Ask about their raw land policy, maximum LTV, term, recourse and whether they lend in that county.
- Prepare the borrower package. Expect tax returns, a personal financial statement, entity documents, the purchase contract and a budget or site plan.
- Order the third-party reports. The lender will require an appraisal and usually a survey, title commitment and environmental report. The full list is in the due diligence checklist.
- Match contract deadlines to the loan. Set the loan condition deadline long enough for the appraisal and credit approval.
- Close and plan the exit. Before the balloon date, know whether you will build, sell or refinance.
Risks and Mistakes to Avoid
- Buying before the loan is lined up. Many lenders do not finance raw land at all. Without a financing condition, the deposit is at risk.
- Paying above appraisal. The loan is based on the lower number, so the gap comes out of your cash.
- Ignoring carrying costs. Interest, property tax, insurance and maintenance run every year the land sits idle.
- Underestimating approval time. Rezoning, subdivision and site plan review can outlast a short loan term.
- No exit for the balloon. If values fall or approvals stall, refinancing a land loan can be hard.
- Overlooking water and access. A lender values land without legal access or a water supply far below land that has both.
Land Loans in Colorado
Colorado adds its own rules on security, water and taxes.
Deeds of Trust and the Public Trustee
In Colorado, a land loan is usually secured by a deed of trust. It is a three-party document among the owner, the lender and the county public trustee, who holds the power of sale.
In many counties the elected treasurer also serves as public trustee. When the loan is paid off, the lender sends a release to the public trustee, who records it with the county clerk and recorder. If the borrower defaults, the foreclosure runs through the same office under Title 38 of the Colorado Revised Statutes.
Water Rights and Collateral
Colorado water rights are separate property from the land. A lender will want to know exactly which rights, wells or water shares come with the parcel, and whether they are part of its collateral.
A parcel with a decreed water supply or a commitment from a water provider is worth more and finances more easily. Raise this with the lender and a water attorney before the contract deadlines run out.
Property Tax While You Hold Land
For 2026, Colorado assesses vacant land at 26% of actual value. That tax is a carrying cost the lender expects you to cover.
- Actual value: $500,000.
- Assessed value: $500,000 × 26% = $130,000.
- At an assumed combined levy of 80 mills, the annual tax is $130,000 × 0.080 = $10,400.
Add interest on the loan, and the yearly cost of holding land becomes clear. On a $325,000 loan at an assumed 8% interest-only rate, interest alone is $26,000 a year. Ask the county treasurer for the actual mill levy.
Mountain Markets in 2026
Land demand varies sharply across Colorado mountain towns. In Archuleta County, land absorbed the larger correction in the first quarter of 2026, according to RMCRE’s Pagosa Springs Q1 2026 market update.
In Montrose, RMCRE’s broker reported many listings and price reductions in the second quarter of 2026. In Durango, land costs and zoning keep speculative industrial building hard to justify, though owner-user projects still work. At the Steamboat Springs airport, 17 of 29 lots in a new industrial park were under contract in the second quarter.
Softer land markets give buyers room to negotiate, but lenders may also appraise land cautiously.
Frequently Asked Questions
How much do you need to put down on a commercial land loan?
More than on a building. Federal guidelines cap bank loans on raw land at 65% of value, so expect at least 35% down at a bank and often more. Improved land and SBA 504 projects for owner-users can need less.
Can you get an SBA loan to buy land?
Yes, if your business will build on and occupy the property. SBA 504 and 7(a) loans can include land as part of an owner-occupied project. They cannot fund land held for speculation or rental investment.
Why are land loan terms so short?
Land produces no income, so lenders expect it to be built on, sold or refinanced soon. Short terms with a balloon payment limit the lender’s exposure.
Can I use land I own as a down payment on a construction loan?
Often, yes. Lenders and federal capital rules can count contributed land toward the borrower’s equity, at its appraised value.
Is a land loan the same as a construction loan?
No. A land loan pays for the ground; a construction loan pays to build on it in draws.
Land Financing Help from RMCRE
Rocky Mountain Commercial Real Estate (RMCRE) is a network of partner brokers across Colorado mountain towns, active since 2010. We help buyers find land, test what it can support and connect with local, SBA and construction lenders who know the market.
Browse Colorado commercial land for sale, learn about our development and site selection services, or contact an RMCRE broker to talk through financing on a specific parcel.
