Options for loan terms on commercial LAND ONLY purchase
Hi all - the org I work with is acquiring 40 acres of farm land and were trying to figure out the financing side of things. The bank we've been working with sent over a commitment sheet which outlines the term of the loan only being 1 year, with monthly interest only payments and the principal due in 12 months. 

We were under the impression that the loan would be at least 5 years, and when I spoke with the bank they said that the terms are for 1 but at the end of the year they can review and stretch it out another year or for 5 years. Is this normal? I don't want us to be on the hook for the full balance in 12 months. 

Currently there are no structures on the property, but we are planning to erect a few things there. Once we have structures, do our options change in terms of what we can do finance wise?

Thanks for any help you can provide.
[{"id": "gsoxyab", "text": "It sounds like you\u2019re going for a construction loan? You should have a clear exit if that is the case (i.e. payoff with perm debt collateralized by whatever you are building). It\u2019s true that these loans can be flexible but don\u2019t take it from the bank contact, read your loan agreement. There should be zero ambiguity about the term of the loan.\n\nI think we need more info about your plans with the land and loan proceeds to contribute.", "replies": [{"id": "gsp1m9o", "text": "So the loan is straight for the purchase of the property. Were a religious organization and ultimately plan on building a temple and supporting buildings on the property, but that will come through congregational donations.\n\nWe raised 40% of the purchase price, and the bank is financing the additional 60%. \n\nHere are the terms per the commitment letter:\n3a. Interest Rate and Term: The Loan is to be for a term of 12 (twelve) months beginning the date documents evidencing and securing the Loan are sig Monthly payments of interest only shall commence thirty (30) days following Closing. Interest \nshall be computed on the principal balance then outstanding at the rate of one half of one percent (.50%) in excess of the Bank's Prime Rate of interest (currently 4.00%) as in effect from time to time (computed daily) on the basis of a year of 360 days and for the actual number of days elapsed. If it is not sooner paid, the entire unpaid principal balance, together with interest accrued thereon, shall be due and payable in full upon the expiration of the twelve (12) month term, subject to acceleration in the event of default.\n\n(excuse the typos...thats google docs doing a conversion of a pdf)", "replies": [{"id": "gsp3yz8", "text": "Ok it does sound like a one year term. In that case, it sounds like you may need additional financing although I\u2019m not sure how being a religious organization would affect your options. If you are relying on donations for purchase of the land, will that also fund construction? Then, you will be on the hook for the balloon payment on the loan.\n\nDo you have someone advising you through this? It sounds like a large project with moving parts. Also, 40 acres seems like a lot for a church so maybe you could explore ways to generate revenue with the excess land?", "replies": [{"id": "gsp4r6v", "text": "&gt; Do you have someone advising you through this? It sounds like a large project with moving parts. Also, 40 acres seems like a lot for a church so maybe you could explore ways to generate revenue with the excess land?\n\nUnfortunately not, I was brought onto the board rather late into the discussion. Regarding the size of the land, its also going to be a cow sanctuary, so the acreage will be needed down the road. Its currently leased out to a farmer who grows soy/corn, but the proceeds from that lease are quite small.\n\nI'll have to reach out to someone for some more in depth help on this, I'm getting less confident about this purchase every day.", "replies": [{"id": "gsp8172", "text": "I hear you, listen to your gut. PM me if you have any questions, I\u2019d be glad to help if I can.", "replies": [{"id": "gsq2xgr", "text": "Just got off the phone with the bank, and apparently we were offered both that land loan (1 year) or a land/construction/permanent loan (5 year term) but due to the urgency to move on the land, the president of our board said we'll just do the 1 year. \n\nGoing to try and hold an emergency meeting to shoot this project down...too much risk. All it takes is one zoning variance getting denied, a permit being held up, or a litany of other possibilities for the bank to deny our construction loan request and were on the hook for the full balance next May. At least that was my understanding from discussions with the banker.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "gsp42om", "text": "This is normal, they are offering (sounds like this is an offer sheet and not a commitment) interest only payments for one year to get your shit together. This is not a term loan. Once you have built your buildings and have some stabilized income then you would get a term loan based on the cash flow of the property and pay back this loan.", "replies": [], "depth": 3}, {"id": "gsqs01m", "text": "If you\u2019re a religious organization you may be able to use an SBA 504 loan. If that is possible you would be working a 25 year term.", "replies": [{"id": "gsr1axy", "text": "Not sure if we\u2019re eligible as a non-profit", "replies": [{"id": "gsr25r2", "text": "Talk to the SBA CDC for your area, they would be able to determine eligibility. It probably only works if it was structured as a for profit entity for the organization.", "replies": [], "depth": 5}, {"id": "gssr2wl", "text": "Correct, you're not.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gsp08jt", "text": "If you are buying agricultural or rural property, my suggestion is call the local Farm Credit lender. They handle this stuff better than most banks.\n\nIt also sounds like you are getting a construction loan which if that's the case, then the terms sound normal.", "replies": [], "depth": 1}, {"id": "gsp88vw", "text": "So you don't have the funds for construction on or development of the property right now and the bank doesn't want to be stuck with a raw land loan for years on end (especially to a religious organization). \n\nThe 12 month term is a ripcord for the lender to get out if you're pledge drive/capital campaign doesn't work out as you expect. If things go well they will consider renewals; if not a matured note is a clear default that gives the lender maximum leverage.", "replies": [{"id": "gspjqr5", "text": "This is exactly right.", "replies": [], "depth": 2}, {"id": "gsqy03g", "text": "I doubt the lender is hoping for a maturity default. They just want the ability to re-evaluate the credit in 9-10 months and decide whether they want to force the borrower or refi them at 12.", "replies": [{"id": "gssqtej", "text": "Agreed. However, a matured note is more leverage to force the loan out than a covenant or relying on the blanket lender advantaged language in the security docs.  Hence why the lender is offering 12 months IO rather than the 60 months OP wanted/expected.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gsq1ft8", "text": "Bottom line. I think you need more money. Will seller carry a note?", "replies": [], "depth": 1}, {"id": "gsqrifu", "text": "Don\u2019t borrow money to buy land.", "replies": [], "depth": 1}, {"id": "gsxq9g0", "text": "I\u2019m a CRE direct lender, let me know if I could be of assistance.", "replies": [], "depth": 1}]