Amid elevated interest rates, shifting consumer demand, and tighter capital from traditional banks, off balance sheet land banking has emerged as a prominent strategy for home builders.
With many companies—particularly public builders—pursuing land-light models, land banking allows them to acquire and hold land for future construction. Land bankers serve as capital partners, providing financing to acquire paper lots, fund land development, and hold finished lots. Bill Southworth, founding principal of lot finance provider Builder Capital, says for builders, the quicker timelines and repeatable deal structures are among appealing elements of land banking.
“A bank loan may have a 50% or 60% advance rate where lot banking does take it to higher advance rates. The other compelling thing for a builder is our counterparty has an option agreement to purchase lots and it is not a requirement,” Southworth says. “This is not treated as debt, it is treated as off balance sheet financing. It is advantageous from that aspect if you’re looking to manage your balance sheet.”
For public builders in particular, the land light model and off balance sheet land banking allows them to achieve better valuations. Tim Sullivan, chief advisory officer for Zonda, says land banking provides builders the flexibility to allocate their own capital elsewhere and remove land—perceived as risky and less favorable by Wall Street—from their balance sheet. Sullivan points to NVR—often considered the “poster child” for land-light models—as a prime example. With a stock price around $7,200, it far outpaces its public peers.
Under a typical land banking structure, the builder sources land for future development, securing zoning and entitlement. Prior to or upon closing of the land parcel, the builder and land banking partner agree on a development budget and takedown schedule and the land banker holds title to the land until all finished lots are purchased. While it may take banks months to get a loan approved and get to the closing table, Southworth says a land banking structure is more streamlined, allowing builders to get to the finish line in 30 to 45 days.
“The repetitive nature [is appealing] as well. You do your first deal and the second deal is much easier; you can rinse and repeat,” Southworth says. “Once your counterparty or builder understands what it is going to look like, it is much easier for predictability and knowing what it is going to look like going forward.”
Southworth says following Silicon Valley Bank collapse in 2023, A&D loan conditions became much tighter for home builders, pushing them toward alternative options such as land banking.
“I don’t think the banking spigot is going to turn on fully anytime soon,” Southworth says. “I think for the foreseeable future [land banking] will be out there. Now that it has gotten more acceptance, I don’t think this is going to go away.”
State of Market
Sullivan says builders are tapping the brakes in the land market after a breakneck pace over the past couple of years.
“Not that they will stop buying, but they are just being a little more critical and more careful right now because the consumer has pulled back and they are responding to that,” Sullivan says.
Despite a more measured pace, Southworth says interest in land banking remains steady, with new builders continuing to enter the space. Looking ahead, he believes the interest rate environment and job growth will be the primary factors driving whether activity accelerates or slows further.
“In general, we are expecting rates to continue to come down. That is going to be an accelerant to demand,” Southworth says. “The unknown is job growth. We’ve seen in various parts of the country we are seeing more layoffs than we have seen a couple months or quarters ago. We aren’t seeing anything right now that is scaring anybody away.”
If interest rates decline and home price appreciation levels off, Southworth expects the entry-level segment to stabilize—potentially supporting broader market resilience.
“Supply and demand are the biggest factors. The capital is still very disciplined and not overly aggressive,” says Southworth. “The demand, jobs and population growth are going to be the biggest determinants of that. I think from the perspective of what’s out there, the key ingredients are still robust.”
