By Alex Vandiver, Associate, Entoro Capital, LLC
Last column I said that for data centers, the scarce input is not capital. It’s power. A site with deliverable electricity trades at a big premium to the same dirt without it, and the real opportunity is financing the work that gets the power there. Housing has its own version of that story. In a master-planned community, the scarce input isn’t the houses. It’s the finished lot: land that is entitled, graded and served, with roads, water, sewer and power already in the ground. Nobody builds a house without one, and almost nobody wants to pay for making one.
Why phase one is different money
Every large community starts with a horizontal phase. That means buying and assembling the land, getting it zoned and approved, then putting in streets, utilities, drainage, and whatever amenities the plan calls for. Only then can anyone build vertically.
Horizontal work is the least attractive money in the deal to most capital sources. There’s no building, no tenant and no rent. It takes years, and most of the risk in the whole project is packed into it. Entitlements can stall. Utility capacity can come in short. Infrastructure bids can come back over budget. And the lots are only worth what builders will pay for them when they’re finished, which depends on absorption two or three years out. The return is real, but it comes late and it comes to whoever was willing to carry the dirt through the hard part.
The banks stepped back from the dirt first
Land lending is what hurt the banks in 2008, and they haven’t forgotten. Bank lending for single-family construction and land development stood at $91.3 billion in the second quarter of 2026, according to FDIC data tracked by the National Association of Home Builders. That is 56 percent below its peak of $204 billion in early 2008.
Regulation makes the math worse, and it lands right on the dirt. Under federal capital rules, a bank loan that only buys land or develops lots is treated as high volatility commercial real estate and carries a 150 percent risk weight, so the bank has to hold 50 percent more capital against it than a standard commercial loan. A loan to build the houses on those same lots is exempt. The rules penalize the horizontal phase and let the vertical phase go. Add higher reserve requirements, and for a lot of lenders the land loan just isn’t worth making. Some have left private builder lending entirely. This is the same pullback I wrote about two columns ago. It just shows up first, and hardest, at the land.
The institutions wait for the finished product
At the other end, the big players don’t want the dirt either. Public homebuilders have spent the last decade going land-light. They control lots through option contracts and land banking partners instead of owning them outright, and they take lots down when they’re ready to build. Institutional capital prefers the stabilized, vertical product: the rental community with an occupancy history, or the finished lot with a builder contract behind it.
That leaves a gap in the middle. The bank won’t lend on raw land, and the builder and the institution will only show up once the lots are finished. Somebody has to own the land from raw to ready, and in a lot of deals nobody has lined up to be that somebody.
Not every market is short, which is why underwriting matters
This is not a blanket call that lots are scarce everywhere. Zonda’s lot supply index rose for a seventh straight quarter in early 2026. Markets like Austin, Denver and Atlanta now look oversupplied, while nearly half the markets Zonda tracks are still significantly undersupplied. Builders have also slowed their takedowns in softer markets, and that has put real pressure on some land banking deals that assumed a faster pace.
So, the scarcity is local, and so is the opportunity. A finished lot in a supply-constrained, fast-growing submarket is a very different asset from the same lot in a market that’s already long. The discipline is in knowing which one you’re looking at.
Where the middle market plays
The phase-one gap is middle-market capital’s home turf. The deals are too early and too land-heavy for a bank, too small or too complex for an institutional fund, and a good fit for family offices and private credit that can underwrite one project at a time. The entry points look like this:
- Pre-development and entitlement equity to take a site from control to approved.
- Horizontal infrastructure financing, usually private credit or bridge debt against entitled land, to put in the roads and utilities.
- Preferred or structured equity in phase one, sitting behind the debt and ahead of the sponsor.
- Public infrastructure tools, like special districts and municipal financing, that can repay part of the horizontal cost over time.
And the underwriting must be specific:
- Which entitlements are in hand, and which are still pending.
- Whether the utilities have committed capacity in writing.
- Whether builders have signed takedown agreements, at what price and at what pace.
- Whether phase one is sized to real absorption in that submarket.
- How the capital gets out, whether through lot sales, a refinance once the land is finished, or a recapitalization when the vertical phases start.
The bottom line
This series keeps landing in the same place. The finished asset gets financed. The trophy data center campus gets financed. The stabilized apartment community gets financed. What doesn’t get financed is the constraint sitting in front of all of it. For data centers, that’s power. For housing, it’s the finished lot. The opportunity for private capital is to go horizontal first: carry the land through the part everyone needs and nobody wants to fund, and be priced for it. That’s where the risk is concentrated, the competition is thin, and the return is earned.
Definitions
Horizontal development: the land-side work that comes before any building, including entitlements, grading, roads, utilities and drainage.
Vertical development: construction of the buildings themselves, like homes, apartments or commercial space.
Entitlements: the government approvals, such as zoning, plats and permits, that allow land to be developed for a specific use.
Finished lot: a lot that is entitled and fully served by infrastructure, ready for a builder to start a house.
AD&C loan: an acquisition, development and construction loan used to buy land, improve it and build on it.
HVCRE: high volatility commercial real estate, a regulatory category covering land acquisition, lot development and most commercial construction loans, which requires banks to hold extra capital against them.
Land banking: an arrangement where a third party owns and carries land or lots on behalf of a homebuilder, who has the option to buy them over time.
Takedown: a builder’s purchase of lots from a developer or land banker, usually on a set schedule.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Entoro, LLC, or any of their respective affiliates. This article is provided for general informational and educational purposes only and does not constitute investment advice, a recommendation, an offer to sell, or a solicitation of an offer to buy any security, financial product, or investment strategy. The information presented is believed to be reliable but is not guaranteed as to its accuracy, completeness, or timeliness. Any forward-looking statements or opinions are subject to change without notice.
Author Bio: Alex Vandiver is an Associate at Entoro Capital, focused on business development across real estate, energy, and artificial intelligence. He brings six years of commercial real estate experience and holds an MBA from Rice University’s Jones School of Business, giving him a strong analytical foundation and industry depth in financial analysis, market evaluation, and client-facing strategy.
