Real Estate Finance & Investments, 16e (Brueggeman)
Chapter 17 Financing Land Development Projects
1) Option contracts are used to reserve a parcel of land so that it will not be sold to someone else,
while the developer does preliminary analysis of the site.
2) Lenders typically insist on a loan repayment rate that is equal to the rate for which parcels are
expected to sell.
3) The release price is the dollar amount of a loan that must be repaid when a lot is sold.
4) A feasibility study analyzes whether a tract of land can be purchased and developed
profitably.
5) An option contract does not preclude the landowner from selling the property to someone else
after the expiration date.
6) The release schedule refers to a schedule of expiring leases for existing tenants.
7) By using an option contract, a developer may profit from an appreciation in the property’s
value over the option period.
8) In most instances, a developer’s repayment rate is set so that the development loan will be
repaid at the exact point that 100% of total project revenue is realized.
9) It is proper to include an estimate for developer profit as a cost of development when
projecting net cash flows and evaluating whether a required rate of return will be met.
10) A lender does not usually require a developer to submit a schedule of estimated cash flows
prior to approving a land development loan.
11) A developer must sell all of the lots in a development project and repay the entire
development loan before any of the new property owners can receive a clear title.
12) In order to obtain a land development loan, the developer is usually required to purchase title
insurance.
13) It is common for a developer to hold back funds to be sure that subcontractors perform all
work completely before making final payment.
14) It is illegal for the lender to hold back funds from the developer.
15) The loan submission package for a land development project must include project
information, market financial data, government and regulatory information, legal documentation
and emergency contingency plans.
16) While permitted for building projects, holdbacks are not permitted for land development
projects.
17) Consider the feasibility study shown in the table. What is the return on total cost for the
proposed project?
Total sales revenue
$
10,000,000
Less: Development cost
6,000,000
Less: Land asking price
1,000,000
Potential gross profit
$
3,000,000
Less: Admin., legal, commissions, etc.
1,500,000
Potential net profit
$
1,500,000
A) 15.0%
B) 17.6%
C) 21.4%
D) 150.0%
18) Consider the feasibility study shown in the table. You have been advised that sales revenues
may be 10 percent lower and/or development costs may be 10 percent higher. Performing a
sensitivity analysis, you conclude:
Total sales revenue
$
10,000,000
Less: Development cost
6,000,000
Less: Land asking price
1,000,000
Potential gross profit
$
3,000,000
Less: Admin., legal, commissions, etc.
1,500,000
Potential net profit
$
1,500,000
A) A 10 percent decrease in sales revenues would have a bigger impact on returns than a 10
percent increase in development costs
B) A 10 percent increase in development costs would have a bigger impact on returns than a 10
percent decrease in sales revenues
C) A 10 percent increase in development costs and a 10 percent decrease in sales revenues would
have opposite impacts on returns, canceling each other out and having no impact on returns
D) Both factors would have such a small impact, that there is no reason to be concerned about
either a 10 percent increase in development costs or a 10 percent decrease in sales revenues
19) Consider the table, which summarizes monthly construction draws and sales revenues. What
is the percentage of lot sales revenue that needs to be used to repay the loan?
Month
Construction
Draw
Sales
Revenue
1
$
200,000
2
150,000
3
75,000
4
25,000
$
600,000
Total
$
450,000
$
600,000
Present value @ 12%
$
441,883
$
576,588
A) 4.0%
B) 75.0%
C) 76.6%
D) 33.3%
20) The land development industry is best characterized by which of the following statements?
A) The land development industry is dominated by relatively few national competitors
B) The land development industry is highly fragmented, localized, and extremely competitive
C) Land development and project development are synonymous
D) The production technologies and market risks involved in land development are essentially
the same as those in project development
21) Which of the following is the MOST LIKELY sequence of events in the land development
process?
A) Inspect site, perform feasibility analysis, implement marketing program, purchase land and
begin construction of improvements
B) Inspect site, purchase land and begin construction of improvements, perform feasibility
analysis, implement marketing program
C) Inspect site, perform feasibility analysis, purchase land and begin construction of
improvements, implement marketing program
D) Purchase land, perform feasibility analysis, perform preliminary market study, begin
construction of improvements, implement marketing program
22) Generally, which of the following is FALSE regarding an option contract?
A) An option contract allows the developer to perform a preliminary market study and feasibility
analysis
B) If the developer decides to purchase a property, the price of an option is applied towards the
price of the property
C) If the developer decides not to purchase the property, the landowner will refund any money
paid for the option
D) An option contract provides the developer with the assurance that a property will not be sold
over the course of the option period
23) Each parcel of land in a new development is selling for $15,000 and the total project revenue
is estimated to be $5,000,000. The project lender has stated that the loan should be paid off when
80% of the total project revenue has been earned. The total loan amount is $3,500,000. What is
the release price for each parcel?
A) $8,400
B) $12,000
C) $12,750
D) $13,125
24) Which of the following might impact the density of housing in a land development project?
A) The price paid for the land by the developer
B) The terrain of the land
C) The target market’s preferences regarding density
D) All of the above
25) Which of the following costs should NOT be included in a net present value analysis of a
land development project?
A) Land purchase price
B) Property tax
C) General overhead such as personnel costs
D) Developer’s profit
26) When financing land development, the lender generally requires the developer to submit
which of the following?
A) A detailed breakdown of project cost
B) Required zoning changes
C) Bank references for the general contractor to be used on the project
D) All of the above
27) A transaction in which two firms trade individual financing advantages to produce more
favorable borrowing terms for each is known as a(n):
A) Interest rate swap
B) Sequential short hedge
C) Cross hedge
D) All of the above
28) A futures instrument, such as a T-bill, can be used to hedge a cash or a spot instrument such
as the prime rate, where the two instruments are not perfectly correlated. What type of hedge is
this referred to as?
A) A perfect hedge
B) A straight hedge
C) A cross hedge
D) None of the above
29) Generally, which of the following is FALSE regarding interest rate risk management
techniques?
A) Borrowers can protect themselves from upward movements in interest rates by using interest
rate caps
B) Borrowers can protect themselves from upward movements in interest rates by using interest
rate futures contracts
C) Borrowers can benefit from downward movements in interest rates by using interest rate caps
D) Borrowers can benefit from downward movements in interest rates by using interest rate
futures contracts
30) An analysis of whether land can be purchased and developed profitably is known as:
A) Financial analysis
B) Feasibility study
C) Turnkey study
D) Project profitability
31) The amount to be paid to the lender from each lot sale is included in the:
A) Release schedule
B) Development agreement
C) Cost breakdowns
D) Subcontracts
32) Which of the following does NOT contribute to the complication of estimating the amount of
interest carry?
A) The loan is taken down in draws and interest is calculated only as funds are drawn down
B) Revenue from each type of site varies
C) The rate of repayment of a loan depends on when the parcels are actually sold
D) Development loan interest rates are usually fixed while market rates fluctuate
33) Which of the following is FALSE regarding the release price?
A) It is usually calculated to pay off the loan when the last lot is sold
B) It is usually calculated to pay off the loan before the last lot is sold
C) Increasing the release price usually lowers the lender’s risk
D) Increasing the release price is likely to lower the investor’s initial cash flow
34) If a developer constructs some speculative buildings in hopes of identifying purchasers after
completion, this is referred to:
A) Feasibility construction
B) Turnkey basis
C) Build to suit basis
D) Optional construction
35) Since land development projects sometimes run behind schedule due to development
problems or slow sales of parcels, lenders generally require which of the following in the initial
contract?
A) Subcontractor holdbacks
B) Title extension
C) Extension agreement
D) Release from liability