Question 1

The amount to be paid to the lender from each lot sale is included in the

Accepted Answer

The Release Schedule typically outlines the terms and conditions under which lots are released for sale, including the amount to be paid to the lender from each sale.

Question 2

An option contract does not preclude the landowner from selling the property to someone else after the expiration date.

Accepted Answer

An option contract typically only gives the option holder the right to buy or lease the property, but does not prevent the landowner from selling the property to someone else after the option has expired.

Question 3

Which of the following is the likely sequence of events in the land development process?

Accepted Answer

The logical sequence of events in the land development process would include inspecting the site to determine its suitability for development, performing a feasibility analysis to determine the costs and benefits of the planned improvements, purchasing the land, and then beginning construction of the improvements. Finally, a marketing program would be implemented to attract potential buyers or lessees to the completed development. Choice C accurately follows this sequence.

Question 4

Which of the following was not stated as contributing to the complication of estimating amount of interest carry?

Accepted Answer

Development loan interest rates being fixed while market rates fluctuate does not directly contribute to the complication of estimating the amount of interest carry. The other options involve variables that directly affect the calculation of interest carry.

Question 5

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?

Accepted Answer

To find the release price for each parcel, we need to divide the total project revenue by the number of parcels. 
Total number of parcels = total project revenue / price per parcel = $5,000,000 / $15,000 = 333.33 (round up to 334)
Now we need to calculate when 80% of the total project revenue has been earned:
80% of $5,000,000 = $4,000,000
We know that the loan amount is $3,500,000, so the remaining amount that needs to be earned is:
$4,000,000 - $3,500,000 = $500,000
To calculate the release price, we need to divide the remaining amount by the number of unsold parcels:
$500,000 / (334 x 0.2) = $500,000 / 66.8 = $7,485.03 (round up to $7,485.05)
Finally, we need to add the release price to the original price of each parcel:
$15,000 + $7,485.05 = $22,485.05 per parcel
Since this answer is not one of the available choices, the closest option is B) $13,215.

Question 6

Which of the following is FALSE regarding the release price?

Accepted Answer

The release price is typically calculated to ensure the loan is paid off before the last lot is sold, not when the last lot is sold. This strategy helps in managing risk and ensuring the loan is repaid in a timely manner.

Question 7

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.

Accepted Answer

In some instances, a developer's repayment rate may be set to a different point in time, such as a certain percentage of total project revenue being realized or a certain time period after the project is completed. However, the goal is typically to ensure that the loan is repaid in full before the developer receives any profit from the project.

Question 8

Generally,which of the following is NOT true of interest rate risk management techniques?

Accepted Answer

Interest rate futures contracts are typically used to hedge against interest rate risk, not to benefit from downward movements in interest rates. They lock in a rate, which can protect against rising rates but won't allow borrowers to benefit from falling rates.

Question 9

Which of the following might impact the density of housing in a land development project?

Accepted Answer

All of the factors listed can impact the density of housing in a land development project. The price paid for the land by the developer may impact the amount of money they have available to invest in construction, which can affect the number of units they build. The terrain of the land may make certain areas more suitable for high-density development or may require additional investment to make the land usable for construction. The target market's preferences regarding density can also play a role in determining the final density of the housing development.

Question 10

The release schedule refers to a schedule of expiring leases for existing tenants.

Accepted Answer

The release schedule refers to a schedule of upcoming availability of rental properties for new tenants, not expiring leases for existing tenants.

Question 11

Usually,a lender does not require a developer to submit a schedule of estimated cash flows prior to approving a land development loan.

Accepted Answer

Typically, lenders do require a developer to submit a schedule of estimated cash flows prior to approving a land development loan. This helps the lender assess the feasibility of the project and the developer's ability to pay back the loan.

Question 12

The land development industry is best characterized by which of the following statements?

Accepted Answer

The land development industry is highly fragmented, localized, and extremely competitive, with a large number of small firms operating in each local market. This is due to the fact that land development is a highly localized activity, where knowledge of local zoning laws, regulations, and market conditions are critical to success. Additionally, the large capital requirements needed to enter the industry act as a barrier to entry, thereby limiting the number of national competitors. Land development and project development are not synonymous, as project development involves the various stages of planning, design, construction, and operation of a project, while land development only involves the initial purchase and preparation of land for development. The production technologies and market risks involved in land development are not the same as those in project development, as land development involves land improvement, zoning changes, and the construction of infrastructure, while project development involves the management of resources and coordination of various stakeholders.

Question 13

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?

Accepted Answer

This is referred to as a cross hedge, which involves hedging a cash or spot instrument with a futures instrument that is not perfectly correlated. In this case, a T-bill is being used to hedge the prime rate, which is not a perfect correlation. A perfect hedge would involve using a futures instrument to hedge an identical cash or spot instrument, while a straight hedge would involve hedging with a futures instrument that is perfectly correlated.

Question 14

Which of the following costs should NOT be included in a net present value analysis of a land development project?

Accepted Answer

The answer of Which of the following costs should NOT...

Question 15

When financing land development,the lender generally requires the developer to submit which of the following?

Accepted Answer

When financing land development, the lender generally requires the developer to submit a detailed breakdown of the project cost to ensure that the project is financially feasible and the loan can be repaid. The lender may also require information on any required zoning changes to ensure that the project complies with local regulations. Additionally, the lender may ask for bank references for the general contractor to be used on the project to ensure that they are financially stable and capable of completing the project successfully. Therefore, all of the above options are necessary for a successful loan application when financing land development.

Question 16

A transaction in which two firms trade individual financing advantages to produce more favorable borrowing terms for each is know as a(n):

Accepted Answer

An interest rate swap involves two firms exchanging financing advantages, usually swapping fixed and floating interest rates, to achieve more favorable borrowing terms for each. Sequential and cross hedges are types of risk management strategies used in financial markets, not related to interest rate swaps. Therefore, the correct answer is A) interest rate swap.

Question 17

Generally,which of the following is NOT true of an option contract?

Accepted Answer

If the developer decides not to purchase the property, the landowner typically does not refund the money paid for the option; the option fee is usually non-refundable.

Question 18

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.

Accepted Answer

The answer of It is proper to include an estimate...

Question 19

By using an option contract,a developer may profit from an appreciation in the property's value over the option period.

Accepted Answer

An option contract gives the buyer the right, but not the obligation, to purchase a property at a certain price within a specific time period. If the property value increases during the option period, the developer can exercise the option and purchase the property at the lower price, then sell it for a profit at the higher market value.

Question 20

An analysis of whether land can be purchased and developed profitably is known as __________.

Accepted Answer

The analysis of whether land can be purchased and developed profitably is a comprehensive study known as a feasibility study, which assesses the financial, economic, technical, and legal aspects of a real estate development project. Financial analysis, turnkey study, and project profitability are all components of a feasibility study but do not encompass the entirety of the analysis.

Quiz 17: Financing Land Development Projects