Deck 16: Financing Project Development

Question 1

Which of the following is the usual progression for a real estate development project?

A)Land acquisition,completion,management,sale,construction
B)Land acquisition,construction,completion,management,sale
C)Land acquisition,construction,completion,sale,management
D)Land acquisition,management,construction,completion,sale

Answer 1

Land acquisition,construction,completion,management,sale

Question 2

Commitments for construction financing are usually contingent on commitments for permanent financing

Answer 2

True

Question 3

A standby commitment is:

A)A way to increase NOI for projects with large debt service obligations
B)An agreement by a lender to provide permanent financing for a property once construction is complete
C)Another term for a construction loan
D)The same thing as a take-out loan commitment

Answer 3

An agreement by a lender to provide permanent financing for a property once construction is complete

Question 4

Holdbacks are used by construction lenders to be sure that a developer has met all of his or her obligations before all of the funds from the construction loan are given to the developer

Question 5

Loans made under the assumption that markets will turn around are referred to as spec loans

Question 6

A bullet loan is a construction loan that,in effect,becomes permanent financing when construction is complete

Question 7

Consider the table above.An investor-developer demands a return of at least 9 percent on cost.Which of the following statements is TRUE based on the information above?

A)Neither project produces a sufficient expected return
B)The 275 unit project produces a sufficient return,but the 300 unit project does not
C)The 300 unit project produces a sufficient return,but the 275 unit project does not
D)Both projects produce sufficient return,but the 275 unit project produces a higher return than the 300 unit project

Question 8

Which of the following is one reason that construction lenders typically prefer the cost approach to valuation over the income approach?

A)The cost approach provides a more conservative estimate of value
B)The cost approach provides a more optimistic estimate of value
C)The cost approach is a good indication of the expected value of an income-producing property once construction is complete and it has been leased-up
D)The cost approach is a better estimate of actual market value of the project

Question 9

Permanent financing commitments usually allow the lender to approve major leases

Question 10

The demand for retail space should be examined in terms of the characteristics of the tenants demand in a given market

Question 11

One of the risks of project development is "project risks," which are the result of unexpected changes in general market conditions affecting the supply and demand for space

Question 12

Which of the following is a "soft cost" of construction?

A)The cost of the architectural drawings
B)The cost of pouring the foundation
C)The cost of erecting the building
D)The cost of finishing the interior space

Question 13

Generally,as the cost of a site increases,so do the quality and the density of the improvements constructed on it

Question 14

Permanent funding commitments usually contain many funding contingencies.Which of the following typically is NOT one of those contingencies?

A)Approval of all prospective leases
B)Approval of design changes or building material substitution
C)Provisions for gap financing
D)Minimum rent-up requirements

Question 15

In general,developers must get a construction loan before they can line up permanent long-term financing that will be used once the project is complete and being operated with tenants

Question 16

Lenders typically finance the development of a project as a percentage of completed appraised value,including the price of the site

Question 17

Under a triparty buy-sell agreement,the construction lender will accept funding from the first party willing to repay the construction loan

Question 18

Construction loans provide the money to construct a building and are usually provided by life insurance companies or pensions funds

Question 19

Permanent loans provide the money for a single permanent mortgage loan and are usually provided by commercial banks or mortgage banking companies

Question 20

Even after obtaining permanent financing,a developer still maintains the right to alter a project's design or the level of expenditures

Question 21

In the context of a lease,percentage rents generally indicate that:

A)The tenant will pay a proportionate amount of rent for his space in comparison to the total net rentable area
B)In addition to a base rent,the lessor will receive a percentage of the tenant's cash flow above some break even point
C)The tenant will pay a rent that is a certain percentage of the national average
D)None of the above

Question 22

What term applies to third-party financing that is used between funds advanced by the permanent lender and funds needed to repay the construction loan?

A)Interim loan
B)Mini-perm financing
C)Gap financing
D)Partial financing

Question 23

Which of the following is NOT one of the developer strategies mentioned in this chapter?

A)To sell and lease back the land
B)Owning and managing after sale
C)Sell after lease-up phase
D)Develop for lease in master-planned development

Question 24

The MOST common method of distributing funds provided by a construction loan is a:

A)Single lump sum of money at the closing of the loan
B)Single lump sum of money at the end of the construction project to reimburse the developer for the project's expenses and profit
C)Series of payments throughout the construction project to reimburse the developer for costs incurred since the previous payment
D)Series of payments throughout the construction project to reimburse the developer for anticipated expenses in the upcoming period

Question 25

Developers usually hold back about ___ percent of each progress payment.

A)1
B)10
C)25
D)75

Question 26

Mini-perm loans usually refer to financing:

A)At local coffers
B)For lease-up period
C)For construction and all subsequent periods
D)For construction,lease-up,and one or two subsequent years

Question 27

In comparison to permanent financing,the rates and rate variability for a construction loan would be: Interest Rates Interest Rate Variability

A)High Steady
B)High Fluctuating
C)Low Steady
D)Low Fluctuating

Question 28

Why would a developer be willing to manage a completed project even after it has been sold?

A)The developer knows the project better than other management companies and,therefore,could manage the property more efficiently
B)The developer could profit from the lucrative management fees being charges by management companies
C)Knowledge of the tenant's needs and the current leasing market might give the developer better insight with respect to future developments
D)All of the above

Question 29

Besides an estimate of costs,a construction loan submission package includes many other components.Which of the following is NOT one of those components?

A)Pro Forma Statement of Cash Flows for an investor's portfolio
B)Pro Forma Statement of Cash Flows
C)Pro Forma Operating Statement
D)Ratio and Sensitivity Analysis

Question 30

Interest on a construction loan is usually paid:

A)Up front at the beginning of the loan
B)Periodically over the life of the loan
C)In quarterly installments over the life of the loan
D)At the end of the loan

Question 31

Which of the following common contingencies is usually included with a permanent financing agreement?

A)Completion date for construction phase
B)Minimum rent-up requirements
C)Materials used in construction phase
D)Cleanliness of work area

Question 32

Which of the following is FALSE regarding a construction loan?

A)It usually has a lower rate than does permanent financing
B)It is also known as interim loan
C)Hard costs can usually be financed
D)The entire land cost can not usually be financed