Question 1

While the risks of construction lending may be less in a number of respects than those associated with land acquisition, banks still require a premium in their lending rate as compensation for the risks involved. For construction loans, banks typically require a premium above LIBOR that ranges from:

Accepted Answer

Construction loans are considered riskier than standard loans, so banks typically require a premium of 150-250 basis points above LIBOR to compensate for these risks.

Question 2

Suppose that a developer pre-leases space to a financially strong, national tenant such as Home Depot, without having yet built the structure in which they will be leasing space. This is more commonly referred to as a:

Accepted Answer

Pre-leasing space to a financially strong tenant before constructing the building is known as a build-to-suit. This allows for the developer to tailor the building to the tenant's specific needs, creating a more efficient use of space and potentially increasing the value of the property. Ground lease involves leasing land for a period of time, design-build refers to a project delivery method where the same entity designs and constructs the building, and a contract for deed is a financing agreement for the purchase of real estate.

Question 3

There are a number of ways that a developer can finance the establishment of site control, each with its own advantages and disadvantages. Which of the following methodologies calls for only the initial land rent to be paid out before development actually gets under way?

Accepted Answer

A ground lease is a financing arrangement where the developer pays only the initial land rent before starting the development. In this type of lease, the developer is given control of the land and can use it for a fixed period, paying rent to the landowner. At the end of the lease, the land and any improvements revert back to the landowner. This option allows the developer to save on upfront costs, but they will not own the land at the end of the lease period. The other options listed (joint venture, option, and contract for deed) may require the developer to pay additional costs upfront.

Question 4

With a site under control, the developer will begin to evaluate the feasibility of the project. The main tool that a developer will use in determining the financial feasibility of a project is:

Accepted Answer

Net present value (NPV) analysis is the main tool used by developers in determining the financial feasibility of a project. This analysis takes into account the time value of money and calculates the present value of expected cash inflows and outflows to determine whether the project will be profitable or not. The other options mentioned (cost approach, repeat-sales approach, and direct capitalization) are all related to real estate appraisal and valuation, but are not the primary tools used for determining financial feasibility.

Question 5

Since the architect can be involved in various stages of the development process, there are a number of methods used to compensate him for his services, each of which may depend on the particular phase of development. If the architect provides pre-design services or schematics early in the development process, he will typically be compensated:

Accepted Answer

Pre-design services or schematics are often compensated on an hourly basis because they involve preliminary work that is not directly tied to the final construction costs.

Question 6

The expertise of several types of engineers must be coordinated by the architect in bringing together the final structure design. Which of the following types of engineers is responsible for specifications to achieve safety and stability for a structure's foundation?

Accepted Answer

A soils engineer is responsible for analyzing soil samples and other factors to determine the necessary specifications for a safe and stable foundation for a structure.

Question 7

In each stage of the development process, the developer faces risks that can have a profound impact on the success of the particular project. Which of the following risks is of primary concern after the construction phase has been completed?

Accepted Answer

After the construction phase has been completed, the primary concern is market risk. This refers to the risk associated with the demand for the project in the market. If the market for the project is not as expected, it may result in a financial loss or the project may not be successful. Environmental risk, title risk, and permitting risk are more relevant during the earlier stages of the development process.

Question 8

Once a specific use has been chosen for a site, the first stage in the development process, often considered the "entry ticket to development," is:

Accepted Answer

Establishing site control is considered the first stage in the development process because it ensures the developer has the legal right to proceed with planning and development activities on the site.

Question 9

With a multitude of players involved in the development process, it is important to understand where they participate within the various stages of development. Which of the following individuals is the least likely to be involved in the design stage of development?

Accepted Answer

The general contractor typically becomes involved in the project during the construction stage, after the design has been completed. The other three professionals listed (landscape architect, civil engineer, and land planner) are usually involved in the design stage.

Question 10

Development involves a complex organization of many moving parts. Which of the following choices is often viewed as the single greatest cause of project delays and cost overruns?

Accepted Answer

Effective communication between developer, architect, and engineer is often viewed as the single greatest cause of project delays and cost overruns. When these parties do not communicate effectively, it can lead to misunderstandings and mistakes that can be costly and time-consuming to correct.

Question 11

A developer's selection of an architect is a vital step in the development process as the architect fulfills a number of important roles throughout the life of the project. As compensation for contributions in the design phase, the architect is often given a percentage of the construction cost. For moderately complex designs, the average compensation will be:

Accepted Answer

According to industry standards, the average compensation for moderately complex designs is between 3 to 7% of the construction cost. Therefore, option B is the correct choice. Option A is too low, option C is too high, and option D is not a reasonable option for moderately complex designs.

Question 12

When construction costs exceed the amount of the construction loan, a developer may seek to cover the gap using mezzanine financing. All of the following statements regarding mezzanine debt are true EXCEPT:

Accepted Answer

Mezzanine debt is typically more expensive than traditional construction financing and equity financing. It is often used as a last resort when other forms of financing are not available or insufficient to cover the gap in construction costs. Mezzanine financing also does not prevent foreclosure in the case of default and can result in a loss of equity returns.

Question 13

Suppose that a development group would like to determine if the local zoning and land-use ordinances will permit the type of development they desire. However, they do not want to be obligated to purchase the property if they find that their proposed development will not be permitted. To gain control of the site without being obligated to perform, the development group should purchase which of the following?

Accepted Answer

An option is a contract that gives the holder the right, but not the obligation, to purchase the property at a specific price and within a specific time frame. In this scenario, if the development group purchases an option on the property, they have the right to purchase it at a later date if they determine that their proposed development will be permitted by the local zoning and land-use ordinances. However, if they find that their proposed development will not be permitted, they can simply choose not to exercise their option and are not obligated to purchase the property. This gives the development group control over the property without being obligated to perform. A ground lease is a long-term lease agreement for land, a fast-track is a method of expediting a project, and a floor loan is a type of loan used in construction projects. None of these options would provide the same level of control as an option.

Question 14

The strength of a successful developer lies in his or her ability to select design professionals and engineers that play vital roles in the project's plan and completion. Which of the following individuals would be most concerned, on a general level, with the design aesthetics, optimal use and preservation of the site, traffic flows, utility systems and drainage systems?

Accepted Answer

The individual who would be most concerned with design aesthetics, optimal use and preservation of the site, traffic flows, utility systems and drainage systems would be a land planner, as their role involves coordinating and balancing all aspect of a development project to ensure it is sustainable, functional, and visually pleasing. Landscape architects may also have a similar focus but their primary responsibility is the design of outdoor spaces and green areas. Mechanical engineers are typically focused on the HVAC and plumbing systems within a building, while environmental agents are concerned with environmental impacts and regulations, but not necessarily the overall design and functionality of a project.

Question 15

The developer will face a variety of costs throughout the project's life. Which of the following would be classified as a soft cost?

Accepted Answer

Soft costs are typically expenses that are not directly related to the physical construction of the project. They include expenses such as legal fees, design and engineering fees, permits and taxes, and other administrative costs. Out of the options given, legal fees of the permitting process would fall under the soft cost category. The other options are all hard costs, as they relate directly to the physical construction of the project.

Question 16

In more complex development projects, a developer may choose to combine the roles of the architect and general contractor into one in order to mitigate design-cost conflicts that otherwise must be negotiated when plans are revised. This arrangement is more commonly referred to as a:

Accepted Answer

The arrangement described in the question where the architect and general contractor roles are combined into one is commonly known as design-build. This method can help to streamline the project and avoid conflicts that may arise when design changes are required during construction. The other options mentioned (build-to-suit, subordination agreement, fast-track) do not accurately describe this particular arrangement.

Question 17

Since banks seldom loan 100 percent of construction costs, developers often turn to mezzanine financing to obtain necessary funds. With mezzanine debt, which of the following entities is typically pledged as collateral to the lender?

Accepted Answer

Mezzanine financing typically involves the pledge of ownership shares in the development entity rather than physical assets such as land or construction materials. This allows the lender to take ownership of the borrower's equity in the development in the event of default. Personal assets of the developer may also be pledged as additional collateral, but this varies depending on the specific terms of the mezzanine financing agreement.

Question 18

While uncertainties involving the multitude of players and stages in the development process provide a great deal of risk, market cycles tend to compound these risks. Out of the four phases of a market cycle, which would be the most desirable point for a developer to enter the market?

Accepted Answer

The answer of While uncertainties involving the multitude of players...

Question 19

The majority of financing for the acquisition of land for development is most likely to come from which of the following parties?

Accepted Answer

Pooled equity of a limited liability corporation (LLC) is commonly used to finance land acquisition for development, as it allows multiple investors to pool their resources and share the risks and rewards.

Question 20

Even the smallest building project involves a multitude of separate contractors to complete construction. Therefore, it becomes difficult for the developer to monitor the construction process. Which of the following individuals serves as the developer's liaison and representative on the project site?

Accepted Answer

The construction manager typically serves as the developer's liaison and representative on the project site, overseeing the work of various contractors and ensuring that the project stays on schedule and within budget. The general contractor and subcontractors are responsible for specific areas of the construction process, while the land planner is typically involved in the initial design and development of the project.

Quiz 23: Development: The Dynamics of Creating Value