CHAPTER 17

Financing Land Development Projects

TRUE/FALSE

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. (T)

2. Lenders typically insist on a loan repayment rate that equal to the rate for which parcels are
expected to sell. (F)

3. The release price is the dollar amount of a loan that must be repaid when a lot is sold. (T)

4. A feasibility study analyzes whether a tract can be purchased and developed profitably. (T)

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

6. The release schedule refers to a schedule of expiring leases for existing tenants. (F)

7. By using an option contract, a developer may profit from an appreciation in the property’s
value over the option period. (T)

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. (F)

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. (F)

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

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. (F)

12. In order to obtain a land development loan, the developer is required usually to purchase
title insurance. (T)

13. It is common for a developer to hold back funds to be sure that subcontractors perform all
work completely before making final payment. (T)

14. It is illegal for the lender to hold back funds from the developer. (F)

MULTIPLE CHOICE

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

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 Potential net profit $1,500,000

15. Consider the feasibility study shown in the table above. What is the return on total cost for
the proposed project? (A)

(A) 15.0%
(B) 17.6%
(C) 21.4%
(D) 150.0%

16. Refer to the information in the previous question. 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: (A)

(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

Construction Sales
Month Draw 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

17. Consider the table above, which summarizes monthly construction draws and sales
revenues. What is the percent of lot sales revenue that needs to be used to repay the loan?
(C)

(A) 4.0%
(B) 75.0%
(C) 76.6%
(D) 33.3%

18. The land development industry is best characterized by which of the following statements?
(B)

(A) The land development industry is dominated by relatively few national competitors
(B) The land development industry is highly fragmented, localized, and extremely
competitive

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 (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

19. Which of the following is the MOST LIKELY sequence of events in the land development
process? (C)

(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

20. Generally, which of the following is FALSE regarding an option contract? (C)

(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

21. 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? (B)

(A) $8,400
(B) $13,215
(C) $18,750
(D) None of the above

22. Which of the following might impact the density of housing in a land development project?
(D)

(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

23. Which of the following costs should NOT be included in a net present value analysis of a
land development project? (D)

(A) Land purchase price

(B) Property tax
(C) General overhead such as personnel costs

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 (D) Developer’s profit

24. When financing land development, the lender generally requires the developer to submit
which of the following? (D)

(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

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

(A) Interest rate swap

(B) Sequential short hedge
(C) Cross hedge
(D) All of the above

26. 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? (C)

(A) A perfect hedge

(B) A straight hedge
(C) A cross hedge
(D) None of the above

27. Generally, which of the following is FALSE regarding interest rate risk management
techniques? (D)

(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

28. An analysis of whether land can be purchased and developed profitably is known as: (B)

(A) Financial analysis

(B) Feasibility study
(C) Turnkey study
(D) Project profitability

29. The amount to be paid to the lender from each lot sale is included in the: (A)

(A) Release schedule

(B) Development agreement
(C) Cost breakdowns

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 (D) Subcontracts
30. Which of the following was NOT stated as contributing to the complication of estimating
amount of interest carry? (D)

(A) The loan is drawn and interest is calculated on drawn amount

(B) Revenue from each type of site varies
(C) The rate of repayment of a loan depends on when the parcel is sold
(D) Development loan interest rates are usually fixed while market rates fluctuate

31. Which of the following is FALSE regarding the release price? (A)

(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

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