Question 1

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

A) True 
 B)False  False

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

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

Accepted Answer

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 B

Question 4

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

Accepted Answer

A)   Financial analysis
B)   Feasibility study
C)   Turnkey study
D)   Project profitability

Question 5

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

Accepted Answer

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

Question 6

Generally, which of the following is FALSE regarding an option contract?

Accepted Answer

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

Question 7

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

Accepted Answer

A)   Interest rate swap
B)   Sequential short hedge
C)   Cross hedge
D)   All of the above

Question 8

Generally, which of the following is FALSE regarding interest rate risk management techniques?

Accepted Answer

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

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

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

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

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

Question 13

$$\begin{array} { c r c } 
\text { Month } & \begin{array} { r } 
\text { Canstructian } \
\text { Draw }
\end{array} & \begin{array} { c } 
\text { Sales } \
\text { Revenue }
\end{array} \
1 & \$ 200,000 & \
2 & 150,000 & \
3 & 75,000 & \
4 & 25,000 & \$ 600,000 \
\text { } & & \
\text { Total  } & \$ 450,000 & \$ 600,000 \
\text { Present value @ 12\% } & \$ 441,883 & \$ 576,588 \
\end{array}$$
-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?

Accepted Answer

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

Question 14

$\begin{array} { lr } 
\text{Tatal sales revenue}&\text { \$ 10,000,000 } \ 
\text{Less: Develapment cost}&\text { 6,000,000 } \ 
\text{Less: Land asking price}& \underline{1,000,000} \
\text{Patential gross profit}&\$ 3,000,000 \ 
\text{Less: Admin., legal, commissians, etc.}&\underline{1,500,000} \ 
\text{Patential net profit}&\underline{\$ 1,500,000} \ 
 \end{array}$
-Consider the feasibility study shown in the table above. What is the return on total cost for the proposed project?

Accepted Answer

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

Question 15

A feasibility study analyzes whether a tract can be purchased and developed profitably.

Accepted Answer

A) True 
 B)False

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

It is illegal for the lender to hold back funds from the developer.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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

Question 19

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

Accepted Answer

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

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 17: Financing Land Development Projects

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.

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

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

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

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

Generally, which of the following is FALSE regarding an option contract?

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

Generally, which of the following is FALSE regarding interest rate risk management techniques?

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

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?

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

A feasibility study analyzes whether a tract can be purchased and developed profitably.

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.

It is illegal for the lender to hold back funds from the developer.

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

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

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.