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Flashcards in PROP 1023 / CHAPTER 11 Deck (21):
1

Three major elements of business costs are _ _ _ _ _

Three major elements of business costs are fixed overhead, market monitoring, and exploratory costs.

2

Fixed overhead includes _ _ _ _ _

Fixed overhead includes the cost of business accommodation, basic staff wages and salaries, and the required minimum income of the developer.

3

Explain:  Market Monitoring Costs

Market Monitoring

The entrepreneurial nature of land development requires developers to spend funds on an ongoing basis to monitor changes in market conditions in order to identify potential development opportunities.

 

Market monitoring may range from informal contacts and observations to sophis­ticated research and data collection activities.

4

Explain:  Exploratory Costs

Exploratory Costs

Market monitoring will indicate development opportunities. Developers must then use capital to quickly explore the economies of a potential project through preliminary feasibility studies. The management objective at this stage is to provide sufficient financial resources to determine the project's general market potential.

5

In this stage the project is planned, financed, and approved; this is the phase of negotiation and decision-making.

ANSWER:  PROJECT INITIATION

6

What are the five major activities involved in project initiation.

There are five major activities involved in project initiation: land acquisition, detailed feasibility analysis, planning, initial marketing, and financing. 

7

Explain what's involved in the land acquistion stage?

The acquisition stage involves obtaining control over a site before detailed feasibility studies, financial commitments, or planning approval have necessarily been obtained.

The developer has to balance two concerns: to have full control over the site in case initial expectations are confirmed and to avoid being "stuck" with the site if reality differs from these expectations.

8

 List 5 methods which a developer may use to obtain control.

Options

Methods of obtaining control over land may be categorized as:

  • Outright purchase
  • Option to purchase (or a series of options, e.g. an option to option)
  • Lease subject to purchase option
  • Agreement for sale
  • Joint venture with land owner
  • Purchase with financing provided by vendor

9

NOTE ONLY / CONTROL OF A SITE

Rather than full and outright purchase, developers prefer to obtain control of a site through a low cost vehicle. The lower the acquisition cost, assuming some valid form of control of the site is obtained, the greater the developer's flexibility. However, in order to have low costs, the developer generally must be satisfied with a reduced element of control.

NOTE ONLY / CONTROL OF A SITE

Rather than full and outright purchase, developers prefer to obtain control of a site through a low cost vehicle. The lower the acquisition cost, assuming some valid form of control of the site is obtained, the greater the developer's flexibility. However, in order to have low costs, the developer generally must be satisfied with a reduced element of control.

10

What are the two levels of planning in the project initiation stage of the development process?

[1]  Planning and design of the project itself, including detailed soil tests, surveys, grading and levelling designs, and the preparation of architectural and engineering plans.

 

[2]  The second element of planning costs involves those associated with obtaining government approval.

11

Once developers have decided to proceed with a project beyond the initiation stage, the focus shifts from decision-making and entrepreneurial activity to _ _ _ _ _ _ _ _ _

Once developers have decided to proceed with a project beyond the initiation stage, the focus shifts from decision-making and entrepreneurial activity to the administration and management of the physical aspects of improving land.

12

What are hard costs?

All costs incurred in the creation of the physical improvements to the land. These include the costs of servicing the land, constructing buildings, paving and landscaping and all of the other costs associated with the physical creation of the finished real estate project. 

13

What are soft costs?

Expense item that is not considered direct construction cost.

 

Items such as development cost charges and other levies paid to municipalities, formal architectural working drawings, detailed engineering and survey, legal conveyancing costs, and the host of other expenses that make up the balance of the construction budget beyond land acquisition and hard construction costs.

14

_ _ _ _ _ _ _ represent the developer's own capital available to contribute to the project. These funds are derived from accumulated revenues, retained earnings, profits from other development ventures, capital accumulated from unrelated business activities, or other personal sources of capital. 

Equity reserves represent the developer's own capital available to contribute to the project. These funds are derived from accumulated revenues, retained earnings, profits from other development ventures, capital accumulated from unrelated business activities, or other personal sources of capital. 

15

A_ _ _ _ _ _ _ _ is used to supplement a developer's own reserves. It is arranged through a financial institution whose credit analysis focuses upon the developer's track record, business, and credit history. 

A line of credit is used to supplement a developer's own reserves. It is arranged through a financial institution whose credit analysis focuses upon the developer's track record, business, and credit history. 

16

_ _ _ _ _ _ is the source of mortgage funds actually received during the development process and used to carry out the development. The loan is secured by the real estate, typically by way of a first mortgage. 

Construction financing is the source of mortgage funds actually received during the development process and used to carry out the development. The loan is secured by the real estate, typically by way of a first mortgage. 

17

Construction financing is also known as _ _ _ _ _ _ _ 

Construction financing is also known as interim financing. 

18

Explain how construction loans are advanced?

Construction loans are not advanced to developers in a lump sum, rather, they are advanced incrementally in instal¬ments as specific stages in development are completed. As a result, the developer must draw on other sources of working capital to carry the construction between receiving portions of the mortgage loan.

19

What is a stand-by commitment?

  • For a fee a lender guarantees to act as a lender of last resort,
  • Demonstrating to the construction lender there will ultimately be long-term funds available, although another lending institution may provide them.
  • Essentially the stand-by commitment is a long-term loan commitment where neither the lender nor the borrower necessarily expect the loan to be drawn down.
  • The whole purpose of the stand-by loan is to facilitate the arrangement of a construction loan, while the developer fully expects to obtain permanent financing elsewhere before the construction loan is due.
  • The stand-by loan has value to the developer as it assures the construction lender that a source of funds to repay the construction loan does exist.

20

Explain the role of pre-sale contracts?

Pre-sale contracts  provide the construction lender with assurance that the construction loan will be paid off upon project completion.

 

The construction lender has the comfort of knowing that the sale proceeds of the project will be available upon completion of construction.

 

However, the role of the pre-sale is not to necessarily provide the construction lender with assurance that funds will be available to pay out the construction loan upon completion of the project but, rather, it mitigates the lender's perception of the marketing risk by providing a strong indication of the demand for, and market acceptance of, the real estate product being developed.

21

Explain what a blanket mortgage is?

BLANKET MORTGAGE:  A mortgage which covers two or more pieces of real estate. The real estate is held as collateral on the mortgage, but the individual pieces of the real estate may be sold without retiring the entire mortgage.