REA Development & Feasibility Analysis 2

Question 1

What is a 'guaranteed maximum price' (GMP) contract in real estate construction?

Accepted Answer

A contract where the contractor agrees to complete the project for no more than a stated maximum price, bearing cost overrun risk

Answer

A government guarantee that ensures the developer will receive a minimum sales price for completed units

Answer

A lender's commitment to fund construction draws up to a stated maximum loan amount

Answer

An insurance policy that guarantees the project will be completed if the developer defaults

Question 2

What does 'yield on cost' measure in real estate development?

Accepted Answer

Stabilized NOI divided by total project cost, indicating the project's return on invested capital before sale

Answer

Annual cash flow divided by equity contribution, measuring cash return to equity

Answer

Market cap rate applied to land value, determining the land's development potential

Answer

NOI divided by the current appraised value of the completed building

Question 3

What is a 'residual land value' analysis used for?

Accepted Answer

Determining the maximum price a developer can pay for land while still achieving return targets

Answer

Estimating the land's value after the proposed development is completed and stabilized

Answer

Calculating the tax basis of land after depreciation over the holding period

Answer

Determining the minimum proceeds needed from a land sale to pay off existing liens

Question 4

In development underwriting, what is an 'interest reserve'?

Accepted Answer

Funds set aside in the construction loan to cover interest payments during the construction and lease-up period

Answer

A deposit held by the lender to cover potential cost overruns on the project

Answer

Cash reserves maintained by the developer to fund equity shortfalls

Answer

A portion of permanent loan proceeds withheld until the property reaches stabilized occupancy

Question 5

What is a 'ground lease' structure and how does it affect development economics?

Accepted Answer

A long-term lease of land where the developer builds improvements but pays rent to the land owner

Answer

A lease of the first floor or ground level of a commercial building to retail tenants

Answer

A land purchase agreement contingent on obtaining development entitlements

Answer

A subordinated mortgage on land used to reduce equity requirements in development

Question 6

What is 'construction contingency' in a development budget?

Accepted Answer

A reserve percentage added to hard costs to cover unforeseen construction expenses

Answer

The developer's fee for managing the construction process on behalf of investors

Answer

The amount by which construction costs can increase before triggering loan default

Answer

A lender-required reserve funded at closing to cover future capital expenditure needs