Real Estate Finance Ch. 16

Commitments for construction financing are usually contingent on commitments for permanent financing. (T/F)

True

Permanent financing commitments usually allow the lender to approve major leases. (T/F)

True

Which of the following is a "soft cost" of construction?

A. The cost of finishing the interior space

B. The cost of pouring the foundation

C. The cost of erecting the building

D. The cost of the architectural drawings

D. The cost of the architectural drawings

One of the risks of project development is "project risks," which are the result of unexpected changes in general market conditions affecting the supply and demand for space. (T/F)

False

What term applies to third-party financing that is used between funds advanced by the permanent lender and funds needed to repay the construction loan?

A. Partial financing

B. Mini-perm financing

C. Gap financing

D. Interim loan

C. Gap financing

In comparison to permanent financing, the rates and rate variability for a construction loan would be:

A. High interest rates, Steady interest rate variability

B. High interest rates, Fluctuating interest rate variability

C. Low interest rates, Steady interest rate variability

D. Low interest rates, Fluctuating interest rate variability

B. High interest rates, Fluctuating interest rate variability

In general, developers must get a construction loan before they can line up permanent (long-term) financing that will be used once the project is complete and being operated with tenants. (T/F)

False

A standby commitment is:

A. Another term for a construction loan

B. A way to increase NOI for projects with large debt service obligations

C. An agreement by a lender to provide permanent financing for a property once construction is complete

D. The same thing as a take-out loan commitment

C. An agreement by a lender to provide permanent financing for a property once construction is complete

Under a triparty buy-sell agreement, the construction lender will accept funding from the first party willing to repay the construction loan. (T/F)

False

Lenders typically finance the development of a project as a percentage of completed appraised value, including the price of the site. (T/F)

False

Which of the following is one reason that construction lenders typically prefer the cost approach to valuation over the income approach?

A. The cost approach provides a more optimistic estimate of value

B. The cost approach is a good indication of the expected value of an income-producing property once construction is complete and it has been leased-up

C. The cost approach is a better estimate of actual market value of the project

D. The cost approach provides a more conservative estimate of value

D. The cost approach provides a more conservative estimate of value

Which of the following common contingencies is NOT usually included with a permanent financing agreement?

A. Minimum rent-up requirements

B. Cleanliness of work area

C. Completion date for construction phase

D. Materials used in construction phase

B. Cleanliness of work area

Permanent loans provide the money for a single permanent mortgage loan and are usually provided by commercial banks or mortgage banking companies. (T/F)

False

Holdbacks are used by construction lenders to be sure that a developer has met all of his or her obligations before all of the funds from the construction loan are given to the developer. (T/F)

True

Which of the following is FALSE regarding a construction loan?

A. The entire land cost can not usually be financed

B. Hard costs can usually be financed

C. It usually has a lower rate than does permanent financing

D. It is also known as interim loan

C. It usually has a lower rate than does permanent financing

Which of the following is the usual progression for a real estate development project?

A. Land acquisition, management, construction, completion, sale

B. Land acquisition, completion, management, sale, construction

C. Land acquisition, construction, completion, management, sale

D. Land acquisition, construction, completion, sale, management

C. Land acquisition, construction, completion, management, sale

Which of the following is NOT one of the developer strategies mentioned in this chapter?

A. Owning and managing after sale

B. Sell after lease-up phase

C. Develop for lease in master-planned development

D. To sell and lease back the land

D. To sell and lease back the land

Mini-perm loans usually refer to financing:

A. At local coffers

B. For lease-up period

C. For construction and all subsequent periods

D. For construction, lease-up, and one or two subsequent years

D. For construction, lease-up, and one or two subsequent years

Loans made under the assumption that markets will turn around are referred to as spec loans. (T/F)

False

A bullet loan is a construction loan that, in effect, becomes permanent financing when construction is complete. (T/F)

True

The demand for retail space should be examined in terms of the characteristics of the tenants demand in a given market. (T/F)

True

Construction loans provide the money to construct a building and are usually provided by life insurance companies or pensions funds. (T/F)

False

Consider the table above. An investor-developer demands a return of at least 9 percent on cost. Which of the following statements is TRUE based on the information above?

A. Both projects produce sufficient return, but the 275 unit project produces a higher return than the 300 unit project

B. The 300 unit project produces a sufficient return, but the 275 unit project does not

C. The 275 unit project produces a sufficient return, but the 300 unit project does not

D. Neither project produces a sufficient expected return

B. The 300 unit project produces a sufficient return, but the 275 unit project does not

Developers usually hold back about ___ percent of each progress payment.

A. 1

B. 10

C. 25

D. 75

B. 10

In the context of a lease, percentage rents generally indicate that:

A. The tenant will pay a proportionate amount of rent for his space in comparison to the total net rentable area

B. In addition to a base rent, the lessor will receive a percentage of the tenant's cash flow above some break even point

C. The tenant will pay a rent that is a certain percentage of the national average

D. None of the above

B. In addition to a base rent, the lessor will receive a percentage of the tenant's cash flow above some break even point

Why would a developer be willing to manage a completed project even after it has been sold?

A. The developer knows the project better than other management companies and, therefore, could manage the property more efficiently

B. The developer could profit from the lucrative management fees being charges by management companies

C. Knowledge of the tenant's needs and the current leasing market might give the developer better insight with respect to future developments

D. All of the above

D. All of the above

The MOST common method of distributing funds provided by a construction loan is a:

A. Single lump sum of money at the closing of the loan

B. Single lump sum of money at the end of the construction project to reimburse the developer for the project's expenses and profit

C. Series of payments throughout the construction project to reimburse the developer for costs incurred since the previous payment

D. Series of payments throughout the construction project to reimburse the developer for anticipated expenses in the upcoming period

C. Series of payments throughout the construction project to reimburse the developer for costs incurred since the previous payment

Even after obtaining permanent financing, a developer still maintains the right to alter a project's design or the level of expenditures. (T/F)

False

Generally, as the cost of a site increases, so do the quality and the density of the improvements constructed on it. (T/F)

True

Permanent funding commitments usually contain many funding contingencies. Which of the following typically is NOT one of those contingencies?

A. Approval of all prospective leases

B. Provisions for gap financing

C. Approval of design changes or building material substitution

D. Minimum rent-up requirements

A. Approval of all prospective leases

Interest on a construction loan is usually paid:

A. Up front at the beginning of the loan

B. Periodically over the life of the loan

C. In quarterly installments over the life of the loan

D. At the end of the loan

D. At the end of the loan

Besides an estimate of costs, a construction loan submission package includes many other components. Which of the following is NOT one of those components?

A. Pro Forma Statement of Cash Flows for an investor's portfolio

B. Pro Forma Operating Statement

C. Ratio and Sensitivity Analysis

D. Pro Forma Statement of Cash Flows

A. Pro Forma Statement of Cash Flows for an investor's portfolio