Chapter 8 HOW TO GET LAND DEVELOPMENT AND CONSTRUCTION LOANS Flashcards
1
Q
What is the goal of the chapter on development and construction loans?
A
To introduce the world of development, land acquisition, and development loans to enhance financing capability
2
Q
What are the two primary types of loans foundational to real estate development?
A
- Land development loan
- Construction loan
3
Q
What is a land development loan?
A
A loan obtained by a property owner or developer specifically for developing vacant land or redeveloping existing properties
4
Q
What challenges does land development face today compared to 20 years ago?
A
Increased bureaucracy causing delays and higher costs
5
Q
True or False: Delays in land development can significantly increase project costs.
A
True
6
Q
What can happen if a developer runs out of time to complete due diligence?
A
They may lose the project or see the value of their land decrease
7
Q
What is the significance of housing starts in the real estate market?
A
A decline in housing starts can indicate trouble for the entire real estate market
8
Q
What is a combined loan in relation to development?
A
A loan structure that ties together a land development loan and a construction loan
9
Q
What does Oscar plan to develop on his 224 acres of land?
A
Two-acre single-family homesteads
10
Q
What is the estimated total development cost for Oscar’s project?
A
$1,898,000
11
Q
Fill in the blank: Oscar’s estimated cash needed for development is _______.
A
$1,823,000
12
Q
How does Oscar plan to finance the development of his land?
A
By selling hardwood from the land and obtaining a land development loan
13
Q
What is the anticipated profit from Oscar’s land development project?
A
$4,900,700
14
Q
What is one reason Oscar decided to keep the roadways private?
A
To avoid building to public way specifications and reduce costs
15
Q
What are the potential sales from Oscar’s development based on his pricing strategy?
A
$8,960,000
16
Q
What is the maximum price Oscar could ask for each two-acre tract?
A
$80,000
17
Q
What should Oscar consider when requesting the amount of money to borrow?
A
To request a higher amount to cover unforeseen expenses during development
18
Q
What might Oscar need to do if he wanted to build homes on the developed sites?
A
Obtain a construction loan
19
Q
What is the relationship between Oscar’s loan-to-value ratio and the lender’s risk?
A
A lower loan-to-value ratio reduces the lender’s risk, making loan terms easier
20
Q
What could be one strategy for Oscar to handle the sale of his land?
A
Establishing a development corporation to manage the sales
21
Q
True or False: All real estate categories experience the same cycles.
A
False
22
Q
What type of partners do large national developers like Trammel Crow Residential seek?
A
Wall Street or insurance companies
23
Q
What are some costs that Oscar needs to account for in his development presentation?
A
- Roadway costs
- Power line costs
- Sales brochures
- Interest on loan
- Miscellaneous costs
- Reserve for contingencies
- Sales commissions
24
Q
What can a developer do to secure preapproval for financing?
A
Contact lenders and explain the development project
25
What is the potential outcome of delays in obtaining project approvals?
Developers may lose significant amounts of money and time
26
What is the role of permanent loans in the development process?
They are taken out by buyers after homes are sold to pay off construction loans
27
What is the purpose of a construction loan?
To finance the development of individual homes or projects
28
How does a construction loan get paid off after a home is sold?
The buyer takes out a permanent loan, paying off the construction loan
29
What is the release price in a construction loan?
An amount stipulated by the lender for each home sold
30
What should Oscar consider when determining his loan amount?
To be conservative in his loan amount and development costs
31
True or False: A construction loan can only secure one home at a time.
False
32
What problem does Bill encounter when trying to get a construction loan?
He cannot get a regular loan due to secondary financing in the deal
33
How does Bill resolve the issue with his construction loan?
He gives Oscar a first mortgage against another property to pay off the land
34
What are combined loans in construction financing?
Loans that combine construction and permanent financing into one transaction
35
What is typically easier to obtain: combined loans or separate loans?
Combined loans
36
What is a permanent or end loan?
The final mortgage placed on the property after construction
37
What is the typical amortization term for a permanent loan?
20 to 40 years
38
Fill in the blank: The longer the term of amortization, the _______ the constant payment.
lower
39
What is the total payment for a $1,000,000 loan at 9% interest amortized over 25 years?
$2,517,510
40
What is a key benefit of a fixed-rate, long-term amortized loan for investors?
It allows for good leverage and cash flow increase
41
What is the cash flow return on a cash investment of $460,000 with a cash flow of $70,900?
15.413 percent
42
What is a disadvantage of a balloon mortgage?
The borrower may be caught with a property that is no longer favorable to lenders
43
Who are common sources for permanent loans?
* Commercial banks
* Credit unions
* Insurance companies
* REITs
* Pension funds
44
What typically starts the sequence of development and construction loans?
The actual development or building process
45
What effect does the permanent loan have on the development loan?
It influences the amount of development or construction funding available
46
What should developers do to maximize loan proceeds?
Understand what permanent lenders favor for financing
47
What is the first step in examining new developments for financing?
Feel out the market to see what permanent lenders favor.
## Footnote
Understanding lender preferences helps guide investment choices.
48
What types of projects might permanent lenders favor?
* Single-family homes in the $340,000 range
* Shopping centers in growing suburban areas
* Mobile home parks with a density no greater than six sites per acre
## Footnote
These preferences can change based on market conditions.
49
What should smart developers do regarding funding?
Follow big money and local market trends.
## Footnote
Local conditions often dictate lender preferences more than national trends.
50
What are the three most important elements in real estate?
* Location
* Use
* Approval
## Footnote
These elements must be considered in that order for successful investments.
51
What is the importance of 'Location' in real estate?
Location determines property value and is governed by zoning ordinances and building regulations.
## Footnote
Always seek local government approvals before assuming rights to build or use.
52
What is the first rule of any real estate investor when selecting a property?
Tie up the property once you find one that meets your criteria.
## Footnote
This involves negotiating basic terms and conditions with the seller.
53
What is a common method to tie up a property?
Contract for an option to buy with a due diligence period.
## Footnote
This allows for inspections and decision-making without rushing.
54
What is gap financing?
A secondary form of financing used to fill the gap between the floor amount of a loan and the maximum amount.
## Footnote
Also known as mezzanine financing, it is often expensive and should be used cautiously.
55
What should investors do once they have a loan commitment?
Nail down the development or construction lender.
## Footnote
Permanent lenders may also provide interim loans leading to the permanent loan.
56
What happens if the terms of a loan commitment are not met?
The lender may withdraw from the loan or impose stricter conditions.
## Footnote
Changes made without lender approval can jeopardize financing.
57
True or False: It is advisable to obtain a construction loan without an end loan commitment.
False.
## Footnote
Obtaining a construction loan without an end loan can lead to financial disaster.
58
What is the advantage of a combined package loan for projects under $2 million?
Local lenders can compete favorably with a two-part loan structure.
## Footnote
This combines construction and permanent loans into one document.
59
What is important for those involved in real estate development or construction?
A working knowledge of financing tools and the ability to package deals.
## Footnote
Expertise in planning and engineering may be necessary.
60
What type of property did Jackson own in Fort Lauderdale?
A 15-acre prime, business-zoned land located on a major highway.
## Footnote
This property was the largest vacant property in the city.
61
What type of property did Jackson own?
A 15-acre prime, business-zoned land in Fort Lauderdale with deep-water access to the Atlantic Ocean
## Footnote
The property was noted for being the largest vacant property in the city.
62
What was the asking price per square foot for Jackson's property?
$22 per square foot
## Footnote
This price was higher than what realtors predicted a buyer would pay.
63
What were some drawbacks in marketing Jackson's property?
* General economy
* Price perception
* Size of the tract
* Inability to subdivide the property
64
What approach did Jackson take to entice an investor?
He sought to find an economic use for the property that could be financed
## Footnote
Jackson listed all possible uses, no matter how impractical they seemed.
65
What did Jackson do after compiling a list of possible uses for the property?
He approached lenders and mortgage brokers to discuss financing options
## Footnote
He sought their insights on which uses were most financeable.
66
What was the outcome of Jackson's efforts?
The property was sold based on developed concepts that attracted interest from lenders and buyers.
67
How can one increase the amount of money borrowed on a development loan?
* Seek the lender’s favorite type of project
* Plan the project thoroughly
* Have accurate financial numbers
* Tie up the property
* Act confidently when asking for funds
* Leave inexperience out of the equation
* Negotiate for more than initially offered
* Offer incentives to the lender
68
What is a crucial aspect of a presentation for a development loan?
It should include greater detail to cover the potential of the project
## Footnote
Unlike existing properties, new developments rely on projected performance.
69
What is a common mistake in feasibility studies?
Ignoring the competition and market saturation when assessing project viability
## Footnote
A well-planned project may still fail if there are numerous similar projects in the area.
70
What are the main components of a feasibility study outline?
* The Project
* The Property
* The Developer
* The Loan Request
* Supporting Documents
71
What should the 'Economics of the project' section include?
* Cost estimates
* Operating expenses
* Cash flow analysis
72
What are some sources for obtaining a development or construction loan?
* Mortgage brokers
* Local commercial banks
* Private money sources
73
What is important to remember in negotiations with lenders?
* Distance requires more support
* You can’t really lose by doing initial work yourself
74
What aspects should be included in the 'The Developer' section of a feasibility study?
* Name
* Address
* Occupation
* General data
* Net worth
* Supporting documents
75
True or False: Experience is the most important factor in obtaining a high loan amount.
False
## Footnote
Ability and the project's viability are more crucial than past experience.
76
Fill in the blank: The lender's request for a feasibility study is often to determine the ______ of a given project.
potential for success
77
What is the purpose of third-party support material in a property study?
To provide evidence that decision-makers can rely on.
78
What advantage does conducting initial work on a property study provide?
Increases knowledge about the area, project, and competition.
79
How can mortgage brokers assist in property studies?
They can help analyze numbers and may get excited about feasible projects.
80
What should you be ready to negotiate regarding financing?
The terms of the loan, as lenders may demand favorable deals.
81
What is an override in the context of loan agreements?
A lender receives a preset percentage of income above a certain threshold.
82
What does land ownership entail for a lender in a loan agreement?
The lender takes title to the land and leases it to the developer.
83
What is a co-venture in financing?
A partnership where the lender provides funds and receives a percentage of the venture.
84
True or False: It is important to accept 'no' as a final answer from lenders.
False.
85
What should you do after facing a defeat in securing financing?
Analyze the reasons for the rejection and move on to other options.
86
Why is too much praise a concern during project evaluation?
It may indicate a lack of critical analysis and could overlook potential flaws.
87
What is the primary goal of techniques for obtaining construction and development loans?
To buy the property right.
88
What is the first factor to consider in existing financing?
The term of the loan.
89
What can affect the last scheduled payment date of a mortgage?
Incorrect amortization calculations.
90
What is a balloon payment in a mortgage?
A large final payment due at the end of the loan term.
91
What should you know about the interest charged on a loan?
Any penalties or adjustments that could increase the interest rate.
92
Can you prepay principal without penalty?
This is a critical consideration; loans with penalties should be avoided.
93
What is subordination in financing?
An agreement allowing new liens to be placed above the existing mortgage.
94
What does a sliding mortgage technique allow?
To change the security for the note to another property.
95
What must you check regarding the sale or replacement of property assets?
If the loan allows for the free sale or replacement of assets.
96
What is a release price in relation to a mortgage?
The cost and conditions for releasing a property from the mortgage.
97
Why is the location of the lender important?
Remote lenders may complicate communication and fact-checking.
98
What legal aspects must be considered in a financing transaction?
Laws that may impact the project or financing.
99
What is a crucial step regarding the borrower's credit?
To build and maintain a good credit history.
100
What is recommended to build good credit?
Obtain and responsibly use several credit cards.
101
Fill in the blank: The lender must be able to ______ on your credit and references.
check
102
What should you do with your bankcard to build credit history?
Work up to one or two cards, use them regularly, and pay off the balance early
## Footnote
Utilize the 'credit payment plan' offered for a month or two
103
What is the consequence of being in default on one credit card?
Other cards may also call you in default
## Footnote
Credit card companies monitor your payment history across all cards
104
What should you do when you receive your new credit card statement?
Watch for annual charges that could affect your low introductory rate
## Footnote
Overlooking these charges can lead to losing benefits on other cards
105
How should you approach your commercial bank president?
Make sure they know you and inquire about available loans
## Footnote
Start with a small loan to build good history
106
Why is it beneficial to do business regularly with the same people?
It builds relationships and can help you secure credit references
## Footnote
Regular clients are more likely to provide positive references
107
What should you inform your business contacts before taking out a loan?
Let them know you would like to use them as credit references
## Footnote
Prompt responses from them can influence loan approval
108
What is the purpose of a personal reference letter?
To provide a positive background and critical aspects for potential loans
## Footnote
It should include personal details and be positively framed
109
What type of list should you build for credit references?
A list of known businesspeople including your CPA, banker, and professional associates
## Footnote
This list should be impressive and regularly updated
110
What should you include in your reference letter?
An updated list of credit references
## Footnote
New additions show that you are well-connected
111
What is a letter of recommendation?
A letter from a reference stating you are trustworthy and respected in the community
## Footnote
It should be tailored and specific to the individual writing it
112
How often should you obtain a new letter of recommendation?
Every couple of years or when there is a significant change in your biography
## Footnote
Attach previous letters to maintain continuity and improvement
113
What is essential for obtaining maximum loans at favorable terms?
Good planning and sound business practice
## Footnote
Filling in the missing blanks in your plan is crucial
