PROP 1023 / CHAPTER 11 Flashcards
Three major elements of business costs are _ _ _ _ _
Three major elements of business costs are fixed overhead, market monitoring, and exploratory costs.
Fixed overhead includes _ _ _ _ _
Fixed overhead includes the cost of business accommodation, basic staff wages and salaries, and the required minimum income of the developer.
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.
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.
In this stage the project is planned, financed, and approved; this is the phase of negotiation and decision-making.
ANSWER: PROJECT INITIATION
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.
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.
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
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.
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.
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.
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.
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.
_ _ _ _ _ _ _ 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.
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.
