Development & Feasibility Analysis Flashcards
6 cards from real REA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Development & Feasibility Analysis flashcards as text
What is a 'guaranteed maximum price' (GMP) contract in real estate construction?
Answer: A contract where the contractor agrees to complete the project for no more than a stated maximum price, bearing cost overrun risk
Under a GMP contract, the general contractor caps its fee and bears the risk of cost overruns above the guaranteed maximum price, protecting the developer's budget.
What does 'yield on cost' measure in real estate development?
Answer: Stabilized NOI divided by total project cost, indicating the project's return on invested capital before sale
Yield on cost (stabilized NOI ÷ total development cost) measures the return generated relative to the total capital invested in the project.
What is a 'residual land value' analysis used for?
Answer: Determining the maximum price a developer can pay for land while still achieving return targets
Residual land value works backward from projected development revenues and costs to determine how much can be paid for land while still meeting return hurdles.
In development underwriting, what is an 'interest reserve'?
Answer: Funds set aside in the construction loan to cover interest payments during the construction and lease-up period
An interest reserve is built into the construction loan budget to fund interest payments during the construction period when the property generates no income.
What is a 'ground lease' structure and how does it affect development economics?
Answer: A long-term lease of land where the developer builds improvements but pays rent to the land owner
In a ground lease, the developer builds and operates improvements while making lease payments to the landowner, reducing upfront capital needs but creating a subordinate rent obligation.
What is 'construction contingency' in a development budget?
Answer: A reserve percentage added to hard costs to cover unforeseen construction expenses
Construction contingency (typically 5–10% of hard costs) is a budgeted reserve for unforeseen costs such as design changes, subsurface conditions, or material price increases.