Property Development and Construction
Core concepts
Understand the development cycle: acquisition, entitlement, design, financing, construction, lease-up, and stabilization. Know feasibility analysis - residual land value, pro forma development budgets, hard versus soft costs, and contingency. Grasp construction financing mechanics: draws, retainage, interest carry, and the loan-to-cost versus loan-to-value distinction. Understand construction contracts (lump sum, cost-plus, guaranteed maximum price) and the roles of architect, general contractor, and owner. Know critical-path scheduling, change orders, and the certificate of occupancy as the milestone for lease commencement.
Traps
Questions often confuse loan-to-cost (loan ÷ total development cost) with loan-to-value (loan ÷ completed value). Another trap: forgetting interest carry and contingency in the total development cost. Watch for the guaranteed maximum price - the contractor absorbs overruns above the GMP absent owner-approved change orders. Don't conflate hard costs (materials, labor) with soft costs (design, permits, legal, financing).
Worked example
Land $500,000 + hard costs $1,500,000 + soft costs $300,000 + contingency $100,000 = $2,400,000 total cost. A $1,800,000 construction loan is 75% loan-to-cost. If stabilized value is $3,200,000, loan-to-value is 56.25%.
Rule of thumb
Loan-to-cost uses total development cost as denominator; loan-to-value uses stabilized appraised value.