Why does a developer's required profit rise for a longer subdivision project?
Correct Answer
C) Longer projects carry more risk and tie up capital
Why this is correct: A longer development period increases risk (e.g., market shifts, cost inflation) and ties up the developer's capital. Investors require a higher rate of return (profit) to compensate for this increased risk and opportunity cost. Why the other choices are wrong: 'Construction costs are always higher over time' may be true but is not the primary reason for higher required profit; it's the risk and capital commitment. 'Lenders require a fixed share of gross revenue' is not a general rule; lender requirements vary. 'Profit is set by statute according to project length' is false; profit is market-driven, not statutory. Exam tip: In development valuation, required profit is a function of risk, time, and opportunity cost.
Why This Is the Correct Answer
Why this is correct: A longer development period increases risk (e.g., market shifts, cost inflation) and ties up the developer's capital. Investors require a higher rate of return (profit) to compensate for this increased risk and opportunity cost. Why the other choices are wrong: 'Construction costs are always higher over time' may be true but is not the primary reason for higher required profit; it's the risk and capital commitment. 'Lenders require a fixed share of gross revenue' is not a general rule; lender requirements vary. 'Profit is set by statute according to project length' is false; profit is market-driven, not statutory. Exam tip: In development valuation, required profit is a function of risk, time, and opportunity cost.
More Land/Site Questions
Under which condition is the land residual technique most applicable?
Why can the same physical parcel carry different values in two assignments?
In a built-up area where no vacant land has sold for years, which approach to site value is the usual fallback?
How is entrepreneurial profit treated in the subdivision development method?
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How does holding cost enter the valuation of land bought for future development?
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Which of the following is an off-site improvement rather than a site improvement?
Vacant lots in a subdivision sell for about $80,000 while finished homes there sell for about $400,000. Applying that relationship to a subject home that sold for $525,000, what site value does allocation indicate?
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