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-or-site-valuation Questions
Under which condition is the land residual technique most applicable?
What is the appraiser's obligation when a site's legal description does not match its apparent physical boundaries?
Why can the same physical parcel carry different values in two assignments?
A site differs from land in that a site is best described as which of the following?
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?
A land comparable sold 18 months ago in a market rising about 4 percent a year. What adjustment direction applies?
In a land residual analysis for a proposed office development, the appraiser estimates total annual net operating income (NOI) will be $1,250,000. The improvement value, derived via the cost approach, is $15,000,000. Market evidence indicates a 7.0% overall capitalization rate is appropriate for similar improved properties. What is the indicated land value?
A developer plans a 36-lot residential subdivision on raw land. Each lot is expected to sell for $85,000. Total development costs (excluding land) are $1,420,000, including $220,000 for entrepreneurial incentive. The developer requires a 12% annual yield on invested capital over a 3-year development period. Using the subdivision development method, what is the maximum price the developer should pay for the land if all lots sell at the projected price and timing?
In applying the land residual technique to a proposed subdivision, an appraiser estimates that the time required to fully absorb all lots will be 6 years. The developer requires a 10% annual yield on invested capital. Which discounting approach is most appropriate for converting future net proceeds to present value?
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