Marcus is an experienced builder with over $12$ years in the construction industry. He has worked on several residential and commercial projects for various firms. However, Marcus has not independently completed a major project from start to finish as the lead builder.

Marcus now wants to start his own home building company. He has identified an opportunity to construct a new subdivision of $20$ single$-$family homes in an upcoming housing development. The total project cost is estimated at $$8$ million.

Marcus has approached Zeta Bank to seek financing for the subdivision project. He has provided the standard documentation $-$ business plan, project details, cost analysis, and projected returns.

While Marcus has solid construction experience, the bank needs to evaluate a few potential risk factors:

$1.$ Collateral: Marcus does not have enough personal assets or property to fully collateralize the requested $$8$ million loan. His current collateral is valued at only $$2\mathrm{.}5$ million.

$2.$ Legal Risk: Marcus is currently involved in a pending court case related to a previous construction project. Depending on the outcome, he may face fines up to $$50,000.$

$3.$ Limited Track Record: As Marcus lacks experience leading an entire project himself, he does not have a proven history of successfully delivering completed construction work as a lead builder.

Given these risks, the bank must carefully assess Marcus's loan application and the viability of the proposed home subdivision project.

With a potential $$8$ million loan to Marcus for a new $20-$home subdivision, Zeta Bank will be taking on significant exposure to residential real estate market conditions. Which of the following would be the best way for the bank to mitigate this concentration risk?

Question $9$ Answer

a$.$

Increase the interest rate on the loan by $2\%$ over market rates to compensate for the heightened real estate risk exposure.

b$.$

Have Marcus take out a smaller $$4$ million loan for just the first phase of $10$ homes, and consider financing the second phase later.

c$.$

Require that Marcus presell at least half of the $20$ homes before funding the loan to ensure confirmed buyer demand.

d$.$

Insist that Marcus secures a fixed$-$price construction contract to protect against cost overruns impacting the project's profitability.