When creating a development site, we first setup a secondary domain to hold the dev site files usually something like dev.domain.com for example. Then we use a utility on the server called rsync to copy all the files from the html directory of the live site, to the html directory of the dev site. Then we create a new Database and MySQL user for this dev site, and then we copy the live database into the new database for the dev site. 

Next we reconfigure the local.xml for the dev site to access the correct database with correct user and password. Finally we update the base_url of the dev site to use the new domain name that was setup before, and clear the cache for the site, to make sure it will correctly utilize the new URL. Setting the base_url in this case, is done directly in the database, since there would not be a way to log into the correct admin area without changing this base_url first.