REA Due Diligence & Risk Assessment 3

Question 1

What is 'entitlement risk' in real estate development?

Accepted Answer

The uncertainty of obtaining government approvals for a proposed development

Answer

The risk that a tenant will not pay rent under its lease

Answer

Exposure to environmental cleanup costs exceeding insurance coverage

Answer

The possibility that a lender will call a loan early

Question 2

An analyst is reviewing a lease with a 'percentage rent' clause. When is additional rent triggered?

Accepted Answer

When tenant sales exceed a specified natural breakpoint

Answer

When the CPI increases above a stated threshold

Answer

When the tenant exercises an expansion option

Answer

When occupancy in the building falls below 90%

Question 3

Which risk factor would a real estate analyst most carefully evaluate when underwriting a single-tenant net lease property?

Accepted Answer

Tenant credit quality and lease term remaining

Answer

Local vacancy rates for multifamily properties

Answer

The property's proximity to public transportation

Answer

Market absorption rates for new office construction

Question 4

What is a 'sensitivity analysis' used for in real estate due diligence?

Accepted Answer

Measuring how changes in key assumptions affect projected returns

Answer

Assessing the impact of environmental contamination on property value

Answer

Comparing a property's condition to market standards

Answer

Verifying that title insurance covers all identified encumbrances

Question 5

What does a 'tail risk' scenario represent in real estate underwriting?

Accepted Answer

An extreme, low-probability adverse outcome that could cause significant loss

Answer

The residual value of a property after full depreciation

Answer

The final payment on a balloon-maturity mortgage

Answer

Excess returns generated beyond the preferred return hurdle

Question 6

Which clause in a purchase and sale agreement (PSA) allows a buyer to exit without penalty if due diligence findings are unsatisfactory?

Accepted Answer

Inspection contingency

Answer

Force majeure clause

Answer

Right of first refusal

Answer

Subordination clause