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

Entitlement risk is the probability that necessary permits, zoning changes, or government approvals will be delayed or denied.

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

Percentage rent requires tenants to pay additional rent once their gross sales exceed the natural breakpoint (base rent ÷ percentage rate).

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

Single-tenant NNN properties derive all income from one tenant, making that tenant's creditworthiness and lease duration the dominant risk factors.

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

Sensitivity analysis tests how variations in vacancy, rent growth, cap rate, and financing costs impact IRR and equity multiples.

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

Tail risk captures severe downside scenarios—such as a major recession or tenant bankruptcies—that could lead to outsized capital loss.

(REA) Real Estate Analyst Certification Practice Test