REA Due Diligence & Risk Assessment 1 — Questions and Answers
Question 1: What is the primary purpose of a Phase I Environmental Site Assessment in real estate due diligence?
- To identify potential environmental contamination on a property (Correct answer)
- To calculate the property's net operating income
- To verify zoning compliance with local ordinances
- To assess the structural integrity of buildings
Correct answer: To identify potential environmental contamination on a property
A Phase I ESA identifies recognized environmental conditions (RECs) that suggest potential contamination without invasive testing.
Question 2: Which document provides a buyer with the legal description, easements, and encumbrances on a property?
- Title commitment (Correct answer)
- Survey report
- Zoning certificate
- ALTA/NSPS survey
Correct answer: Title commitment
A title commitment discloses all liens, easements, covenants, and encumbrances affecting the property's title.
Question 3: During due diligence, a real estate analyst discovers that a tenant's lease contains a co-tenancy clause. What risk does this present?
- Anchor tenant departure may allow other tenants to reduce rent or terminate leases (Correct answer)
- The property may require additional parking spaces
- Environmental remediation costs may increase
- The cap rate may be artificially inflated
Correct answer: Anchor tenant departure may allow other tenants to reduce rent or terminate leases
A co-tenancy clause allows tenants to reduce rent or exit their lease if a key anchor tenant leaves, threatening income stability.
Question 4: What does a 'estoppel certificate' confirm during due diligence?
- A tenant's acknowledgment of lease terms, rent paid, and any landlord defaults (Correct answer)
- The property's compliance with ADA accessibility standards
- The accuracy of the property's tax assessment
- The structural condition of the roof and HVAC systems
Correct answer: A tenant's acknowledgment of lease terms, rent paid, and any landlord defaults
An estoppel certificate is a signed tenant statement confirming current lease terms, rent amounts, and absence of landlord defaults.
Question 5: Which risk is most directly assessed through a Property Condition Assessment (PCA)?
- Deferred maintenance and capital expenditure needs (Correct answer)
- Lease rollover exposure over the holding period
- Interest rate sensitivity of the acquisition
- Demographic shifts in the surrounding market
Correct answer: Deferred maintenance and capital expenditure needs
A PCA identifies physical deficiencies, deferred maintenance, and projects capital expenditure requirements over a forecast period.
Question 6: What is 'concentration risk' in a real estate portfolio context?
- Overexposure to a single tenant, market, or property type (Correct answer)
- The risk that interest rates rise faster than NOI growth
- Liability from undisclosed environmental hazards
- Overestimating market rental rates in underwriting
Correct answer: Overexposure to a single tenant, market, or property type
Concentration risk arises when a portfolio is overly dependent on one tenant, geography, or asset class, amplifying losses if that segment underperforms.
REA Due Diligence & Risk Assessment 1
What is the primary purpose of a Phase I Environmental Site Assessment in real estate due diligence?