Due Diligence & Risk Assessment Flashcards
6 cards from real REA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Due Diligence & Risk Assessment flashcards as text
What is 'entitlement risk' in real estate development?
Answer: The uncertainty of obtaining government approvals for a proposed development
Entitlement risk is the probability that necessary permits, zoning changes, or government approvals will be delayed or denied.
An analyst is reviewing a lease with a 'percentage rent' clause. When is additional rent triggered?
Answer: When tenant sales exceed a specified natural breakpoint
Percentage rent requires tenants to pay additional rent once their gross sales exceed the natural breakpoint (base rent ÷ percentage rate).
Which risk factor would a real estate analyst most carefully evaluate when underwriting a single-tenant net lease property?
Answer: Tenant credit quality and lease term remaining
Single-tenant NNN properties derive all income from one tenant, making that tenant's creditworthiness and lease duration the dominant risk factors.
What is a 'sensitivity analysis' used for in real estate due diligence?
Answer: Measuring how changes in key assumptions affect projected returns
Sensitivity analysis tests how variations in vacancy, rent growth, cap rate, and financing costs impact IRR and equity multiples.
What does a 'tail risk' scenario represent in real estate underwriting?
Answer: An extreme, low-probability adverse outcome that could cause significant loss
Tail risk captures severe downside scenarios—such as a major recession or tenant bankruptcies—that could lead to outsized capital loss.
Which clause in a purchase and sale agreement (PSA) allows a buyer to exit without penalty if due diligence findings are unsatisfactory?
Answer: Inspection contingency
An inspection contingency gives the buyer a defined period to complete due diligence and terminate the PSA without forfeiting the earnest money deposit.