REA Due Diligence & Risk Assessment 2 — Questions and Answers
Question 1: What is the significance of a 'subordination, non-disturbance, and attornment' (SNDA) agreement in due diligence?
- It protects tenants from lease termination if a lender forecloses on the property (Correct answer)
- It waives the tenant's right to negotiate lease renewals
- It allows the landlord to relocate tenants without consent
- It confirms the property's compliance with local building codes
Correct answer: It protects tenants from lease termination if a lender forecloses on the property
An SNDA ensures tenants' leases survive foreclosure in exchange for the tenant subordinating its lease to the lender's mortgage.
Question 2: In real estate risk analysis, what is 'rollover risk'?
- The risk that leases expire and cannot be renewed at current or higher rents (Correct answer)
- The risk of property value loss due to market depreciation
- The probability of construction cost overruns on a development project
- The risk that floating-rate debt reprices above the property's yield
Correct answer: The risk that leases expire and cannot be renewed at current or higher rents
Rollover risk refers to the uncertainty about re-leasing space when leases expire, including potential vacancy and below-market renewals.
Question 3: What financial metric is most commonly used to quantify a property's sensitivity to vacancy fluctuations?
- Break-even occupancy rate (Correct answer)
- Debt service coverage ratio
- Loan-to-value ratio
- Gross rent multiplier
Correct answer: Break-even occupancy rate
Break-even occupancy shows the minimum occupancy level at which a property's income equals its total operating and debt service expenses.
Question 4: Which type of due diligence risk is specifically addressed by reviewing a property's rent roll?
- Lease credit risk and income concentration (Correct answer)
- Soil contamination and environmental liability
- Structural deficiencies and deferred maintenance
- Title defects and encumbrances
Correct answer: Lease credit risk and income concentration
Reviewing the rent roll reveals tenant creditworthiness, lease expirations, and income concentration risks.
Question 5: What is the purpose of a 'zoning compliance letter' obtained during due diligence?
- Confirms the property's current use is permitted and any nonconforming status (Correct answer)
- Discloses pending litigation from adjacent property owners
- Verifies that all environmental remediation is complete
- Certifies structural soundness of the building
Correct answer: Confirms the property's current use is permitted and any nonconforming status
A zoning compliance letter from local authorities confirms legal use and identifies nonconforming status that could affect redevelopment or financing.
Question 6: Which scenario represents 'interest rate risk' in a real estate investment?
- Rising rates increase refinancing costs and compress cap rates at exit (Correct answer)
- A major tenant exercises its early termination option
- Construction costs exceed the original budget by 20%
- The property's assessed value increases, raising property taxes
Correct answer: Rising rates increase refinancing costs and compress cap rates at exit
Rising interest rates raise debt costs at refinance and push cap rates higher, reducing the property's value at disposition.
REA Due Diligence & Risk Assessment 2
What is the significance of a 'subordination, non-disturbance, and attornment' (SNDA) agreement in due diligence?