When real estate investors evaluate potential rental property purchases, or banks underwrite loans, one of the first documents requested is the property’s rent roll or rent roll report. This document serves as a vital tool in assessing the value and viability of a property. In this article, we will define what a rent roll is, its components, and its importance in the commercial real estate (CRE) due diligence process.
What is a Rent Roll?
A rent roll is a fundamental document listing all the tenants occupying a rental property. It is an indispensable part of the due diligence process and is typically provided by the current owner or a property management company. While the format of a rent roll can vary—sometimes as an Excel file and other times as a printed report—it generally contains the same essential information:
- Tenant Name: The name of the tenant occupying a specific space. If a space is vacant, it will be noted as such.
- Unit Number: The number of the suite or unit occupied by the tenant.
- Unit Size: The area occupied by the tenant, often noted in square feet (or square meters). This measurement is particularly significant since rent is typically charged on a per square foot basis.
- Percent of Net Rentable Square Footage: This value represents the percentage of total square footage occupied by the tenant, calculated based on their unit size.
- Rental Rate: The amount paid by the tenant, commonly expressed per square foot annually and as a total gross monthly rent.
- Annual Rent: This calculated value reflects the total annual rent for the space, obtained by multiplying the monthly rent by 12.
- Lease Start Date: The effective date of the lease agreement.
- Lease End Date: The expiration date of the lease.
- Lease Term: The total duration of the lease expressed in months.
- Security Deposit: Some rent rolls may note the amount of security deposit held for the tenant, especially in multifamily properties.
A rent roll is typically organized into a spreadsheet, with each component functioning as a column.
Why the Rent Roll Is Important
The importance of the rent roll cannot be overstated; however, its utility may differ based on the viewer’s perspective—investors and lenders glean different insights from this document. Here are some key reasons why analyzing a rent roll is crucial:
- Property Income: The total annual rents for all tenants provide insight into the property’s overall income potential. For example, if three tenants each pay $10,000 annually, the property’s total income is $30,000, a critical starting point for calculating the net operating income.
- Tenant Concentrations: In properties with multiple tenants, certain “anchor” tenants may occupy much of the space. In a retail center, for example, a grocery store might lease the bulk of the area, creating income concentration risk. If this anchor tenant chooses not to renew the lease, it can significantly impact the property’s income.
- Expiration Concentrations: If multiple leases expire simultaneously, it poses a risk to income stability. If none of the tenants renew their leases, property income could drastically decrease until these spaces are re-leased.
- Tenant Roster: The identity of the tenants affects the property’s overall risk profile. A rent roll featuring well-known, financially stable companies poses less risk compared to one filled with unknown, local businesses.
- Lease Lengths: Analyzing lease lengths helps forecast income stability. Longer leases are more desirable for lenders and investors, while shorter leases indicate potential volatility.
- Comparable Properties: Investors can use a rent roll to compare rental rates across similar properties. If the target property has average rates of $15 per square foot while similar properties list at $18, this discrepancy may present an opportunity to increase rents.
- Vacancy/Occupancy: A rent roll aids investors in assessing occupancy levels. High vacancies increase risk, unless justified by specific circumstances.
- Due Diligence: Finally, a rent roll is essential for due diligence in real estate investments. It helps validate reported income accuracy; discrepancies between a rent roll and income statements can indicate possible financial issues.
While it may seem like a simple spreadsheet, the information provided in a rent roll is instrumental in evaluating a property’s health and viability, serving as a foundation for future financial projections.
Summary & Conclusions
A rent roll document encapsulates key details about the tenants occupying a commercial rental property. Despite variations in format by property owners or types, all rent rolls include fundamental data points such as tenant name, unit size, rental rate, lease start and end dates. Analyzing the rent roll reveals essential insights regarding tenant concentrations, property vacancy rates, potential revenues, and market comparability.
Ultimately, understanding the rent roll’s role in real estate investment helps investors and lenders make informed decisions regarding property purchases and financing.
