When real estate investors evaluate a potential rental home purchase or a bank takes out a potential loan, one of the first documents they ask for is the “rent list” or “rent list report.”
This article describes the hire role document in detail and highlights its usefulness in the CRE due diligence process. Let’s start with a simple definition.
What is a rental role?
A rental list is an important document that lists all the tenants in the property. When investing in real estate, it is an important part of the due diligence process and is usually provided by the current owner or a property management company. The rental roll format can vary – sometimes it’s an Excel file, sometimes it’s a printed report – but they all contain the same general information:
- Name renter: The name of the current tenant occupying a specific space in the property. If the space is empty at the time the rental list is created, the tenant’s name may be “empty”.
- Unit number:: The number of the suite or unit used by the tenant.
- Unit size: The number of square meters (or square meters) occupied by the tenant. For example, a tenant may occupy 1,000 square feet of space. This number is especially important because rent is often calculated — and rent payments are calculated — per square foot.
- Percentage of net rentable square footage: Based on the tenant’s unit size, this is a calculated value that represents the percentage of the total square footage occupied by the tenant. For example, if a tenant occupies 1,000 square feet in a 10,000 square foot building, they occupy 10% of the net rentable square footage.
- Rental price: The rent paid by the tenant. Often there are two columns for this information. The first is usually expressed as a value per square foot per year and the second is the total gross monthly rental amount, a value calculated by multiplying the total rented SF by the gross rental PSF.
- Annual rent: A calculated value that represents the total annual rent for the space. It is obtained by multiplying the monthly rent by 12. For example, if the rent for a space is $1,000 per month, the total annual rent is $12,000.
- Lease start date: The date on which the lease started.
- Lease end date: The date on which the lease expires.
- Lease term: A calculated value that represents the total duration of the lease. It is usually expressed in months.
- Deposit:: Some rental listings, especially those for multi-family homes, may include a section on the amount of the security deposit currently held for the tenant.
A rental list is usually stored in a spreadsheet so that each of the above elements represents a column. It might look something like this (again, the actual format can vary greatly from one rental role to another):
As part of this article, we’ve created a rental roll template that can be downloaded for free by clicking here.
Why the hire role is important
The importance of the rental list is undeniable, but its usefulness varies based on the perspective of the person looking at it. For an investor, analyzing them is a critical part of the pre-purchase due diligence process. For a banker or lender, it is a critical part of the credit acceptance process. In either case, there are several important insights that can be obtained from a rental list:
- Income from real estate: The sum of the annual rents for all tenants gives an indication of the total annual income for the house. For example, if there are 3 tenants with an annual rent of $10,000 each, the total income of the property is $30,000. This is a useful starting point for calculating the property’s net operating income, or net cash flow after operating expenses.
- Tenant concentrations: In multi-tenant commercial properties, it is common for one or more “anchor” tenants to rent most of the space in the property. For example, in an anchored mall in a supermarket, the supermarket rents most of the square footage in the property and is supported by several other smaller tenants. The supermarket lease creates a ‘concentration’ of space in the hands of one tenant and increases the risk profile of the property. If a main tenant decides not to renew their lease, it can be difficult to fill and can cause a drastic reduction in income for the property.
- Decay concentrations: Multi-tenant leases expiring on or around the same date presents a potential risk that investors and/or lenders will want to be aware of. In the worst case scenario, none of the tenants renew their leases, resulting in a drastic reduction in property income until the space is re-let. Lower rental income equals a lower net operating result and a lower valuation.
- Tenants list: Who the tenants are has a major impact on the risk profile of the property. For example, a rental list filled with unknown local businesses represents more risk than a rental list filled with nationally recognized companies known to be financially strong. For this reason, bankers and investors like to see each tenant’s names and use them to research their financial condition.
- Lease lengths: The length of each lease is important because it allows the banker and/or lender to predict how long the income stream generated by the lease will last. Lease roles with long-term tenants are preferred over those with shorter leases. In reality, most rental lists usually contain a mix of long and short term leases.
- Similar properties: From an investor’s point of view, a rental listing can be particularly useful as a tool to compare the market rates of one property to another. For example, if the target property has average rental rates of $15 PSF, but similar properties in the same market are letting for $18 PSF, this could be a sign that there is room to increase rents, which is positive for investors.
- Vacancy/Occupation: A rental list helps investors determine the total number of rental units occupied relative to the total available to rent. A high vacancy rate increases the risk profile of the property, unless there is a valid reason and/or current leases for new tenants.
- By diligence: Finally, the rental list can be a useful tool for due diligence prior to purchasing real estate investments. Commercial property owners, especially smaller ones, are notorious for keeping poor records. Thus, the rental list can be used as a tool to evaluate the accuracy of reported income. For example, if the sum of the total rental income on the rental list is $50,000 per year, but the income statement reports $75,000, it could be a sign that one of the two documents is incorrect.
While it may seem like a simple spreadsheet document, the points above support the idea that a rental list is a crucial tool that can be used to understand a home’s health.
Summary and conclusions
A rental list is a document that provides important information about the tenants who occupy a commercial rental property. The format may vary by property owner or property type and is typically provided by the existing property manager as part of the pre-purchase and/or pre-loan due diligence process.
Despite possible differences in format, all rental lists contain the same basic information, including things like: tenant name, SF leased, rent, lease start date, lease end date, and the unit number.
Analysis of the rental list can provide important information such as tenant concentrations, vacancy rates, potential rental income and how the rent compares to the market rent for comparable properties in the same market.