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Rent Roll. What Is It & Why Is It So Important To Commercial Investors?

November 04, 2021
rent roll

Whether you like it or not, winter is coming.

The most important factor to consider when staring down the barrel of at least 3 months of sub-zero temperatures is preparedness. Here are a few helpful tips that will keep you (and your property) on track and worry free as we move into the holiday season.

 

1. Know your roof’s maximum snow load

When it comes to the weight of snow, the type of snow is as important as the depth of the snow. Fresh powder snow is typically lighter than wet packed snow, and ice is heavier than snow.

There are several contributing factors to the acting load on your roof that include snow drifts from adjacent buildings or mechanical equipment, heavy rain on snow, and melting snow that refreezes.

If you don’t know your roof’s snow load, hire a structural engineer to verify the snow load threshold of the roofing system. This information will be important after an event when determining if there is too much snow on the roof.

 

2. Prevent plumbing from freezing

  • Inspect and seal or repair all cracks, holes, leaks, windows, doors, and other openings on exterior walls with caulk or insulation to prevent cold air from penetrating the wall cavity.
  • Insulate and seal around attic penetrations such as partition walls, vents, plumbing stacks, and electric and mechanical chases.
  • Make sure your pipes in hard-to-reach places like attics, crawl spaces, and along outside walls are insulated. Wrap pipes and faucets in unheated or minimally heated areas of the building.
  • Make sure your existing freeze-protection devices and alarms are in good working order.
  • Test freeze stats (low temperature sensing device) and valves before the weather gets cold.
  • Pipes leading to the exterior should be shut off and drained at the start of winter. If these exterior faucets do not have a shut-off valve inside the building, have one installed by a plumber.
  • Hire a licensed fire protection specialist to conduct routine maintenance on your sprinkler system. Discuss the systems exposure to winter weather and potential mitigation options.

 3. Winterize your landscaping and irrigation

  • Keep all bushes and trees trimmed and away from the building. Trees with branches near or hanging over your building can damage the roof cover, siding, and windows.
  • Pay particular attention to trees within falling distance of overhead power lines leading into the property. Avoiding a power outage can save a day or two of business interruption.
  • Shut off and drain irrigation systems and outdoor hoses.

 4. Maintain your HVAC system

  • Schedule preventative maintenance and make sure the system is operating properly and efficiently.  Be sure to change any air filters and check that exhaust gases are being ventilated properly.
  • Select a heating system repair service before an unexpected outage or maintenance issue arises mid-season. Loss of heat for even a few hours could significantly disrupt your business during a cold snap.
  • Have someone ready to come quickly – including after hours – and negotiate an emergency rate in advance.

5. Service your generator.

The time to maintain a generator is well before a major snowstorm or disaster strikes (when professional assistance may be unavailable, power lines are down, and access roads are blocked). Backup power can help maintain a consistent building temperature and reduce the risk of freezing pipes leading to business disruption and damage.

 Permanent:

  • Permanent generators should have a proper maintenance plan that includes weekly, monthly, and annual checks. See the manufacturer’s specifications for more information.
  • Run the unit weekly on its maintenance plan to ensure it is properly functioning in case of an emergency. Individual units may have a timer that allows a programmed test to be scheduled. Qualified personnel should oversee these scheduled weekly tests.
  • Check the generator enclosure for loose debris or other conditions that could cause the unit to not function properly.

Portable:

  • Store in a dry location.
  • Set up a maintenance schedule to include periodic test runs for the unit

6. Check your roof and gutters

    Water that does not properly drain off a roof has the potential to freeze, adding to snow load and creating ice dams. Ice dams can add significant additional loads to the roof and could cause interior water damage if left unattended. It is important for your team to maintain the roof drains and gutters.

    Low slope (flat) roofs:

    • Inspect roof and repair leaks before winter season.
    • Remove all debris and other items from roof and roof drainage systems that prevent drainage of water from the roof during the melting process.
    • Check that all flashing and seals are flush and secure.

    Steep slope roofs:

    • Inspect your roof and repair leaks before winter season.
    • Secure loose shingles.
    • Check roof-edge waterproofing and seal to prevent potential drafts.
    • Add extra insulation in your attic or surrounding areas.

    Gutters:

    • Inspect gutters and ensure they’re secured to the building. Replace any missing gutter fasteners.
    • Clean gutters and interior downspouts thoroughly, removing all debris and unclogging drains.
    • Run test of gutters and downspouts to be sure water does not back up. This can be done by using a hose.
    • Check downspouts to ensure they divert water away from the foundation.

     7. Create a business continuity plan

    • Have a plan for communicating with employees across multiple channels (text, email, phone).
    • Have an emergency/recovery plan that is communicated to employees, customers, clients, delivery, etc.
    • Create a snow and ice removal plan for all roofs and grounds.
    • Plan for emergency snow removal in event of heavy accumulation. Identify and supply proper equipment and check it in advance of predicted snow.
    • Some businesses rely on on-street parking, so develop a back-up plan for nearby off-street parking if the municipality imposes a parking ban on streets (for plows). This occurs more frequently in the north, even hours before snow is expected, so they can pre-treat the roads.
    • Purchase and be ready to add non-slip water absorption mats to all entrances for both your employees and customers to capture water and snow as they enter your business and to minimize slips and falls.
    • Test/practice the plan.

    8. Check your insurance coverage and inventory valuable equipment

    • Know what your insurance covers and what it doesn’t
    • Keep your insurance agent’s contact in your phone
    • If you have a loss due to a winter-related event, you’ll have to itemize your losses for your insurance company. Take a complete inventory of your home and store it somewhere safely offsite.

    NOTE: Check in with tenants regarding any maintenance requests or building concerns they may have. Living or working in your commercial property means they are on constant alert to their surroundings. If they see, hear, or smell something, ask that they say something.

    When you invest in a commercial rental property you’re buying two things: the real estate and the income that the property generates.

    It’s relatively easy to determine the value of a property using a metric like price-per-square foot. However, using a rent roll to measure the value of the income stream is a bit more difficult, especially during times of unusual market conditions or economic volatility.

    Here’s how to read and use a rent roll to help determine the true value of a commercial rental property before you buy or sell.

    What is a Rent Roll?

    A rent roll shows the rental income from a real estate asset. It can be constructed for any type of income producing real estate, including single-family houses and multifamily buildings, commercial property such as office buildings or shopping centers, and land leased for agricultural use.

    While some people view a rent roll as a simple document, information from the rent roll is used in key rental property financial performance formulas such as net operating income (NOI), internal rate of return (IRR), gross rent multiplier (GRM), and cap rate.

    How a Rent Roll Works

    Rent rolls can also be property-specific or developed as a master rent roll for the entire rental property portfolio. Although the exact information on a rent roll varies based on the property type, a good rent roll always includes the following information:

    Property Information

    • Name of property owner or management company
    • Address of property
    • Type of property
    • Zoning or market area of property (commercial, industrial, residential, mixed-use, urban, suburban)

    Unit Data

    • Unit number (such as #1, A, etc.) if the property has multiple rental units
    • Square footage
    • Lot size
    • Additional amenities

    Tenant Information

    • Name of tenant
    • Monthly rent
    • Extra rent (ie. Late fees)
    • Rent due date
    • Date rent paid
    • Past due rent
    • Prepaid rent
    • Security deposit held by landlord
    • Lease start date
    • Lease end date
    • Rent concessions given by landlord to tenant

    Rental Income Summary

    • Total monthly rent collected (including extra rental income)
    • Total annual rent collected (including extra rental income and any annual fees charge to tenant such as landscaping)

    Where Does This Data Come From?

    Although there’s a lot of information on a rent roll document, data for the rent roll comes from just a few sources:

    • Local tax assessor for property size, lot size, and zoning
    • MLS listing information (if property was purchased from an agent)
    • Appraisal report for detailed property
    • Lease agreement and tenant file for tenant information
    • P&L for monthly and annual gross income

    Who Uses a Rent Roll?

    There’s a lot more to a rent roll than first meets the eye. While many real estate practitioners focus on the P&L and balance sheet, the rent roll for a rental property can provide a surprising amount of detail on a single page. The rent roll is an all-purpose document that can be used by buyers and sellers, property managers, real estate investors and landlords, and lenders.

    Buyers and sellers during due diligence

    A quick look at the rent roll will tell a buyer and seller whether the property has been generating stable gross rental income. Comparing the fair market rent to the rent the tenant is currently paying indicates the possibility of increasing the value of the property simply by raising the rent.

    If the tenant’s lease is coming up for renewal in the next few months, a seller who proactively extends the lease may be able to sell the property at a higher price since the tenant has been “stabilized” for another term. That’s because some buyers are willing to pay more for a rental property when they know the future income stream is predictable.

    Property managers and landlords

    The rent roll provides an early warning sign to property managers and owners that a problem may be brewing with the tenant.

    If a tenant suddenly begins paying the rent late, or if a tenant is a habitual slow payer, it could be a big red flag that the tenant may need to be evicted and the property pre-marketed for lease to reduce the amount of down time due to vacancy and repairs.

    Real estate investors analyzing potential deals

    Real estate investors use a rent roll to verify the current rental income, search for upside potential in the rental property, and to anticipate problems with future cash flow.

    By comparing the rent roll to the income line on the profit and loss statement, an investor can immediately see if the gross income is being accurately reflected on the P&L. After receiving a CMA (comparative market analysis) the rent roll will show whether the rent the tenant is paying is a fair market rent or has room for an increase.

    Lastly, the rent roll can help an investor learn if there could be a problem with cash flow in the future. For example, a tenant paying rent late or a lease coming up for renewal may be a sign that cash flow will be reduced if the tenant needs to be evicted or income temporarily stops and vacancy rises when the tenant does not renew the lease.

    Mortgage brokers & lenders

    Mortgage brokers, lenders, and banks are experts in using the rent roll to evaluate the potential risk of making a loan, a cash-out refinance, or opening a line of credit. Lenders review the rent roll to anticipate the future income-generating potential of the property.

    For example, if the historical turnover rate is high and the vacancy rate has been increasing over the last few years, a lender may see that as a sign that there are issues with the condition of the rental property, tenant screening procedures, or the property management company.

    Five Ways Anyone Can Use a Rent Roll

    Now, let’s look at how anyone can use a rent roll to measure and forecast potential outcomes on the performance of the rental property.  For the most accurate analysis, you’ll need copies the rent roll for different time periods which will be used as your baseline data:

    • Current month
    • Same month one year ago
    • Annual rent rolls for the previous two years
    1. Tenant turnover & renewals 

    If the name of the tenant changes from year to year – or even within the same year – the property has a turnover rate of 100% or more. Cash flow is reduced during the vacancy period between tenant turns, and money is being needlessly spent in marketing and leasing fees.

    The question to ask is why tenant turnover is so high and renewal rates are so low. Turnover may be high due to fixable factors such as poor maintenance or property management, or there may be a property defect that you’re not aware of.

    1. Rent growth

    By comparing same-month reports year-over-year you can see if the rental revenue is increasing and my how much. Comparing that to the average growth rate for your area indicates how the rental property is performing vs. other potential investments in the same market.

    1. On-time rent collection

    Looking at the percentage of time the rent is paid on the due date is an indicator of the quality of the tenant renting the property and the ability of the property management company.

    On-time rent payments also help you decide whether to renew a tenant’s lease. If you have a tenant that pays consistently late, it may make good business sense to proactively market the house for lease if the demand for rental property in the market is currently strong.

    1. Late fee income

    Some investors view late fee income as ‘found money’ and an additional source of revenue. For example, if the normal monthly rent is $1,000 and the tenant pays a late fee of $100, the effective rent is $1,100 – or 10% more than the normal rent.

    However, if you’re buying a property with an existing tenant who always pays late, beware. If the tenant decides to leave or has to be evicted, you’ll end up spending much more on repairs and legal fees than the few hundred dollars of found money the seller promised you would collect.

    1. Evictions activity

    If you notice that the rental property has a new tenant every year, ask the seller how often the tenant was evicted. And, if the tenant was evicted, ask whether the tenant left voluntarily, had to be taken to court and evicted by the local authorities, and what the costs were in legal and repair fees before the property could be rented again.

    Final Thoughts

    The rent roll document is a valuable tool used by commercial rental property investors to maximize gross rental income and improve property performance. Important things to remember about a rent roll include:

    • A rent roll is a report that provides detailed information about the property, the tenant, and rents.
    • Rent rolls can be constructed for a single property or an entire rental property portfolio.
    • Sources for data on a rent roll include the local tax assessor’s office, appraisal report, and lease agreement.
    • The rent roll document is used by buyers and sellers, investors and property managers, and lenders.
    • Information gleaned from a rent roll report includes tenant turnover, rent growth, and occupancy rate.

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