It is hard to say which single document is the most essential to review when purchasing an income property.  However, as the prime source of property revenue, the rent roll is clearly one of the most critical.

It is important to compare the leases with the seller’s rent roll to be sure that the tenants are all in occupancy and have active leases, which correctly express the cash flow expected to be received.  Often, poorly stated rent rolls are simply reflective of sloppy accounting; however, it is always possible that the seller is purposely being deceptive.  As such, you should always have the seller certify in writing that the information contained in the rent roll (as well as the leases and operating statements) are true and correct, as of the date of closing.  If you are obtaining a loan, which will probably be the case, your lender will require such certification.

Some of the key components of the rent roll are:

  1. Tenant Name – If a tenant’s name on the rent roll is not identical in every way to the lease (and the estoppel letters), be sure to look for lease amendments assigning the lessee’s rights to another party.
  2. Location – Double check the square footage and location of the leased premises against the “as built” floor plans or survey.  And check the leases carefully to determine any rights the tenant or the landlord may have to re-measure the space and thereby reset the base rent and pass-throughs.
  3. Commencement, Move-in & Expiration Dates – Confirm that the tenants have been paying rent from the onset, or commencement, of their leases (often the move-in dates do not coincide with the lease commencement, as in the application of “free rent” at the beginning of a lease).
  4. Base Rent & Escalations – Most leases consist of a base rental payment, which may increase in stipulated amounts over the term of the lease.  Increases may be based on a fixed amount or percentage increase, a specific index (such as the Consumer Price Index), or the market rate, as determined by some formula in the lease.  Therefore, confirm that the tenants are paying the correct rental amounts.  The best way to determine this is to reconcile the estoppel letters with the leases.
  5. Operating Expense Base Year or Amount – Verify the base year upon which each lease calculates its operating expense reimbursement.

 

By confirming these items (among others) in each lease, you will be assured of receiving the income stream from the property that you are buying.

-Jerry Monash

Gerald Monash, CCIM is Executive Vice President at NAI Global.  Jerry leads NAI’s Investment Services Group and is a loan sales specialist on NAI’s Special Asset Solutions team.