August 22, 2023
If you or your team have ever encountered data or process problems while running a rent roll, you could be leaving important tenant information on the table. Find out how these small, incremental changes to your data practices can forever change the impact your portfolio's income.
As the saying goes, “Necessity is the mother of invention”. When need becomes imperative, we find a way to achieve it. So it isn’t any wonder that CRE professionals and institutions that find themselves in a precarious investment landscape are needing to become particularly savvy and strategic when it comes to maintaining portfolio performance.
To decrease unnecessary exposure, mundane tasks like lease abstraction, critical dates tracking, and general portfolio data management are suddenly very important to get right. They take on entirely new importance as a means to avoid vacancies, strengthen renewal negotiations, and overall help the performance of a CRE portfolio.
No matter what challenges the market presents, the rent roll report has always been the most straightforward way to calculate NOI, IRR, GRM, cap rate, and gain an understanding of a portfolio’s overall performance. If rent roll reports are filled with inaccurate out-of-date information, that can spell disaster for CRE firms when market conditions are fair. In the capital suppressed markets of today, repeated data inaccuracies tied to rent roll can leave CRE firms extremely exposed and financially vulnerable.
Jump To A Section in This Article
What Is a Rent Roll?
What Is Included in a Rent Roll?
What Role Does Rent Roll Play for Investors?
Common Tenant Red Flags a Rent Roll Can Uncover
How to Improve Rent Roll Accuracy
What Is a Rent Roll?
If you’re in CRE, odds are you’re already well versed in rent reconciliation. But for those who don’t interact with rent roll on a regular basis, it’s hard to understand just how important this singular report can be for an entire portfolio’s ROI.
So, for the uninitiated, what is a rent roll? Well, in real estate, whether that’s commercial or residential, a rent roll is a record of rent revenue of all properties of valid leases in a portfolio.
There are a number of stakeholders, such as investors, lenders, brokers, property managers, and property owners, who use rent roll to verify rental income. But a rent roll also serves a purpose beyond simply tracking a property’s performance; property managers can also leverage rent roll to gauge financial opportunities, investigate a high turnover rate and manage vacancies, and determine rent increase potential.
What Is Included in a Rent Roll?
Even though the rent roll is extremely crucial, it isn’t standardized. CRE firms will often generate a rent roll using their own proprietary templates or manually aggregate data in a complex spreadsheet. This can make the rent roll generation process arduous and prone to inaccuracies.
Typically though, rent roll reports will capture a tenant’s address, unit square footage, the lease start date and termination date, rent price, security deposit, the total amount of revenue collected, the date of the last rent increase, and sometimes these reports will also include the rent price against the current market price.
Depending on the size of a commercial portfolio, aggregating and formatting the data into the report can take hours. It can take even longer to manually scroll, synthesize, and interpret that data to walk away with meaningful takeaways about portfolio performance, finance opportunities, or potential blindspots. If a rent roll isn’t 100% accurate, CRE firms can miss an investment opportunity or mismanage a tenant contract.
What the Rent Roll Can Tell Potential Investors About a Commercial Property
In addition to providing general portfolio performance metrics, there are a number of more concrete performance KPIs CRE professionals track with a rent roll report to make investment decisions and paint a much fuller picture of their portfolio’s performance.
Gross Potential Rent (GPR).
This metric tracks the maximum amount of rent a property owner or investor can make from a property during a specific period. Put simply, GPR is used to assess the potential amount of income a property could produce. This metric is also important in the calculation of Net Operating Income (NOI).
Gross Rent Multiplier (GRM).
GRM comes in particularly handy for investors when assessing the financial viability of a commercial property. This metric allows them to determine the value of an investment property in a specific market and it is calculated by dividing the price of a property by its annual gross rental income. Generally, the lower the GRM the more profitable the property.
Net Operating Income (NOI).
NOI is another key metric used in CRE investing. This number specifically measures a property’s income once operating expenses are subtracted. This is a great indicator of ROI as well as a determining factor of the property’s operational costs.
Internal Rate of Return (IRR).
The IRR is another important finance metric that represents a property’s percentage rate earned on each dollar invested for each investment period. This number allows CRE investors to get very granular about the financial viability of a property and is very hard to determine if any figures in a rent roll are inaccurate.
With so many moving parts to this one report, rent roll accuracy is very important. If any figures deviate from the amounts determined in a property’s original lease, it can be very difficult to calculate financial opportunities, spot income issues, or make adjustments based on market values to make commercial properties more competitive in the market.
Common Red Flags a Rent Roll Can Help Uncover
Investors can glean highly important information about the investment potential of a given property, but rent roll also allows property managers and owners uncover red flags in their rent collection or a tenant’s financial performance. Catching these red flags is important for uncovering instances of partial payments or spaces that are ordering an inordinate amount of maintenance.
Uncovering unusual expenses.
Aggregating a property’s financial data can allow property managers and owners to uncover instances of unusual expenses on behalf of their tenants. Whether that’s a record of stolen items or repeated broken appliances, digging into tenant expenses can help paint a more detailed picture of a building’s condition, the neighborhood, etc.
Discovering tenants with unusually high maintenance calls.
Tenants that regularly call in with maintenance complaints may be harder to negotiate renewals with, so it’s important that CRE professionals treat rent roll as a means to manage tenant satisfaction as well as rental income.
Tracking these maintenance calls can also help determine if the maintenance issues lie with the tenant or the building. Having a record of these requests however, allows property management teams to investigate and pursue the best course of action.
Tracking payment consistency across tenants.
A rent roll also allows property managers to ensure that every tenant is paying rent, and additional financial obligations, on-time and in-full. Generating a comparative report, like a rent roll, gives property managers and owners a holistic view of the income consistency across their tenants and uncover any potential holes or incomplete payments.
How to Improve Your Rent Roll Accuracy
For any CRE report that includes information about a property’s financial performance, it is highly important that every figure or number captured is accurate and representative of lease data. But in order to get rent roll numbers as accurate as possible, the baseline lease data have to be up-to-date and accurate, too.
Improving portfolio data accuracy.
Rent roll accuracy begins with accurate portfolio data. If vacancies, tenant options, or critical dates aren’t captured accurately upstream, a tenant rent roll is a lot less impactful for realizing investment opportunities or understanding overall portfolio performance.
One effective way to improve the accuracy of a rent roll is to more effectively manage the accuracy of your lease data upstream, starting with introducing structure and digitization to unstructured CRE data.
For decades, CRE data has been managed manually in the form of physical copies of original documents. This has created a massive backlog of unstructured lease data, spanning millions of square feet and decades of amendments, renewals, and legalese and virtually no way to ensure data accuracy.
Prophia offers CRE professionals the first-ever generative AI solution for standardizing and synthesizing the data found in CRE leases. With this system of cloud-based data governance, every lease concept is captured digitally and hyperlinked to the original lease document, making insight streams, like a rent roll, a far more accurate and valuable ROI tool.
Streamlining data aggregation.
Assembling a comprehensive report based on the lease data from millions of commercial square footage is no longer a task to perform by hand. With more and more CRE firms using software and PropTech to elevate reporting tasks, teams who still manage portfolio reports manually put themselves at a competitive disadvantage in the market and open themselves to scrutiny from investors.
In addition to better data accuracy, Prophia allows CRE stakeholders to automate data aggregation and relieve teams of the heavy lift of organizing and aggregating unstructured lease data by hand. This ultimately saves CRE teams, and individuals, an incredible amount of time that they can, instead, spend on investment strategy and data interpretation—something we humans are built to do.
With Prophia-automated rent roll reports, CRE professionals can apply next-generation AI technology to their legacy lease data to come away with impactful insight and spend a lot less time formatting and governing another extemporaneous spreadsheet. If you’re ready to standardize impactful reports like rent roll, reach out to a member of our team to discover the benefits of an AI-powered solution like Prophia.