Rent Roll Underwriting
A building is worth its leases. Before a real estate analyst looks at a cap rate, they read the rent roll lease by lease: what each tenant pays against what the space would let for today, when each lease ends, how likely the tenant is to stay, and what it costs if they leave.
What is a rent roll? The schedule of every lease in a property: tenant, area, rent, expiry, options and the market rent for the space. Underwriting it means turning those leases into income year by year, with vacancy as an event at each expiry rather than a flat percentage.
Four steps on one rent roll, marked together. The property acquisition model runs the same arithmetic for every lease and every year of a ten-year hold.
The rent roll
| Lease | Area (k sf) | In-place $/sf | Market $/sf | Expires end of | Renewal odds | Downtime | TI new / renew | Commission |
|---|---|---|---|---|---|---|---|---|
| Tenant A | 40 | 36 | 36 | Year 5 | 75% | 9 months | $45 / $15 | 15% of yr-1 rent |
| Tenant B | 40 | 34 | 36 | Year 4 | 75% | 9 months | $60 / $20 | 15% of yr-1 rent |
| Tenant C | 20 | 32 | 36 | Year 2 | 60% | 9 months | $60 / $10 | 15% of yr-1 rent |
| Tenant D | 40 | 36 | 36 | Year 3 | 75% | 12 months | $65 / $10 | 15% of yr-1 rent |
Step 1 · What it earns now
Year 1 gross rent from the four leases: area times in-place rent, in $ millions (area is in thousands of square feet).
Step 2 · How far from market
In-place rent over market rent across the building, weighted by area, less one, as a percentage. Then the lease furthest below market.
Step 3 · When the first lease ends
Tenant C is the first to expire, at the end of Year 2. In Year 3 the space earns market rent grown from Year 1, less the expected downtime: the chance the tenant leaves times the months to re-let, over twelve. The same year carries the leasing costs: tenant improvements weighted by the renewal odds, plus the commission on a new letting weighted by the chance of one.
Step 4 · How long the income lasts
The weighted average lease term by area, in years from the start of Year 1 (a lease ending at the end of Year 3 has three years left).
Keep going
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