Why is a Rent Roll Important to Investors
The first concept and item is a rent roll. Let’s start with a simple definition…
What Is a Rent Roll & What Does It Include?
A rent roll is a crucial document that provides you with a high-level snapshot of the property. It breaks down and summarizes every tenant’s lease within the asset. Rent rolls typically include the following details:
- Unit number
- Lease start date
- Lease expiration date
- Monthly base rent
- Rate per square foot
- Renewal options
- Any other major lease related details such as right of first refusal or right of first offer
This information is essential because it allows a potential investor to understand all aspects of leasing and occupancy at the subject property. Once the rent roll has been reviewed, an investor or prospective buyer is able to use this information to begin their underwriting process.
Weighted Average Lease Term (WALT)
The second important concept that impacts the underwriting and analysis process is the Weighted Average Lease Term, also known as WALT. This, essentially, is a measurement of the average time left for all the current leases combined.
Why would you want to know this?
When underwriting a deal, you can determine how much leasing work needs to be done based on the WALT. For example, if there’s a smaller average weighted lease term left on the building, say one or two years, you’re going to have more leasing work. You’ll have to have brokers come in, or you yourself, will have to lease out the property. If you have a longer WALT, then the property is occupied for a longer period of time, and you will have less leasing work.
Does the weighted average lease term vary between asset classes?
The simple answer here is yes, but let’s dive a little deeper.
Typically, flex industrial deals have a lower average WALT – anywhere from two to three years. This can be due to the fact that many flex tenants typically only rent anywhere from 1,500 to 5,000 square feet. Most of these smaller spaces usually lease out for three years, with minimal tenant improvement allowances.
Now, let’s think about a large multi-tenant office building that you would find in your local downtown metro area, or in a suburban office park. Typically, these larger office building WALTs are longer, usually around five years. This is because larger office tenants typically sign leases for longer periods of time, anywhere from five to seven years, which will result in landlords paying larger tenant improvement allowances and allowing the tenant to customize their own space.
While WALT can vary across building types and really be any amount, at Excelsior, we look for at least a three year weighted average lease term in the flex asset class and a five year weighted average lease term in the office asset class.
If you’re interested in learning more about our investment process, please do not hesitate to contact us.
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