How Well Do You Know Your Rent Roll?
Rent rolls are one of the most important aspects of your lease. It wouldn’t be incorrect to say the rent roll is a key financial data point of your lease and forms the crux of your lease contract. But, how well do you know your rent roll? Understanding your rent structure clearly is very important as it can help you negotiate renewals better, save significant amount of money by identifying inaccuracies in rent calculations and also help you drive better real estate-related business decisions. Our blog this week discusses the key aspects of the rent roll that you should be aware of.
What is your rent structure?
All tenants know their rent structures, no doubt, but what about the details? You should be aware of escalation clauses in your lease. What is your rent escalation tied to? Is it a direct, simple escalation by a predetermined amount or percentage, is it pegged to an economic indicator like the CPI, or is it based on your revenue, such as a percentage of your sales (most common in retail leases)? Understanding the rent escalation clause helps you analyze the feasibility of your lease.
What constitutes your Common Area Maintenance (CAM) charges?
If your lease is a net lease, then CAM charges will definitely be a core component of your rent roll. The thing about CAM charges is that it includes multiple headers and complicated calculations, which leave room for errors and even interpretation. You need to be aware of the various components of your CAM charges and how they are computed for you as per your lease. For example, what happens if you moved into a fairly empty building that’s only gradually filling up? How is the CAM divided among the existing tenants including you, until the time there’s 100% occupancy? What will be the repercussions on your CAM charges as new tenants are signed up.
When it comes to rent-roll calculations, the onus is always on the tenant to identify errors, if any, and report them to the landlord. So, it is essential that as a tenant, you pay keen attention to the core rent roll components such as rent escalation calculations and CAM charges allocation. Overlooking any errors in these calculations will cause them to become a part of the base calculations for the next lease year and as a tenant, this can cost you a lot. Plus, most leases place a timeframe within which such discrepancies should be reported to the landlord. Failing to do so on time may be construed as acceptance by the tenant to make the payments.
You can avoid such scenarios by having clear, concise and accurate abstracts of your leases that simplify complex lease terms for you without diluting their essence. Solid lease abstracts can help you understand your rent roll and related components clearly. Two other very important elements in this regard are regular lease audits and a thorough lease administration process that will help you identify the gaps and act at the right time.