What is the difference between a rent roll and pro forma in commercial real estate analysis?

A rent roll provides a snapshot of rental revenue. It includes current base rent, scheduled rent bumps, estimated expense pass-thru’s & sometimes lease option info. Other types of miscellaneous revenue such as parking revenue, etc usually aren’t included. So rent roll is only one component of effective gross revenue (EGR).

In commercial real estate analysis, a rent roll is a document that provides a detailed list of current leases for a property. It includes information such as tenant names, lease terms, rental rates, and any additional income sources. On the other hand, a pro forma is a financial projection that estimates the future income and expenses of a property. It typically takes into account potential changes in rental rates, occupancy levels, and operating costs. In summary, a rent roll reflects current lease details, while a pro forma provides a forward-looking financial projection for a property.

In simple terms, the rent roll says who lives in which apartments and what they pay. When reviewing the rent roll, you are looking for discrepancies between the rent roll and the seller’s projections. If the seller says that rents are average $900/month, but the rent roll shows everyone pays $800 or less, you need to factor that into current value of the property. The rent roll should be an accurate snapshot of how much rental income the property currently receives. The proforma is the expectation or ‘best guess’ of future income and expenses. The rent roll is simply a spreadsheet with a list of units down column 1 and a breakdown of each unit in the proceeding columns, such as lease start/end date, rent amount, sec deposit, etc.

Since a rent roll provides information at a specific point in time, a best practice for review is to cross reference with the actual lease documents. The rent roll will present the lease expiration date, but many commercial leases include options to renew. If a tenant has a below market rent rate and you are valuing the investment assuming you will raise the rent at the next expiration, confirming there aren't renewal terms is critical. Similarly, a rent roll may or may not provide cost recovery information for taxes, insurance and CAM. Even if the tenant's contribution for those costs is included, it's critical to review the lease to make sure there aren't base years, caps or other exclusions that will limit what you can recover.

Excellent description! Regardless of property type - retail, multi-family, industrial - a Rent Roll is a roster identifying all rentable suites or units. Altogether the reported square footage totals the Net Rentable Area (NRA) for a property. Occupancy status and key lease agreement details, such as rent amount, start and end dates are identified for each unique space.

Once you have effective gross revenue (EGR), then subtract expenses (prop tax, insurance, common area maintenance aka CAM, management) to arrive into net operating income. “Below the (NOI) line” expenses incl. tenant improvement allowance (TIA), leasing commissions (LC), & capital expenditures. Subtract from NOI to get net cash flow before debt. You’ll also need assumptions for rent growth, vacancy factor / credit loss, releasing, debt assumptions, & exit / reversion to forecast numbers in order to create a “proforma”.

The proforma is a future projection of the income and expenses of a property. It is usually put together by the broker trying to sell the property. Because the broker is trying to sell the property, the proforma is typically a ‘best case scenario’ projection. It is important to review it, but also important to do so with a grain of salt because there is no guarantee that the numbers are accurate. The proforma will typically show a projection over the next 12 months and the next 5 years. It will include all income (rent, laundry, fees, etc) and expenses to show the total potential of a property. It is typically the first thing a broker will send, but it is vital to always compare the proforma to the actual trailing operating statement.

Ultimately, a Pro Forma is more-or-less akin to a typical household budget. Revenues and expenses for the immediate and following years are estimated and reported as separate line-items. As for all budgets, they are only as accurate as the data being relied upon to create them.

Asset managers monitor aging / delinquency reports; acquisitions teams should also evaluate tenant delinquency to factor into underwriting. Some struggling tenants may not make it—you may not be able to collect all back rent due; in some cases owners settle; possible legal fees involved etc. For underwriting, some acquisitions teams also bake in a bad debt / collection loss factor on top of a general market vacancy factor. So rent roll isn’t going to tell the story on delinquencies, etc. Once you figure this out, you can factor it into vacancy factor, re-leasing etc. for proforma.

One thing I have found helpful is to also ensure that as an investor, you are aware of specific market and sub market regulations as it relates to being able to achieve pro forma income figures. As an example, markets that have strict rent control limitations, could likely create more of a challenge in reaching market level (or pro forma) returns.

Often when you are looking at a rent roll and proforma, they are coming from the seller / broker. It is really key to pick apart both data sets. It is in the sellers interest to keep expenses conservative and be liberal with what they believe they can achieve on rents. You should always do your due diligence to benchmark the expenses, get actuals, bake in conservative projections, and even talk to a few rental brokers who can tell you what your units can rent for!

It’s also advisable to ensure that as an investor, you are familiar with the specific laws and regulations in your particular market as it relates to the ability to increase rents on existing or new tenants. Certain markets may have stricter regulatory environments that may make it more challenging to accomplish market level (or pro forma) returns.

A Rent Roll is equivalent to a single vitals reading for a property, while a Pro Forma is more of a person's reasonable health goals to reach at each annual physical or wellness check up. Together, both documents help others understand the current health or performance of the property while considering the long-term health expectations.