Stagger Your Rent Roll for Optimal Financing
A staggered rent roll for a commercial property, especially for an office or multi-tenant retail center, is ideal. It’s ideal for the investor, and it’s less risky for a lender (which means better financing for the investor).
What does it mean to have a “staggered” rent roll? It means that lease expirations are distributed widely, rather than bunched together.
Here’s a staggered rent roll:
Note how the lease expirations are distributed over a nearly 10-year period, with no greater than ~30% of the property’s income at risk of expiration in any given year. Years 2023 and 2029 are key leasing years for this asset, but they can conceivably weather the loss of any one tenant.
A rent roll that’s staggered like this one is considered less risky than a property that may face larger vacancies in a shorter period of time. Less risk leads to better financing. Here’s how lenders see it:
Lenders love predictable revenue for their loan collateral. If your rent roll is staggered, they can rely on receiving loan payments, on time, even if there is tenant turnover.
Protection against insufficient DSCR
Lenders typically underwrite to a Debt Service Coverage Ratio of at least 1.25x for commercial properties. That means if the property was to lose 20% of its income somehow (like a tenant’s lease expiring), that ratio will still be at least 1:1, meaning there’s still enough income to cover the debt service. Multiple tenant vacancies at once could lead to a larger percentage of potential income lost, sinking this ratio less than 1x, meaning the lender loses out.
Protection against huge Capital Costs
Beyond just protecting the borrower’s ability to cover mortgage payments using the income thrown off by the property, there’s another risk to facing multiple vacancies on a property at once. In order to fill those vacant spaces with new tenants, there is often an upfront cost in the form of tenant improvements and leasing commissions. If a leasing broker brings a new tenant in, the norm is to pay them a percentage of the total rent that will be collected on the new lease, right up front. This can be a huge bill to foot for the landlord. While it doesn’t affect the property’s income (it’s not considered an expense in that way), it does suck out a lot of cash.
Have multiple vacancies you want to fill quickly? A landlord with a struggling property may not be able to afford to fill the property.
While a landlord may not always be able to control the timing of vacancies in their properties for a number of reasons, it’s prudent to attempt to stagger the rent roll as much as is possible.