How do you review financial documents during due diligence?

1 Income Statement

The income statement, also known as the profit and loss statement, shows the revenues and expenses of the landlord and the property for a given period. It helps you understand how much income the landlord generates from rents, fees, and other sources, and how much they spend on operating costs, maintenance, taxes, and debt service. You should review the income statement to see if the landlord has a positive net income, a healthy operating margin, and a reasonable debt-to-income ratio. You should also compare the income statement with the budget and the market trends to see if the landlord is meeting their projections and expectations.

2 Balance Sheet

The balance sheet shows the assets, liabilities, and equity of the landlord and the property at a specific point in time. It helps you understand how much the landlord owns, owes, and has invested in the property. You should review the balance sheet to see if the landlord has enough liquidity, solvency, and capitalization to maintain and improve the property. You should also look for any red flags, such as excessive debt, overdue payments, liens, or lawsuits, that could affect the landlord's financial health and reputation.

3 Cash Flow Statement

The cash flow statement shows the inflows and outflows of cash from the landlord and the property for a given period. It helps you understand how the landlord manages their cash flow and funds their operations, investments, and financing activities. You should review the cash flow statement to see if the landlord has a positive cash flow from operations, enough cash reserves, and a sustainable cash flow growth rate. You should also check how the landlord allocates their cash flow among capital expenditures, dividends, debt repayments, and other uses.

4 Rent Roll

The rent roll is a document that lists the tenants, units, rents, lease terms, and occupancy status of the property. It helps you understand the leasing performance and potential of the property. You should review the rent roll to see if the property has a high occupancy rate, a stable tenant mix, a competitive rent level, and a favorable lease expiration schedule. You should also look for any vacancies, delinquencies, concessions, or disputes that could affect the rental income and cash flow of the property.

5 Operating Budget

The operating budget is a document that outlines the expected revenues and expenses of the landlord and the property for a given period. It helps you understand the landlord's financial goals and plans for the property. You should review the operating budget to see if the landlord has realistic and attainable assumptions, projections, and contingencies for the property. You should also compare the operating budget with the actual results and the market conditions to see if the landlord is on track or needs to adjust their budget.

6 Lease Agreement

The lease agreement is a document that specifies the rights and obligations of the landlord and the tenant for the leased property. It helps you understand the terms and conditions of the leasing deal. You should review the lease agreement to see if it covers all the essential aspects of the lease, such as rent, security deposit, utilities, maintenance, repairs, insurance, taxes, subleasing, renewal, termination, and dispute resolution. You should also look for any clauses, provisions, or incentives that could affect your rights, responsibilities, and costs as a tenant.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?