What are Commercial Lease Concessions?

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For success as a commercial real estate landlord, you’ll want your occupancy rate as close to capacity as possible. It helps generate your optimal cash flow and maximizes your return on any value-add improvements you’ve made to the property.

That’s why vacancies and turnover are like the unofficial pests of commercial real estate. They creep in during a down or renters’ market to lower your occupancy rate, sabotaging your profits.

Even class A properties with meticulous oversight to maintenance will face vacancies and turnover at some point. And if you find yourself stuck in a renters’ market, you may need an incentive that makes your lease more attractive to potential tenants than your competitors’.

This is where commercial lease concessions come in, helping landlords turn the tide.

In this article, we’ll discuss what landlord concessions you can use to help you increase occupancy and potentially lower your tenant turnover.

 

Rent and Leasing Concessions

Money talks. To attract a tenant, you can lower the price or modify the lease in the tenant’s favor.

Rent Abatement

You can waive a month or a few months of rent, usually at the beginning of a lease.

Tenants appreciate this gesture because relocating a business can be expensive, and any construction costs to customize their new location add up. Extra cash in hand will go a long way.

You can completely give away a few months’ rent, or you can offer a free rent concession and charge more later to make up the difference. Either way, the tenant will appreciate saving money at a valuable time.

Rent Concession Clause

Rather than a month or two of free rent, you can reduce the monthly dues for the tenant, i.e., charging $2,100/month instead of the market rate of $2,200.

Any tenant will appreciate paying less, but you should use this option sparingly as it can quickly reduce your bottom line.

Reduced Escalations

Most leases include escalation clauses, which raise a tenant’s monthly rent annually or at set periods.

To help bring in a new tenant, you can either cap these increases or waive them for the first year.

Shorter Lease

Rather than give away cash, you can shorten a tenant’s lease.

This can be helpful for tenants getting a new business off the ground. Since their prospects may be a little uncertain, a shorter lease term, rather than being locked in for longer, might appeal to them.

Permission to Sublease

Another commercial lease concession that won’t require any out-of-pocket costs, you can allow the tenant to sublease their unit to another party.

Just like a shorter leasing period, new businesses may like this option.

But proceed with caution. Make sure to place strict limits within the lease on the conditions and types of parties the tenant can sublease to. Otherwise, you may end up with a bad tenant or a business that’s a poor fit in the space, compounding your problems.

 

Allowances and Amenities

Rather than giving up cash or altering the lease, you can turn to other perks to entice tenants to a rental unit.

Increased Tenant Improvement Allowances

Tenant improvement allowances are monies commercial landlords give tenants to modify their unit. The tenants use these funds to customize the unit to better fit their needs. These changes can be drastic, like knocking out a wall to open up the floorplan, or simple things like repainting.

Giving more money to your tenant for construction and customization can be a powerful incentive. It not only entices them to rent from you but increases their happiness within the space as they rent. When it’s time to renew the lease, that happiness may help the tenant stay put rather than look elsewhere.

Move-in Allowance

Relocating a company is expensive, and the costs associated with it can persuade business owners to remain where they are rather than leasing a new location.

To help them make the move to your rental unit, you can cover all or part of your tenant’s moving costs, including hiring movers, truck rentals, etc.

As an added benefit, the move-in/move-out experience can be stressful for tenants, which makes it one of the best opportunities for you as their landlord to step in, help out, and make a positive impression.

Free Amenities

You can offer tenants small perks that might be easier to give away than increasing tenant improvement or move-in allowances, such as free parking permits, gym memberships, or internet access.

In a tight market, these little incentives may just be enough to tilt the balance in your favor over a competitor.

 

Attract New Tenants and Lower Your Turnover

Through commercial lease concessions, you can help prevent vacancies and turnover from eating away at your profits.

The incentives will help tenants sign on the dotted line as well as increase their satisfaction while renting, boosting your chances that they will re-up when their lease is due.

But you must strike a balance. While you can’t be an immovable landlord, you can’t be a pushover either. Overreliance on lease concessions will slash your profits. They must be applied in moderation.

Pay careful attention to occupancy rates and keep tabs on the demand in your local rental market. Then you’ll be able to wield these concessions as an asset rather than a liability.

At Birchstone Investments, we help investors create passive income streams and grow long-term wealth through strategic multifamily real estate investments. If you’re interested in learning more about commercial real estate investment, join our investor community today.

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Jerry Hollifield

Jerry Hollifield

Jerry is the Managing Principal & Chief Investment Officer at Birchstone Investments, LLC. With a business career that spans more than 30 years, he has been involved in the acquisition, development, financing and management of over $400 million in real estate. In addition, he has been involved in more than 40 Merger and Acquisition transactions with total value exceeding $600 million.

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