How and When to Offer Commercial Rent Concessions
If you’re having trouble leasing your commercial property, you’re not out of luck. You’ve done the math and know what you need to make in base rent, but you can’t seem to secure a tenant. Fortunately, you don’t have to lower rent to get a tenant to sign a lease. Instead, you can offer rent concessions.
You might have heard of or even received a rent concession in a residential lease. From waived security deposits to the first month free, a rent concession feels like a surprise gift to tenants. That’s because it is. And that feeling is no different for commercial tenants. But the benefit to you is that a commercial lease is much longer, so you want to be sure to tailor your concession to your commercial tenant’s needs.
In this article, we’ll explain what a commercial rent concession is, how to offer and negotiate one, and give you a few examples of commercial concessions that will get your ideal tenant to sign your lease and get your relationship with them off to a great start.
What Is a Commercial Rent Concession?
A rent concession, or rental concession, is when a property owner makes an extra offer to a potential tenant to entice them into signing or renewing a lease. Rent concessions are made by landlords in both residential and commercial real estate.
When to Consider Offering Rent Concessions
In commercial real estate, rent concessions are offered during economic downturns or to entice a particularly promising commercial tenant to sign a lease. During the COVID-19 pandemic, many landlords unexpectedly lost tenants who operated small businesses that failed due to lockdowns. To lease the space and keep the property cash flowing, landlords had to be flexible and get creative. But even when the economy is doing well, landlords might make concessions to try to get performing businesses to sign long-term leases with them and keep the property full.
Examples of Commercial Rent Concessions
In commercial real estate, there are many concessions a property owner might make to encourage a tenant to sign the lease. Here are a few examples:
First few months free
Reduced monthly rent
Free parking
A tenant improvement allowance, which helps the tenant build out their space as needed
A single or double net lease, as opposed to a triple net lease
A move-in allowance, meaning the landlord pays for the tenant’s moving costs
A shorter or longer lease term, depending on the wants and needs of the tenant
Negotiating Concessions in Your Commercial Lease
For some landlords, rental concessions are a part of their marketing. If you’re struggling to get tenants, you might advertise, for example, that the first few months are free to attract tenants. If this is your plan, start small and increase the concessions if you don’t have tenants knocking down your door. Hopefully, you’ll have your pick of tenants who are easy to work with.
If you already have a potential tenant who you can tell is on the fence, it’s time to negotiate. Identify their biggest pain point when it comes to signing a lease and offer a concession that alleviates it, but doesn’t send you into the red. You don’t want to come across as desperate, just helpful. Act judiciously when offering concessions.
For example, a nail salon might need to move several large and heavy trade fixtures, like massage chairs and display cases. A move-in allowance would take some of the financial weight off of their shoulders without affecting your cash flow in the same way that reduced rent would.
If you own an office building downtown, consider offering free parking to your tenants. This will make their lives and their employees’ lives much easier if you can afford it. If you can’t, plan ahead by setting the base rent to include what you would have made in paid parking.
Be aware that rent concessions should be added to the language of the lease. This is true for lease renewals, as well. Have a commercial real estate attorney help you, especially if you and your tenant came to an agreement verbally. You want to make sure there were no communication errors that could come back to bite you down the line.
Rent Concessions Are Your Key to Leasing-Up
It’s easy to think your next tenant is right around the corner and convince yourself you don’t need to make any concessions. But how many months will go by before you find your perfect tenant? Stop waiting and get your lease signed by an excellent tenant who just needs a little help getting the pen to paper.
Not only will this help you lease your space, but it will also show your tenant that you’re a flexible landlord who cares about their business. Let commercial rent concessions pave the way for years of cash flow for you and your tenant.
