Empty commercial rental property is of no use to a landlord, but a rent concession bundle can help them attract great tenants. These offers — such as a month of free rent or shorter lease agreement — encourage would-be renters to choose to rent one piece of real estate over another. These concessions are important for a lot of reasons, not least of which is that they can make a huge difference in your bottom line in many ways.
Here’s what you need to know about rent concessions as both a landlord and a tenant, including how to ensure you get the best deal and what those deals mean.
Understanding Rent Concessions
A rent concession is an offer used to attract a new commercial tenant, especially in a slow rental market. It may also be negotiated when it’s time to renew your lease, after a lease audit, or if the landlord becomes worried you’re going to move your business elsewhere. There are a variety of things that may be included:
- Reduced rent or first month free
- Reduced or waived security deposit
- Shorter lease period
- Move-in allowances to cover moving costs
- Options to sublease all or part of the space
- A free parking space
- Access to certain property amenities
- Tenant improvement allowances
The terms of your rental concession package should be carefully negotiated to make sure you’re truly benefitting from the arrangement. It can’t just look good on paper, but needs to serve you and your business in practice.
3 Things to Ensure Tenants Get the Best Rental Concessions
A good deal isn’t always what it seems for tenants. In addition to determining how much you’ll save by accepting certain concessions, you should make sure the item isn’t just a clever ploy to get you in the building. Here are three questions to ask:
1. What’s the real estate market like?
Rental concessions are often a matter of supply and demand. If a landlord has a dozen potential tenants to choose from, there’s no reason to offer any incentives for you to sign a lease.
However, if there are multiple properties sitting empty and you have a variety of real estate options to choose from, real estate owners are forced to offer you a more favorable rental agreement that may help you save money over the long term.
2. What’s the true value of the rent concessions?
Perks like free parking or laundry services might sound great, but you have to consider what that’s really worth to you over the 12 months (or more) of your rental agreement.
- How often will you use those services?
- What would they cost you if you paid for them out of pocket?
- A high tenant improvement allowance sounds great until you realize you don’t need to make a lot of changes to the property.
- Short lease terms might be a great option if you’re not so sure about the location or if you intend to grow into a larger space soon, but they’re not helpful if you’ve negotiated a great deal and would like to stay in that location for the long term.
If the rest of your agreement works well for you, those are nice bonuses, but they may not be enough on their own. In that way, you can’t really say “these rent concessions are great, and those are not.” Their value has to be determined on a case-by-case basis with consideration of your unique real estate needs.
3. What type of concession is being offered?
Rental concessions can be divided into three categories: lease-up concessions, red-flag concessions, and marketing concessions.
- Lease-up
Lease-up rent concessions are used for new commercial real estate properties as a way to fill the vacancies quickly and create cash flow for the property owner.
- Red flag
Red-flag concessions are those that continue to be offered after the original lease contract as a means of ensuring the property stays occupied. This can be a concern to lenders, as it may indicate a structural issue or some other reason why the property isn’t enticing tenants on its own.
- Marketing
Marketing concessions are basically marketing tactics. The property may be advertised above the market rate, then the landlords offer concessions to make the tenants feel like they’re getting a better lease agreement. The real problem for a tenant in this situation is if they don’t realize that’s what’s happening. If a landlord can rent the property to you without the concessions, they probably will.
Working with professional commercial real estate agents can help ensure you’re getting valuable rental concessions. These experts can identify a clever marketing or red flag concession and help you negotiate a lease agreement that’s truly beneficial for you and your business.
Common Pitfalls in Rent Concession Negotiations
If you’re negotiating your own rent concessions, there are a few things you’ll want to watch for:
- Have the concessions included in your lease agreement.
Don’t rely on a verbal agreement with the landlord that you’ll be able to use the amenities in the complex, for example.
- Read the small print.
If you have to break the lease terms, you may end up being responsible for paying back those rent concessions.
- Know the true market value of your desired property.
This will help you determine if the concessions are just a marketing tactic.
- Look at the big picture.
A free month might not mean as much if there’s a rent increase built into your contract after a year.
- Don’t get too caught up in concessions for your rental unit.
Concessions are a secondary consideration. Your first priorities in looking for new business spaces should always include location and foot traffic (if applicable), size of the space, the rent amount, and whether the types of tenants nearby complement your business or compete with it.
Get Help with Rent Concession Negotiations
As a renter, you may feel confident in avoiding these pitfalls and negotiating your own commercial lease agreement, but working with professionals can help ensure you’re getting the biggest bang for your tenant buck.
The Genau Group has a lifetime of experience in this market, and is here to help you find a great property and secure the best contract for you. Contact our team today to speak with an expert about rent concessions and other commercial real estate considerations.
