When you own a piece of commercial real estate, your goal is to leverage it to make a profit. That means keeping it occupied by tenants who pay rent on time at market rates. You, of course, need to maintain the property and handle property-level concerns the tenant shouldn’t be responsible for as part of the deal.

Sometimes, despite your best efforts, the property isn’t enticing enough to tenants to keep them around. 

The property lingers vacant for months, and you struggle to fill it. To get someone in and pay rent, you may need to turn to a rental concession.

What Are Rental Concessions?

In brief, a rental concession is an incentive you as a property owner offer to potential tenants to get them to sign a lease and occupy the property. Generally, they involve some added flexibility or lowered expenses for the tenant. Even a steep concession is often better than a vacant property. A rental concession needs to strike the right balance between enticing for a tenant and still valuable for you as the property owner.

You may use rental concessions to entice a potential tenant who is looking at several comparable properties to pick one. Property managers may also use them to keep an existing tenant around when they otherwise might be considering leaving.  

You can use rental concessions in both business real estate and residential real estate. Owning a property you lease to others is always an opportunity to negotiate for better results on both sides, and rental concessions are a primary vector for that negotiation.

Rental concessions may also be known as lease concessions, rent concessions, landlord concessions, or, more broadly, incentives.

How Often are Rental Concessions Used?

Common advice for tenants and businesses seeking locations to rent is to negotiate rental concessions. Rental concessions are pretty standard. They are often used as incentives to fill a vacant property, though many do not last long after the tenant is settled in. It’s unclear exactly how standard rental concessions are – and it varies from location to location, industry to industry, and property type to property type – but they are much more common than many expect.

Additionally, rental concessions are more heavily used in times of recession and economic downturn. 

When a tenant is faced with rising rents and expenses, along with decreasing patronage, they end up in a difficult position; a rental concession can help them maintain their business and keep paying rent, which is a win for both the property owner and the tenant.

Some property owners choose to avoid concessions in all but the most extreme cases, while others tend to offer many different minor concessions as ways to attract tenants. The decision to use rental concessions is made on a per-property and per-lease basis. In some cases, concessions are also used for marketing purposes; by listing a property’s rent at a higher-than-market rate and offering a concession to bring it in line with the rest of the market, tenants believe they are getting a premium property for a discount.

How Long do Rental Concessions Last?

Rental concessions vary depending on their type.

Some are one-time incentives to get a prospective tenant to sign a lease for the first time. You may use the concession to facilitate their ability to customize it to their needs or help them get established in a new location.  

Some concessions are monthly or annual and regularly apply for the duration of the lease, at which point it can be renegotiated by one side or the other. 

Concessions can vary from lease to lease, and the renewal period is a chance for both sides to readjust what their needs and resources allow. If your portfolio is performing poorly, you may not have the leeway necessary to keep concessions going. Conversely, a previous concession may no longer be required, and a tenant may request something different.

Some concessions are ongoing and last as long as you own the property and the tenant leases are.  

Again, it varies according to the individual situation.

What Kinds of Rental Concessions Exist?

Rental concessions can take many forms, which may or may not apply to your situation. It’s always a good idea to know what kinds of concessions exist, so you can potentially offer them in a situation that proves beneficial to do so.

1. Rent Concessions

The most common rental concessions have to do with rent directly. They can take many forms, including:

• Free rent for the first month or quarter.
• Reduced rent for the first year of occupancy.
• Rebates on rent paid for the first few months or first year.
• Reduced or dismissed fees.
• Reduced escalations (how much rent increases) each year.

As a simple financial concession, rent concessions are some of the most common concessions offered. 

They’re easy to promote as a simple form of value, and it’s easier to balance the books to ensure that you’re not taking a loss for the concession.

2. Security Deposit Concessions

Security deposit concessions are also relatively common. In many areas, a security deposit can be anywhere from a single month’s rent up to three months’ rent, though many states have limitations on how large a security deposit can be.

Security deposit concessions are often a waived or decreased security deposit. Sometimes, however, they may also take the form of a returned security deposit, over time, perhaps repaid over the initial year of the lease or perhaps after the first year is renewed.

In some cases, this is lumped into a rental concession, such that the security deposit is spread out and applied to the first year’s worth of rent, serving to return the security deposit and offer a lower rent on paper for the tenant.

3. Custom Lease Terms

While the most standard lease is a single year and has terms that govern the behavior of the tenants on the property, negotiation for more flexibility in the lease terms can be enough to be an adequate concession for many tenants.

The most common custom lease term is custom durations. Tenants may want the flexibility of signing and renewing a new lease every month, or they may prefer the security of “locking in” a lease for 2+ years instead of a standard single year.  

Additionally, other terms on a lease may be subject to negotiation. In residential leasing, for example, pet-free clauses may be subject to negotiation, or a pet fee may be waived.  

4. Subleasing Allowance

Another common restriction on commercial leases is the prohibition against subleasing. 

Subleasing is when the tenant themselves acts as a middleman and leases the property, in whole or in part, to others. 

For example, you may lease a four-bedroom home to an individual, expecting them to occupy the home. 

Subleasing would allow them to live in one part of the home and sublease other rooms to individuals in need.

Subleasing is often disallowed because of the potential liability issues and administration and responsibility issues that can arise when the property is misused. However, allowing for subleasing can be attractive in certain situations, in both residential and commercial real estate. 

Just make sure it isn’t in violation of any local laws or regulations and that the terms of the sublease are covered.

5. Pre-Lease Property Improvements

One common request when leasing a property is for improvements to be made to that property. 

For example, a potential tenant may want improvements to the front façade, the roof, or to the parking lot for a property. Depending on negotiations, these improvements may be your responsibility as the property owner, or they may fall upon the tenant to repair and maintain.

Often, a tenant may request those improvements to be made before they occupy the property. That way, you end up responsible for the improvements and ensure that they’re done when the tenant moves in. This makes the property more attractive to both the tenant and to potential customers and future tenants for as long as the improvements are relevant.

6. Tenant Improvement Allotments

Often, an improvement a tenant wants to be made to the property falls outside the scope of something you would normally cover, such as interior remodels, signage, and fixtures. One common incentive, particularly for businesses, is an allowance that the tenant can use (or an offer to reimburse them for up to a certain amount) for those improvements. This way, the tenant can hire whoever they want to do the work, purchase fixtures and equipment of their preferred brand and style, and can configure the property to their needs, and can have it paid for or reimbursed instead of having to do it all on their own dime.

7. Move-In Allowance

Moving expenses can be significant, both at an individual residential level and at a business level. 

Offering to cover or partially cover the move-in expenses can be another form of incentive for tenants who need it.

8. Covered Parking or Benefits

In many locations, parking may be monetized by a city. In these cases, covering the parking bill for the tenant allows them to worry less about that individual expense. Many other fringe benefits caused by unique situational elements fall into this same category. They are rarely high-value, but they are a matter of significant convenience to the tenant.

9. Hardship Flexibility

More common in residential property than in commercial property, but not unheard-of, hardship allowances and flexibility can be a potent form of concession. Allowing a waived month of rent or reduced rates during times of hardship, either at an individual level or a societal level, can be a significant incentive for both individuals and businesses to stick where they are as long as they can while they recover.

Are There Drawbacks to Rental Concessions?

The primary benefit of offering rental concessions is maintaining occupancy for your properties. 

A vacant property costs you money, while an occupied property, at worst, breaks even. Rental concessions help keep properties occupied. But, are there drawbacks to offering them?

In fact, there are several.

• First, rental concessions necessarily come out of your own pocket. In extreme cases, they eliminate the actual profit of a property while a new tenant gets established. If tenants frequently leave when concessions dry up and concessions are necessary to fill the property, it becomes a drain on your portfolio.
• Concessions are also difficult to remove once they’ve been established unless they were specifically agreed upon to expire. Many tenants will resist the removal of concessions they’ve relied on and may threaten not to renew their lease if the concession isn’t extended. Depending on the kind of concession, this may be a functional and permanent decrease in rent or another ongoing expense.
• Some concessions also fall into a category called “red flag” concessions. These are concessions that apply from the current property owner to the new owner or from the bank/lender to the purchaser. If a property owner is trying to sell you their property with concessions attached, it’s a red flag that there are hidden reasons why the property isn’t as good as it looks on paper.
• Since rent concessions come out of your bottom line, it may mean you have less money on hand if something detrimental or catastrophic happens and you need to repair the property. 
• Anything from tenant damage to storm damage to vandalism needs to be handled, but if your concessions cut into your profits enough that you don’t have the funds on hand to handle it, it puts you in a sticky situation.
• Finally, rental concessions are part of your Net Operating Income calculations and thus tangibly impact the on-paper value of a property. If concessions are required to keep the property occupied, after all, those concessions become an ongoing expense.  

To properly forecast, account for, and calculate concessions into your portfolio’s financial management, you need excellent software to handle it. The software offered by Rethink Solutions, itamlink, is a key part of a robust property tax analysis and calculations ecosystem. 

‍Click here to learn more, or request a free demo to learn how itamlink can save you time and money with your commercial real estate portfolio.