Understanding Lease Incentives in Commercial Real Estate: What Are They?

Negotiating the best terms for a commercial lease requires more than just securing a good rental rate. Lease incentives provide lucrative, impactful benefits, and negotiating for them will help tenants achieve greater benefits than simply pushing for a lower rent alone.

This blog will help you understand the basics of commercial lease incentives - what they are, why they work, and how to secure them. It will also cover how they differ from commercial lease concessions, and explain why working with a commercial real estate broker is critical to securing the best incentives possible. By the end, you will have the necessary foundation for understanding the incentives most likely to come up at the negotiating table as you pursue your next commercial lease.

What are Lease Incentives?

A lease incentive is an addition made to a commercial lease agreement that’s intended to entice a lessee. It equates to an effective reduction in rent for the tenant. Landlords like lease incentives because they can help increase a tenant’s investment in the property, both monetary and psychological, thus reducing tenant turnover. On the other hand, tenants like lease incentives because they provide additional perks such as renovation funding or reduced rent. When you negotiate for the right lease incentives for your business, they can be a win-win for both parties.

Common Types of Commercial Lease Incentives

In theory, a lease incentive could be almost anything. However, in practice, certain incentives are far more common than others. Below are four of the most frequent lease incentives seen in commercial real estate:

Tenant Improvement (TI) Allowance

A TI allowance is a prenegotiated sum, paid by the landlord to the tenant, that offsets the costs of property repairs and improvements. A TI allowance is generally restricted to renovations that permanently improve a property, like drywalling or HVAC upgrades, or basic updates such as replacing carpet, new paint, or bathroom upgrades. Improvements that the tenant can take with them at the end of the lease, such as furniture and office equipment, are not covered. This incentive is also sometimes referred to as a fit-out contribution.

Free Rent Period

A free rent period is a stretch of time where the tenant is exempt from making rent payments. It usually takes place at the beginning of the lease.

Rent Abatement

Rent abatement is a stretch of time where the tenant is granted reduced rent payments. Many times this will be net or base free where a tenant still pays for other items such as CAM or operating expenses. It can be applied over a set duration, or for the full term of the lease.

Parking

There are several ways landlords can offer parking incentives. One of the most common is free parking, where daily or annual parking fees are waived for one or more vehicles. If the building has a shared parking facility, the landlord may also offer reserved parking, where a set number of spaces are set aside for your business’ exclusive use.

The Difference between Incentives and Concessions

Even though they are often lumped together under the term ‘incentives’, lease concessions are slightly different. Both describe terms applied to a commercial lease to entice potential tenants, but while incentives are generally about adding something positive (extra benefits, additional funds, etc.), concessions are generally about removing or reducing something. Common concession examples include:

• Waived security deposit.

• Waived or reduced rent escalation.

• Waived or reduced maintenance costs.

How to Negotiate Lease Incentives

Once you understand what different kinds of lease incentives entail, you should focus on pursuing the incentives that best support your business needs. For example, a heavily automated warehouse operation with a relatively small number of employees is much better off prioritizing a TI Allowance for fitting out their space for automation, rather than something minimally useful like additional parking spaces.

To get better leverage, you can research local comps and a potential landlord’s portfolio to understand what incentives are typical. Knowing what’s normal for your particular situation makes it easier to push for those terms. You should also take some time to calculate the net effective rent (NER) for each lease option, to determine the real value of each lease. The NER formula essentially deducts the calculated value of all incentives from the nominal rent, allowing you to make an accurate comparison between different lease options.

Remember that as different incentives come into play, commercial lease negotiations can get increasingly complex. Fortunately, working with a seasoned commercial real estate broker like Modern CRE will help you ensure no angle gets overlooked.

Secure Better Commercial Lease Incentives with Modern CRE

At Modern CRE, we’re dedicated to supporting the profitability and growth of businesses like yours. Our experts work with you to understand your business’s unique needs, and will doggedly pursue the best possible terms for your commercial lease options. So, if you want a commercial real estate partner who will fight to get your business the benefits you deserve, contact Modern CRE today.