In this property market, lease incentives are very common. Landlords should be prepared for the tenants request for an incentive, and the leasing agent should help the property owner with the facts about the incentives that are typically used.
A fundamental fact exists regards the use of the leasing incentive; it should be explained to landlords. Incentives if they are given in any lease transaction should be ‘paid back’ by the tenant to the landlord plus acceptable interest over the term of the lease. This can be done by amortising the value of the incentive and adding it to the expected rent payments. The benchmark around which the recovery is made will be a market rental assessment and projection over the coming years of the lease. Large properties and shopping centres do this all the time.
Some tenants are not interested in hearing about this ‘repayment’ process, so in most cases the recovery of the incentive cost is a calculation that is handled in the commerce of the lease by the leasing agent. The lease rent review profile in the initial lease term is ‘enhanced’ to collect this extra money involved in the incentive outlay.
Every property market will have its own trends and evidence regards the incentive types and levels. Other recent property deals will set the evidence and the benchmarks. If the market is over supplied with vacant space through new property developments or higher vacancy factors, then the incentive will be high. Conversely if the amount of vacant space is lessening or negligible then the incentive can even disappear from new lease transactions.
In the case of established tenants negotiating a lease renewal, the lease incentive will be less than that which is given to a new tenant.
Get to know your property markets and watch what the rents and the lease deals are doing. Landlords have to compete with other nearby properties, so incentives are a fact of the current property market.