In commercial real estate, a lease incentive is an enticement for a tenant to proceed further towards a lease transaction and provide a signed lease to the landlord. In most ordinary property markets a lease incentive will be required to get some momentum into lease negotiation.
It is interesting to note that some landlords will not or do not wish to provide an incentive to a tenant. Whilst that fact is understood, it is likely to be the ‘make or break factor’ when it comes to getting tenants to move ahead into leasing a property. In some property markets an incentive is an essential and required factor to get tenants interested in leasing any vacant space or property.
A lease incentive is a cost to the landlord in some way or form, but the cost of the incentive should be loaded into the lease deal over the duration of the lease. In other words the landlord gets back the initial incentive cost plus interest. It all comes down to how the matter is structured and negotiated.
Here are some ideas to help you with incentive based lease negotiations:
- Understand the competition properties locally that you are up against when it comes to attracting tenants and leasing. Check out the effective and face rents that apply in each case. As part of that process also check out their incentives as offered.
- Determine the market rents that apply locally to properties of the same type and in the same region or location.
- Understand the differences in properties that may impact a tenant’s choice of lease or property today.
- Look at incentive alternatives available and assess what works for the property, the location, and the landlord. Usually you will have some alternatives to work with such as rent frees, rent rebates, fit out provisions, fit out cash, landlord works, and cash (or any other type of valuable bonus).
- The process of an incentive should be documented legally and correctly. That may involve the lease itself and or a licence agreement. See a good property solicitor for help with this.
- A lease incentive should not be provided in final form until the lease is fully signed and accepted by all parties. That includes the payment of all rents, guarantees, bonds, and deposits.
- If the incentive involves fit out works of any type, understand who owns that fit out when constructed and what will happen to it at the end of the lease term. Make good provisions at the end of the lease are also essential to resolve any ownership misunderstanding and to achieve the right actions regards fit out removal or retention.
- The cost of the incentive should be amortised back into the rent structure over the lease term. You can do this by determining today’s market rents, assuming rental growth over the lease term, and then modelling the cash flow for the landlord using a Net Present Value financial model. It is then very easy to show the landlord just how they will get their money back. That model will also take into account the rent review structures of the lease as negotiated.
Don’t be afraid to negotiate a lease incentive. Be prepared for it as part of finding new tenants to lease your vacant property. It will make your leasing strategy a whole lot easier.