Landlords and even property managers in the real estate industry have to be innovative in winning and keeping tenants. This is common where rent concessions are used, meaning temporary or permanent rent and lease changes. Rental concessions can attract occupiers to sign leases by reducing space costs and or offering more incentives.
This detailed article will dig inside rental concessions, exploring what they are, the pros and cons of rental concessions, and when the landlord should use rental concessions.
What Is Rent Concession?
By rental concessions, I mean changes made by landlords about how a tenant is supposed to pay rent and the agreement to make a lease agreement with the tenant to lure tenants to rent the property based on more conducive terms.
This is achieved in the form of concessions, and they take a variety of forms, such as lower rental costs, free utilities, and the waving off of fees, among other incentives. Both residential and commercial landlords utilize rental concessions to attract tenants and gain a competitive edge in the market.
Types of Rental Concessions
Rental Concessions
Landlords have many options when it comes to offering rental concessions. Here are some of the most common types:
1. Rent Abatement
This modifier includes the rent-free offered for a certain number of months, usually in the early months of the lease.
2. Reduced Rent
Like the rent reduction, the reduced rent is a continuance for the total term of the lease, thus presenting the Tenant with a Low Payment Rate.
3. Free Rent
Free rent for a particular bonus period, mostly starting from one free month for a lease year of signing, may be allowed by landlords. Also, the free rent months can be used within the lease period.
4. Waived Fees
These auxiliary charges may include the application fee, credit check fee, or security deposit, which could also be forgiven to attract would-be tenants into the lease.
5. Build-Out
In the case of the commercial situation, the landlords sometimes agree on the full or partial build-out of a space. Some landlords may agree to a rent-free period until the build-out works are finished, or to penalties which the tenant will be required to pay if the build-out is not completed within a specific set period.
6. Free Utilities
If, at first, the lease offer compelled the tenant to bear the burden of some or even all utility charges, landlords are successful in covering all or some utility costs for the tenant.
Pros and Cons of Rent Concessions
Rental concessions come with both advantages and disadvantages for landlords. It is important to carefully consider these factors before deciding to offer them.
Pros of Rent Concessions
1. Attracting Tenants
Rent concessions can be a powerful tool for attracting tenants, especially in highly competitive markets or when targeting anchor tenants.
2. Filling Vacancies
Offering concessions can help landlords fill vacant spaces more quickly, reducing potential income loss.
3. Retaining Tenants
Rent concessions can also be used to retain existing tenants. By offering concessions, landlords can make tenants feel valued and encourage them to renew their leases.
4. Negotiating Favorable Terms
Landlords may be able to negotiate more favorable terms in other parts of the lease in exchange for providing a concession.
Cons of Rent Concessions
1. Lost Income
Offering rental concessions means giving up some income from the Lease Agreement. This could be uncollected rent, missed fees, or increased expenses such as build-out or utility costs.
2. Expectations
By offering rental concessions to certain tenants, there is a risk of setting an expectation for future concessions. This can create challenges when dealing with future lease renewals or other tenant requests.
3. Limited Period
Some tenants may try to renegotiate their lease terms when concessions expire. Landlords should be prepared to stand by the original terms of the signed lease.
Common Rent Concession Example
Common Rent Concession
Rental concessions can be applied in various situations. Here are a few examples to illustrate how they can be helpful to landlords:
1. Anchor Tenant Concession
In a shopping center, landlords might offer a reduced rental rate on a square-footage basis to attract anchor tenants. These tenants often expect such concessions and will only sign leases with lower rent than smaller tenants.
2. Seasonal Promotion
If a tenant breaks their lease before, the landlord might offer a concession of two months of free rent to a new tenant. This allows the new tenant to gain visibility leading up to the holiday shopping season without straining their cash flow with additional expenses.
3. Long-Term Lease Incentive
If a successful new tenant requests to renegotiate their lease after six months or more, the landlord might offer a lower rent abatement in exchange for a much longer lease. This can secure a good tenant for several years, especially if they are initially hesitant to commit to a long-term lease.
Factors to Consider When Offering Rent Concessions
Offering rent concessions requires careful consideration of several factors. Landlords should take into account the following:
1. Property Demand
Area and location are crucial in determining the demand for a property. Landlords with prime locations may not need to offer rent concessions, while those with less desirable locations may benefit from concessions to attract tenants.
2. Tenant Qualifications
Assessing a tenant’s rental history and cash flow is important. Strongly qualified tenants with a proven track record may be worth offering more substantial concessions, while unknown or high-risk tenants may not warrant such incentives.
3. Cost Analysis
Landlords should conduct a thorough cost analysis to determine if offering concessions in exchange for other lease features, such as shifting utility costs to the tenant, benefits them in the long run.
Rent Concessions Calculate
Calculating rent concessions involves subtracting the net effective rent (NER) from the base annual rent (AR). The formula is as follows:
RC = AR – NER
- RC: Rent Concession
- AR: Base Annual Rent
- NER: Net Effective Rent
By subtracting the NER from the AR, landlords can determine the value of the rent concession they are offering.
Rent Concession vs. Concession Fee
It’s important to differentiate between a rent concession and a concession fee. A rent concession modifies the rent payments and lease agreement to benefit the tenant, while the landlord imposes a concession fee as an additional charge for specific services or amenities provided to the tenant.
To cover the costs of a gym membership or a parking space, landlords may apply a concession fee. This fee is not considered a rent concession and is separate from the rent.
Rent Concessions as a Powerful Tool
Rent concessions should be viewed as a very useful apparatus for landlords by which they can bring in as well as hold onto the tenants. If landlords place appealing terms such as lower rent, discounted or eliminated fees, and other such incentives, they are more likely to attract tenants and keep decent occupation statistics.
Nevertheless, landlords must analyze the merits and demerits of the payment package and evaluate considerations such as demand for Property and Tenants‘ qualifications and needs. Using rent concession calculators and implementing alternative rent concession terms help landlords make calculated decisions that guarantee maximum ROI from the provision.
To learn more about rental concessions and explore real estate opportunities, visit Citadel Property Management Corp., a leading real estate agency specializing in commercial and residential properties.
Benefits of Choosing Rent to Own Concession Trailers
Rent to own concession trailers offer a low-cost entry into the business world. They allow entrepreneurs to test the market, customize their setup, and eventually own the asset. With flexible terms and reduced risk, they’re a convenient way to start a concession business without a hefty upfront investment.
In some cases, concession trailers may appreciate in value over time, providing an additional source of Potential Profit if the lessee decides to sell the asset in the future.
FAQ
1. What is a concession for a landlord?
A concession for a landlord refers to a modification made to the rent payments and lease agreement to attract or retain tenants. This can include reduced rent, waived fees, free utilities, or other incentives.
2. What is the difference between a rent concession and a rental?
A concession refers to a modification made to the rent payments and lease agreement, while rental refers to the payment made by a tenant to occupy a property.
3. What is another word for rent concessions?
Alternative terms for rent concession include rental incentives, lease concessions, tenant concessions, rental discounts, and lease incentives.
4. What is a concession payback?
A concession payback refers to the period it takes for the landlord to recover the value of the rent concession through increased rent or other means.
