Commercial Lease incentives are payment discounts or any concessions offered by landlord to encourage a new tenant to sign lease or to encourage an existing tenant to renew. The incentive is a critical component of the Negotiation process. Incentives offered varies depending upon demand and supply on a particular micro market and pertaining to a particular building.

Commercial Lease Incentives And Rental Rates 

Incentives allow landlords to adjust their rental rates as per market conditions and tenant demand. ‘Effective rent’ is the term used to describe the rent after commercial lease incentives have been factored in. This figure is lower than the ‘face rent’ amount which doesn’t discount the value of the incentives that a tenant has negotiated with a landlord as part of their lease agreement.

Why Incentive Why Not Lower Rent?

Rental Yield is important for buyers to understand how good the property can be if they want to earn a healthy income from their investment.

Rental Yield = (annual rental income/ property value) x 100

Annual rental income = monthly rent x 12

Property value = purchase value of the property

Suppose, Purchase value of the property is Rs 30 lakh and has been earning an annual rental income of Rs 1.80 lakh. The rental yield, in this case, would be six percent.

Better the rental yield is Better the property value. Landlords are mostly concerned with one thing, property values. If the property is appreciating in value, then their investment is successful.

Types of commercial lease incentives

Incentives are provided in many forms and can vary depending on market conditions. The most common types are rent-free periods, rent abatements, escalation abatements, and fit-out contributions.

Rent-free period

A rent-free period is a time during your lease where you don’t have to pay any rent at all.

Rent abatement (reduction)

A rent abatement is essentially a reduction in rent spread over a period (or all) of the lease term.

Escalation abatement (reduction)

Escalation abatement or reduction from the market standard is essentially a reduction in rent outflow over period of the lease term.

Fit-out contribution

Fit-out contribution is a commercial lease incentive that applies to a tenant’s fit-out – the process of installing fittings and fixtures, appliances and decorative touches to an interior office space. 

How to negotiate commercial lease incentives

Landlords are always eager to attract high-quality tenants or long-term leases, especially in rental markets with high vacancy rates. Use the following steps as a guide to secure the best possible commercial lease incentive: 

1. Work out the kind of incentives that will best suit your business

2. Thoroughly research current market conditions

3. Hire professionals to negotiate on your behalf