Free rent, or rent abatement, is a common and widely sought-after concession in most commercial office leasing transactions. And it’s almost exactly what it sounds like: rent that you don’t have to pay. Believe it or not, depending on your lease and depending on the situation, free rent can mean different things and can have different outcomes on your lease.
Let’s explore the different nuances of free rent and how they might impact your bottom line.
Gross Lease versus Net Lease
In a Gross Lease, rental abatements will usually factor in operating expenses/CAM. Under this scenario, you’ll most likely only be paying your tenant electric and or utilities and janitorial during the free-rent period.
In a Net Lease, rental abatements will usually NOT factor in operating expenses/CAM. Therefore, you still have to pay your share of the operating expenses along with tenant electric and or utilities and janitorial during the free rent period.
Is it really free rent?
Yes, it’s really free rent. Let’s look at an example. Say you agree to a five-year lease (60 months) but you ask for two months free. You’ll most likely notice your lease go from 60 months to 62 months. Why? The Landlord retains 60 months of cash flow to make the numbers work while you benefit from two months of no rent or partial rent, which refers back to the Net Lease.
When do you get the free rent?
This varies from lease to lease. Some Landlords give free rent up front, some like to spread it throughout the lease and some wait to provide it towards the end of the lease. Again, I think it depends on how that Landlord models their cash flow and what they’re most comfortable with. It especially depends on whether you’re leasing from a large owner such as a REIT (Real Estate Investment Trust), which may or may not be publicly traded, or a smaller owner who doesn’t have to worry about their investors.
How much free rent can I have?
There’s no rule of thumb. Many think that they should get one month free for every year on the lease. So a three year lease should yield three months free, a four year lease four months free, and so on. While some owners will do this, not all will. Again, this varies. The best bet is to look at comps from recent transactions in your market from similar buildings to gauge how much makes sense. Even better, try to find comps from the same Landlord to see what they’ve done in the past.
Not every Landlord is going to give free rent. Your advisor should be able to educate you on which Landlords will and which won’t. If you’re able to secure even one month free, it should help bridge the gap on other negotiations. Talk to your advisor to gain a clear understanding of why free rent may or may not make sense for your new lease.
Based in Princeton, N.J., Vinny specializes in tenant and landlord representation for Colliers International, working directly with his clients in the acquisition and disposition of office space. For more commercial real estate insight and trends, follow Vinny on Twitter.