The Advantages of Free Rent

Most tenants understand the impact of office rent on the bottom line and try to reduce it, most often by negotiation. However, they frequently neglect free rent, a common concession in the current real estate market.

When averaged over the full term of the lease, free rent decreases the total rental expense more than you might expect. As an example, let’s say you are leasing 10,000 square feet for five years at $30 per square foot. Negotiating four months of free rent lowers the annual average almost $2.00 per square foot, a cash flow savings of almost $100,000, often within the first lease year. In addition to saving money, free rent at the beginning of the term also helps to offset the front-end costs of an office transition such as movers, furniture and phone vendors, computers, etc. Conversely, many landlords are now agreeing to spread free rent over a period of years. The advantage to tenants is their rent is not artificially low in the first year (due to all of the free rent in the first year) and annual rent in future years is reduced by the value of the free rent, creating a smoother increase.

In many instances, landlords prefer offering several months of free rent instead of reducing the monthly rate because they must provide lenders statistics on their tenants. Higher rates suggest improved ability to repay and may also make the building more attractive to a future buyer.

As with any financial transaction, we highly recommend researching the complete accounting implications of any specific proposal. Reporting standards of liabilities may vary for free rent.