Understanding Rent Abatement & Other Lease Concessions
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
This article was updated on 10/05/23.
Not ready to buy a property? Contrary to popular belief, leasing a commercial property still allows benefits to the tenant. For example, if you're testing out a location for long-term viability, it is far better to rent while gaining insight into the area than purchasing the property outright. That said, proper due diligence is still required to rent commercial property appropriately.
Looking at signing a new lease? Perhaps it's time to look at profit-protecting components of the lease, such as rent abatements. Don't worry if you've never heard of this term before. Rent abatements are straightforward: They're periods of time wherein you either pay less rent or stop paying rent to your landlord as long as certain conditions are met. Rent abatements are considered a type of lease concession.
Think about going to a concert or a state fair; concessions are a sweet part of the experience. The same thinking can be applied to lease concessions: They are "sweeteners" that make signing a lease with a landlord more enticing.
It's no secret that, as you're looking at buildings for rent near you, landlords are looking at ways to reduce vacancies. The COVID-19 pandemic devastated multiple industries, with retail and restaurants hit the hardest.
Rent abatements aren't the only type of concession available. Let's say that you run into decreased revenue, but you don't meet the lease conditions for an abatement. You can pursue a deferral of rent, meaning that you are paying the total amount of rent owed later. This can take the pressure off your accounting and let you catch up.
You can also discuss a short pay, which would be paying some of the rent owed instead of the total due amount. Obviously, most landlords would rather get something than nothing at all.
What Is Rent Abatement?
As mentioned previously, rent abatement is a lease concession that allows no rent payments or payments of less rent for a set period of time based on a specific set of conditions. Generally speaking, the conditions would include when the building is unusable or when repairs are so critical that business comes to a stop. Rent abatements would not be for times when small repairs are needed or when a building is only partially damaged.
Depending on where you live, you should be able to find buildings for rent near you that offer both long- and short-term lease agreements. Should your local commercial market be experiencing exceptionally high vacancies, the bargaining power will be on your side when it comes time to negotiate.
You can let your potential landlord know you want to include rent abatement conditions in your lease agreement. The two of you can determine exactly what conditions would trigger rent abatement, creating an agreement that benefits both parties.
Other Types of Lease Concessions
Once you realize that you are in the driver's seat, looking at other types of lease concessions makes a lot of sense. Here are a few more lease concessions to consider while in the negotiation stage:
- Lease deferrals: Deferring the rent is a wonderful lease concession and can help give you cash reserves to weather times of lower-than-expected revenues. This should be part of your lease.
- Short payments: The ability to pay partial rent can come in handy, just like with a deferral. Landlords aren't going to be happy only to get a portion of the rent due, but it can help when you're in a bind.
- Reduced security deposit: Instead of paying a hefty security deposit, you may use your excellent reputation in the local business community or your creditworthiness to reduce or even eliminate the security deposit completely. This is putting money back into reserves for later use.
There are plenty of ways to spin a lease in your favor. Working with a commercial real estate broker can help you accurately identify and execute those ways.
When You Should Request Abatement or Another Lease Concession
New business owners can turn rent abatement into one of their most powerful profit-protecting tools. When you first open a business, you have more expenses than just the rent to consider. The other utilities and renovation costs play a factor. While some landlords are indeed short-sighted, most want to do everything in their power to turn you into a long-term tenant.
However, you can't become a long-term tenant if your business idea isn't profitable in your local marketplace. Don't just consider rent abatement when you run into major repair problems with the building; you can think about abatement from the very beginning of the lease.
#1 – During Early Negotiations
As mentioned in the previous section, early negotiations are a great time for lease concessions. Come to the negotiation table with an idea of what concessions you're most interested in; set yourself up with plenty of room to comprise later on should you change your mind or desire adjustments.
#2 – During the First Few Months of Your Lease
The first few months of your lease are incredibly important in terms of the health of your business. Until you prove your idea in the marketplace, your business isn't making money. This means that, after you get settled in the building, you need to ensure a smooth pathway to making money.
But remember that your landlord wants you to succeed, so they can keep you as a long-term tenant and fuel their ongoing cash flow.
Depending on its provisions, a lease can be adjusted if things get rocky, but it never hurts to have things spelled out at the beginning before you get too far into the lease.
#3 – If You Plan to Renovate the Workplace
There's no other way to say it: renovation sucks. It's a time sink, it's a money sink, and it takes time away from your core business practices. In other words, you have to make that downtime worth your while. Every space benefits from renovation work, and you should anticipate doing a few things to make the space more functional for your business.
This is a great time to reach out to the landlord and begin discussing concessions, like a tenant improvement allowance, and what this ideally looks like for both of you. Every landlord will have a different outlook on whether or not they should give concessions, but some can be much more motivated than others.
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