Negotiating Free Rent for Your Business | Quick Tips and Strategies

No business wants to pay rent; unfortunately, it’s just part of doing business.  But, as you consider a commercial lease, you should always look to negotiate free rent (a.k.a. a rent abatement) - the money you save can be put to far better use actually operating your business!

In this article, I’ll discuss some tips and strategies you can use to negotiate free commercial rent. 

Rent Abatement, Defined

If you’re negotiating - or renegotiating - a commercial lease and want to save money, you need to understand how rent abatement works.

Rent abatement is the formal term for “free rent,” something all businesses could use.  In other words, an abatement period is simply a period of time when the tenant is not required to pay rent on a commercial space.

Sound too good to be true?

It isn’t!  And, when you work with a commercial real estate broker, you’ll see that not only is rent abatement possible, it’s actually extremely common with commercial leases.

Reasons Why Landlords Give Free Rent

At first glance, it doesn’t seem to make any sense for a commercial landlord to provide tenants with rent abatements.  But, looking at the situation more closely from the landlord’s perspective, several factors drive free rent. 

And, the more you - as a tenant - understand the landlord’s incentive for providing a rent abatement, the more likely you are to successfully negotiate for one.  Here are the major reasons why providing a rent abatement can be beneficial for the landlord:

Reason 1: Tenant cash reserves

Replacing a commercial tenant is far more challenging than a residential tenant turn.  As such, commercial landlords want their tenants to succeed, as this means they’ll continue to occupy a space and pay rent. 

For new businesses, having a cash reserve is critical to getting things running, and a savvy landlord will understand this.  Landlords recognize that a rent abatement up front may give a new business the cash reserve they need to be successful, benefiting the landlord in the long-run.    

Reason 2: Vacancy costs money

Related to the above, a vacant commercial space costs landlords money - potentially a lot of money.  Landlords don’t only lose out on the actual rent, they also need to pay to market the space and provide tenant improvements for the next business to move into a space.  

And, in a worst-case scenario, a vacant commercial space could trigger a loan covenant, with the property’s NOI no longer meeting the required debt coverage ratio.  In these scenarios, lenders can call a loan, a potentially catastrophic outcome for a commercial landlord. 

Reason 3: NOI-related valuations

With commercial properties, net operating income, or NOI, drives valuations in relation to market cap rates.  A vacant commercial space can cripple a property’s NOI, leading to an associated drop in valuation. 

For landlords, decreased valuations significantly reduce sale, refinance, and subsequent investment opportunities, so a little free rent proves far better than a vacant commercial space. 

Best Times to Request a Rent Abatement

Having outlined why landlords would provide rent abatements, the next thing for businesses to understand is when they should request an abatement.  Here are the best times to negotiate this free rent:

●      Early in the initial negotiation period: As early as possible in negotiating your letter of intent, you (or your commercial broker) should emphasize the importance of a rent abatement.  This way, you enter the negotiations with leverage, as you’ve demonstrated the importance of an abatement period to accepting lease terms.

●      When launching a new venture: Even established businesses don’t know whether a new venture will succeed.  As such, prior to launching a new concept, line, or venture, businesses should negotiate for an abatement, as this provides critical flexibility during this vulnerable operating period.   

●      During the initial lease’s tenant improvement period: The tenant improvement period rarely - if ever - goes according to plan.  Depending on the space and level of work required, this process could take from a few weeks to a half a year, and tenants absolutely do not want to be paying rent on a space where they can’t yet operate their business.

●      If a space becomes untenable: If fire, water, or some other casualty forces you to temporarily abandon a space, you definitely don’t want to be paying rent.  Fortunately, most commercial leases include a force majeure clause that automatically implements an abatement period if the property cannot be occupied due to a casualty. 

NOTE: As part of a lease due diligence period, tenants should work with a real estate attorney to ensure that the proposed lease’s force majeure terms include all possible scenarios in which the tenant could no longer occupy the premises for reasons outside of tenant control. 

Local commercial real estate professionals can help you identify commercial rent abatement trends and strategies for your market and unique situation - need help finding reliable ones in your area? Drop us a note!

How Large of an Abatement Should You Request?

Unfortunately, the answer to this question falls into the well-it-depends category.  However, broadly speaking, the follow three factors will drive the length of the rent abatement period a tenant can realistically expect to receive:

●      Length of lease: For shorter commercial leases, landlords typically can’t afford the expense of an abatement period.  Conversely, the longer your rent, the longer the time frame the landlord has to “spread out” these abatement costs, meaning you’re more likely to receive a longer abatement period. 

●      Market factors: Following the 2008-09 Great Recession, commercial landlords couldn’t give away retail space.  But, they also couldn’t drop rents below a certain level, as it would devalue properties.  Instead, landlords chose to offer extremely long abatement periods.  On the other hand, in particularly heated markets, landlords may not have any incentive to offer an abatement. 

●      Property condition: In general, the worse the shape of the commercial property, the larger the abatement a landlord will need to provide during tenant negotiations.  Run down properties just need more time to build out for commercial tenants, and these tenants often won’t accept paying rent during these periods. 

Feel free to drop us a note if you need crafting an abatement negotiating strategy.  This can seem challenging, and we’re happy to help!

Maximizing Your Abatement

Looking at the above factors, tenants have the most control of the length of the lease.  Therefore, if you want a larger rent abatement, sign a longer lease. 

Commercial landlords will be far more inclined to provide rent abatements if they know their property will be occupied by the same tenant for the next 10+ years.  And, depending on your unique situation, most landlords will allow you to either A) accept 100% of this abatement at the front-end of a lease, or B) spread it out of an entire lease term. 

---

We recognize that, even after outlining the above information, tackling the challenges of negotiating a rent abatement in the commercial real estate world can seem daunting.   

That’s why we’re here to help.  The Pocket Broker team lives and breathes commercial real estate, so drop us a note to see how we can help you achieve your unique objectives!