Why Do Landlords Offer Free Rent?

Whether you’re new to the world of commercial real estate or an experienced landlord, you probably have heard about “free rent.” But what exactly is free rent?

Landlords offer this as an incentive to lease space because it’s an effective way of luring prospective tenants into their buildings. It can help reduce vacancy costs, which are often significant for landlords, and it’s also an effective way to retain a high-quality tenant.

Typically, a landlord will give you a certain amount of “free” time during the beginning of your lease term. This varies from landlord to landlord, but it can be anywhere from two months up to a year.

A landlord’s goal is to have a steady stream of income from their tenants, and free rent periods allow them to do that without worrying about losing the rent for those times when the tenant isn’t there.

This can be a great benefit for both parties, and it’s easy to see why it’s becoming more common in the current real estate market.

While the number of available units in a building may not be as high as it was before, the number of potential tenants seeking to move into those spaces is higher than ever. That means that any landlord who doesn’t offer a rental concession or other incentives to attract new tenants is at risk of losing a valuable tenant.

Some of the most common rental concessions are a reduction in the first month’s rent, a free month of rent, or even other goods and services. While this can be a great marketing tool for landlords, it’s important to weigh the pros and cons of offering these incentives before making a decision.

A Month of Missing Income

Free rent is a great incentive to entice tenants into your building, but it’s not without its downsides. One of the most significant con is that this type of rental concession can immediately reduce a tenant’s income for a full thirty-day period, which could be detrimental to their bank account.

A second con is that if you default on your lease, there’s a good chance you will have to pay back the free rent period that was given to you. This is known as a “clawback” provision in the legal world and it can be expensive to resolve if you don’t negotiate it out of your lease.

Another downside of offering free rent is that it may be difficult to justify if you’re competing with other buildings for tenants. This is especially true if the market is in a down cycle, which makes it harder for landlords to find new tenants.

Landlords need to ensure that their buildings are generating enough income to cover their expenses and make the investment worthwhile for their investors. In addition, the financing for many of these buildings is backed by banks, which will need to see that they are earning a sufficient level of income to meet their loan requirements.