What Is An Office Lease Incentive?
If you’re a business owner, chances are you’ve heard the term office lease incentive, rent abatement, commercial lease incentive or rent-free period thrown around before. But what exactly is an office lease incentive? Put simply, an office lease incentive is a perk or discount that landlords offer to tenants to entice them to sign a lease.
Common office lease incentives include;
- Delayed lease commencement sets the lease start date in the future to provide access to the tenancy rent free to conduct fitout works within the space. In some circumstances, this is a way for the landlord to reduce the total incentive exposure, but also provides additional rent free periods for the tenant, or to avoid double rent and / or an opportunity to conduct make good works at their existing premises.
- Rent free period is an agreement between the landlord and tenant on free rent for a certain number of months. This is usually at the start of the lease to entice the tenant to lease the space. This is the least common form of incentive.
- A rental abatement is a rental reduction off the total rent spread evenly over the initial lease term, or it could be a reduced rate for the first few months of occupancy. Rent abatements can be a great way to save money on your office space, so be sure to ask your agent about them when you’re looking for new office space.
- A fit-out contribution to build a brand new fitout or a contribution to amend the current fit-out can be a very attractive office lease incentive for tenants. Essentially, the landlord provides a sum of money for the works as an upfront capital contribution, with the ownership of the fitout remaining with the landlord (and therefore the tax concessions attributed to this). This type of incentive allows the tenant to customize their office space to their specific needs, which can be a huge advantage in terms of productivity and creativity.
How Is A Commercial Lease Incentive Calculated?
A landlord is willing to offer an incentive to the tenant based on the lease term of your office lease.
For example, if the area of tenancy is 1,000sqm with a cost of $700/sqm and the landlord is offering a 40% incentive for a 5-year term duration, the landlord will contribute $1.4 million + GST towards your fit-out costs, that’s $1,400/sqm + GST.
It is calculated using the formula below:
Net Lettable Area (NLA) * cost * term * incentive =
1,000 * 700 * 5 * .4 = $1,400,000
As a tenant, it can be beneficial to increase the lease term to get more of an incentive. If you increase the lease term in the example above from 5 years to 7 years, your incentive increases from $1.4 million ($1,400/sqm) to $1.96 million ($1,960/sqm). An extra $560/sqm just from changing the lease term.
If you don’t use the whole fit-out contribution, the remaining incentive is generally spread over the course of your lease as a rent abatement. Each landlord might have different approaches to their incentives so read the terms and conditions carefully with a leasing professional or lawyer.
The Pros Of Office Lease Incentives
There are several pros of an office lease incentive. First, it can be a great way to help reduce upfront costs when moving to a new space, to help fit out the office or pay for the time it is not occupied. Additionally, it can provide some relief from high rent prices in competitive markets. It can also provide assistance with fitting out the office.
The Cons Of Office Lease Incentives
If you’re a business owner who’s considering signing a lease, it’s important to be aware of the potential consequences of breaking that lease. You are required to pay the full cost of the lease until the initial term is complete along with any associated make good obligation.
Office lease incentives typically require that you sign a longer lease, generally a minimum of 3 years but sometimes up to as long as 10 years. Only commit to a space you can reasonably forecast is right for the size of your business.
Lease incentives can be a great way to reduce the cost of your office lease and provide funds for your fit-out, but it’s important to be aware of the consequences of breaking your lease.
At TACTIC we can help you understand your rights and options and help you negotiate a favourable outcome with your landlord. Contact us here for a no-obligation complimentary consultation.
Please note that this is for general informational purposes and is to be used as a guide only. See full disclaimer here.