What you must know about incentives to lease
The Australian commercial leasing industry has been shaken up by incentives to lease. To the point where they have become an essential attribute to any negotiation. These incentives will vary in degree depending on the rental market at the time. For example, these incentives will be lower when there is low vacancy or higher when there is high vacancy. The problem is that most tenants have no idea what the market conditions are and whether they are getting a good deal. An agent my be telling you that their offer is a good deal, and it may look good after a few rounds of negotiations, but compared with the rest of the market is it really? On top of that there are very few tenants that even know what types of incentives they can push for. Understanding incentives to lease is incredibly important for your business and getting this right will start you off on the right track.
Types of Incentives
When negotiating with an agent for incentives to lease it is important to understand what these incentives are, and which incentives will best suit your business. Understand this and you will be able to negotiate from a stronger, more well-informed position. Here are a few common incentives:
As the name suggests a rent-free period is a negotiated time in which the tenant pays no rent. It is common for this to be provided for the first few months in order to help the business set up and begin generating revenue. For most commercial spaces the rent-free period is usually between 1 to 3 months. If the space has a higher rent some landlords may offer 6 to 12 months rent free. Generally, the latter is for large footprint spaces that the landlord wants a good long term tenant for. While this incentive may not be right for established businesses compared with other options, it is perfect for a new business. By taking up a rent-free period you can allow your business to begin generating revenue before you need to pay rent, helping you get a head start.
A rent reduction provides a long term discount on your rent over an up-front free period. This reduces your monthly payments over an agreed period of time. Effectively to receive the full benefits of this type of agreement you will need to remain a tenant for a longer period of time, and this may be reflected in your contract. This type of incentive is perfect for established businesses who may have the upfront capital to fit-out their space and continue to generate revenue during the move.
Sometimes you will be able to negotiate a fit-out contribution wherein your Landlord reimburses the cost of fitting out the space for your business purposes. A Fit-out refers to the process of installing any fittings, fixtures, appliances or decorative elements to convert the space to match your business’ needs. It is important during negotiation to understand what percentage of the fit-out will be reimbursed, and when reimbursement payments will begin. You need to also understand any of the nitty gritty behind the fit-out for example: Will the landlord take ownership of the fit-out once completed? Will they ask for an incentive guarantee to cover the fit-out? Understanding ever aspect of the agreement is important as it may come round to bite you when you go to begin the fit out or want to move spaces. It is quite normal for a Landlord to also provide a condition for when reimbursement payments begin. These may include whether you have: signed the lease, supplied a deposit, taken out insurance, provided quote, and submitted receipts. Make sure you know what you are getting into.
A landlord my combine any of these incentives together in order to achieve a good deal. As a tenant it is up to you to decide whether this type of incentive is right for you. You may find that a small rent-free period plus a small rent reduction is perfect for your business. Knowing that this is an option is a great way to get a deal that will fit your business.
How to negotiate the best incentives for your business
Tennant incentives are a mainstay in commercial renting, so it is common practice to negotiate with your landlord. Each party obviously wants to get the best deal possible for themselves, so, it is important that you can negotiate on an equal footing to secure the best incentives for your business.
Understand what incentives your business will benefit most from
Not every business is the same, and so, not every business will benefit from the same incentives. While a start-up may find that a rent-free period is perfect for them, allowing them to set up their office and begin making money without worrying about rent, another business may not have the same benefits. An established online clothing brand, originally run out of a garage, may be looking to expand. They will continue receiving revenue and don’t really need help fitting out their office. So a rent free period may not give them the long term benefits to expand their business that a rent reduction could provide. Understanding what your business needs is priority one.
Understand the market
If the rental market is in a high vacancy period, you may be able to strike a better deal with your Landlord. Or if it is in a low vacancy period you may learn that you need to adjust your position. Understanding what is happening in the market is the best way to ensure that an agent or landlord is not ripping you off with a bad deal.
Know the tax implications
This is something a good accountant can help you with. Knowing what each incentive will do in terms of tax is important in deciding which incentive is right for your business.
Other pitfalls to be aware of
Be careful when negotiating the lease in order to avoid any potential pitfalls that may have been snuck in. Some of them could force you to pay back the incentive if a tenant is in default or may even terminate the entire agreement is the premise is suddenly sold.
Be very careful when a clawback provision is involved. These could potentially force you to pay back any incentives provided if the landlord finds that you are in breach of contract, or if you attempt to get out of contract early. As a tenant it is important to consider these provisions carefully, especially if you don’t intend to serve out the full term of the lease.
Make sure that your deed contains a provision that ensures the incentive even if the premises is sold to a new landlord. This will pass the obligations of the landlord onto the new landlord upon the completion of the sale. A premises sale provision could help in stopping a landlord from suddenly pulling the rug out from underneath you by selling the property.
Lease incentives are great for both landlords and tenants. They provide a tenant the chance to utilise the incentives to grow their business while giving landlords a secured long-term tenant for their property. It is important as a tenant to understand what these incentives are and can do for their business, while also being aware of any pitfalls. The most important thing a tenant can do in order to get the most out of their lease incentives is to talk to a professional accountant. An accountant will help you understand any tax implications with each benefit and can help you find the right incentive for your business.
Contact Link Advisors today to get the most out of your lease incentives!