So your building has been on the market for a few years and you haven’t been able to close a deal. Should you consider offering free rent as a marketing tactic to attract a tenant?
Short answer: No.
Slightly longer answer: Free rent should never be a marketing tool, but it can be a useful tool to help close a deal when the market requires it.
If your local real estate market is healthy, there’s no good reason to offer free rent, and we would never offer free rent on a renewal.
But if the market is slow, we have offered a few months of free rent to help a tenant with their cash flow during their relocation. Making the move comes with its own costs, like downtime and moving fees, and some businesses don’t have the cash flow to handle double rent for a few months.
Of course, you have to evaluate your own cash flow to determine whether you can afford to offer free rent. You’ve got several big expenses that have to come out up front, including tenant improvements and your broker commission. Offering free return defers your return on those investments.
At Culmen Real Estate Services, we have negotiated many deals with creative solutions to help tenants out during down markets. But even if we know that the market might demand some free rent, we never lead with it. It’s a negotiating tool, and for it to work properly to convince a tenant to sign a lease, we need to hold it back until they ask for it.
If we do offer free rent, we like to add it onto the standard lease term, instead of subtracting it. So if the tenant wants a 5-year (60-month) lease, we offer them a 62-month lease with the first two months free. Another factor in whether free rent is reasonable is how expensive the tenant improvements will be. If those expenses are lower, free rent is easier to factor into the economics of the deal.
But don’t forget that free rent isn’t purely free for you as the landlord. Free rent costs more than vacancy because your operating costs will increase. You’ll now be paying for services like security and janitorial, and you’ll have to light the common areas. That’s why it’s common for landlords to provide free base rent, but still require the tenant to pay operating expenses.
Finally, as always, it’s crucial that you evaluate the credit of your tenant. The last thing you want to happen is that you offer six months of free rent, and you incur expenses related to the tenant taking occupancy, and then the business fails and you never get any revenue from the deal.
If you anticipate that you’ll have to get creative with the lease terms for one of your properties, a Culmen representative can help you make a smart deal that still provides a good return on your investment.