Commercial real estate is typically an organization's second most significant cost. So when a huge piece of your budget hinges on your CRE, understanding how to achieve savings is critical.
Rent abatement is an incredible method for corporate tenants to generate savings. How do we know this? As tenant reps we have three decades of experience securing the best commercial properties and features for our corporate clients at the lowest prices.
We have seen how successfully negotiated rent abatements can provide dramatic relief for the budgets of corporate tenants. To learn how you can achieve the same, read on. We discuss:
What is Commercial Rent Abatement
A rent abatement is an agreement between the landlord and the tenant that provides a period of free rent. During the abatement period, you are not required to pay rent to occupy your space. Often, the abatement period takes place over the first few months of the lease. Some commercial leases also provide rent abatement in the event that offices cannot be occupied due to repairs or maintenance.
Importance of Rent Abatement in Commercial Real Estate Leases
When you negotiate your next commercial real estate lease, it's always a good idea to see if you can get a rent abatement. After all, the less rent you pay, the more money you save, right? While this is usually the case, sometimes your landlord might expect something in return for your savings.
Understanding the Rent Abatement
Many landlords offer a rent abatement for a simple reason. They want you to become their tenant and pay rent to them. As such, they're willing to give a little bit of income up at the beginning of the lease to make money over its entire length. This makes sense for you because free rent sweetens the overall deal. In many cases, it also helps defray the cost of moving into the leased space.
Usually, the rent abatement covers the initial period of your lease. Depending on what you negotiate, you could end up paying no rent, or reduced rent for a while. It's common to have your rent reduced while your space is under construction, though. You might also be able to get a little bit more time to cover the opening of your business, too.
The timing of your abatement depends on your lease, negotiating style, and terms in force of your market.
Beyond, the only way to find out what kind of rent abatement you can get is to start the process of negotiating. An expert tenant representative can help you get the maximum abatement possible if that is what fits your company's real estate strategy.
The Landlord's Perspective
Maxing out your rent abatement might not give you the best deal, though. It usually turns out that free rent isn't actually free. To understand why this happens, it helps to look at the leasing process from the landlord's perspective.
The landlord typically wants to extract as much value from you, their tenant, as possible. There are many ways that they can do this. For example, they can possibly charge you a higher rent. Or, another option is to make you sign a longer-term lease.
A different landlord may choose to increase the amount of building expenses that you pay. It's kind of like how you can go to a restaurant and fill up on a salad, bread, steak or dessert. Either way, you'll be full.
With this in mind, sometimes a landlord will offer a rent abatement with the intent of making it up elsewhere in the negotiation. For instance, your abatement might come with higher rent during the rest of the lease.
It's common to add the rent abatement months to the end of the lease term. For instance, a 60 month lease with 4 free months turns into a 64 month lease so that the landlord still gets five years of income. This might fit your strategy, and it might be a great deal for you, but it's still important to remember that the owner on the other side of the negotiating table is getting something in return, too.
Things to Remember About Rent Abatement
If you're unfamiliar with rent abatement for commercial leases, you're missing out on a lease clause that can greatly lower your occupancy costs. A rent abatement provides a significant benefit for companies, and having the right to one added to your lease is often easier than you might think.
Rent Abatement Doesn't Cost the Landlord Anything
From a landlord's perspective, a rent abatement is the same as having an office space unoccupied. Knowing they now will make money from you signing a lease, giving a rent abatement to you for a few months is usually something landlords aren't worried about. As a result, landlords may be more open to an abatement than they are to costlier concessions like tenant improvement allowances.
You May Still Owe Money During the Abatement Period
Even if you don't have to pay rent during the abatement period, you may still expenses to pay, such as, utilities. Many leases also include common area maintenance (CAM) fees that cover the cost of maintaining shared areas in a building. In most cases, tenants are still responsible for making CAM payments during the rent abatement period.
Don't Lead With an Abatement Request
At the negotiating table, save your abatement request for the right moment. Discuss your most important requests and concessions first and try to reach a favorable agreement. You can request an abatement later on in the negotiations.
Save your request for abatement at a point where you reach an impasse with the landlord.
For example, if the landlord is balking over your requested budget for tenant improvements, you could request a rent abatement for a period of months equal to the budget. An abatement is an excellent bargaining tool when used wisely.
A Conditional Abatement Often Comes With Caveats
If your commercial lease provides an abatement when you're unable to occupy your office, make sure to read the clause carefully.
The landlord may try to add language that says if the repairs are needed due to the actions of your company, the abatement is void. The landlord may attempt to shift the blame onto you in order to avoid the abatement.
Commercial leases are skillfully drawn up by the sophisticated brokers and lawyers of landlords. As a result, there are many minefields of dangerous lease clauses that can blow up in your face. That is exactly why you want to have your own tenant rep and experienced CRE attorney on your side.
If You Don't Fulfill the Lease, You May Need to Repay
With any type of rent abatement agreement, keep an eye out for clawbacks. If your company defaults on your commercial lease, your landlord will typically have the right to a clawback. This means that your landlord can require you to pay back the entire amount of the rent abatement, and in some cases, additional penalties and fees.
This could prove costly if you default or exercise the right to sublet, assign or terminate your lease early. As a result, rent abatement may not be a wise choice for start-ups or for companies that are struggling financially and in danger of default.
Wrapping up Rent Abatement
Ultimately, it's usually a good idea to get a rent abatement. What you end up giving could be less than what you give up to your landlord. That being said, negotiating carefully with a savvy partner is the best way to make sure that you get as much as possible from your abatement.
If you're looking for an unconflicted party with the know-how to achieve the best rent abatement for your next commercial lease, work with a tenant rep. At iOptimize Realty®, we are tenant reps with over three decades of market knowledge. We know the ins and outs of rent abatement, other critical lease clauses, negotiation with landlords, and beyond.
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