What is a rent free period in a commercial or industrial real estate lease and how do you achieve one?

A commonly requested or negotiated item in commercial real estate leases is a rent free period. Depending on market conditions for the type of space or building you’re looking to lease you may be able to achieve one.

A rent free period is a defined period where the tenant does not pay rent either prior to their lease term or at the start of their lease term. How much rent free to ask for is usually dependent on market conditions and the reasons for needing a rent free period. For Example, an office or industrial tenant looking to build out a new floor plan of offices might need 2 months to complete the work at their cost, and in turn would ask if they could achieve two months rent free to make the transition smoother. A landlord might see this as a reasonable request dependent on market conditions and the length of the lease term.

Speaking of the lease term, a rent free period is usually not considered unless you are signing a longer term lease, which in current market conditions is usually around 5 years depending on the landlord, property, and the reasoning. If you are not prepared to offer a lengthy commitment, it would be wise to not request a rent free period as you would be seen as unrealistic. It would also be wise to not request too much rent free period for the same reason unless it’s a very unique deal that warrants it.

There are also different options for a rent free period. In the situation of a triple net lease for example, some landlord’s may only agree to giving base rent free, meaning the tenant would still pay their proportionate share of property expenses through TMI, CAM, or additional rent depending how the lease is worded (this is common practice and considered a reasonable request).

There is also the option of having a rent free early occupancy period or a rent free period at the beginning of the lease term. If your lease starts February 1, 2019 and you have one month rent free early occupancy, your rent free period would be for the month of January before your lease starts. If it is rent free within the lease, it would likely make February the month you have free. What is agreed is usually a matter of preference between landlord and tenant. For landlord’s, it’s usually more of an advantage to have rent free early occupancy because if you have a 5 year lease, you still get the full 5 year term whereas with rent free within lease, the beginning of the term is eaten up with the free period.

A rent free period is a common negotiating tool for commercial, industrial, and office building leases, but it has its limitations in many markets and not all landlord’s consider it. Because it’s an incentive there may also be a claw back clause in the lease for that incentive in the event the tenant defaults. If the landlord agrees to a rent free period it’s because they feel there is a legitimate reason for the timing of the request and that it benefits their long term big picture of their investment property.

In the current Niagara industrial market, in particular St. Catharines, space is tight so rent free incentives usually aren’t very long if considered. Rent free on a commercial retail space is dependent on building and scenario and office buildings usually have consideration for it if the tenant intends to do their own improvements and alterations to the space.

To make sure you’re getting the best advice on rent free incentives, make sure you’re speaking with a knowledgable commercial real estate broker for the market that you are in.

Why Don't Commercial Real Estate Landlord's Like Short Term Leases?

Occasionally I come across commercial tenant's that don't have a long term commitment in mind but somehow expect a deal from landlord's. In short this is the opposite of what the landlord has in mind.

Real estate investors like long term stability and predictability and tenant's only looking for month to month options or short term leases will find themselves out of luck in most markets. Month to month tenant's are unpredictable because most can leave with just 30 days notice, which isn't much notice for the landlord to get the space ready and on the market looking for a replacement tenant. Landlord's hate putting themselves in a scenario where they have a revolving door for tenant's. Not only is it a headache to deal with it's also costly. Further to that a short term or month to month lease agreement doesn't exactly protect the tenant either, the landlord can issue them 30 days notice to vacate as well, and usually there is little or nothing the tenant can do about it.

While most residential leases are for 1 year, that too would be considered a short term in a commercial building. Most of the landlord's I currently work with won't entertain a 1 year lease in this market. The typical minimum term for most landlord's right now is 3 years but most landlord and tenant's are currently aiming for 5 year terms or longer.

Why so long? If a tenant has a solid business plan they should have no issue committing to a multi-year lease because they should have a pretty clear long term business forecast. Newer businesses are adverse to risk and prefer short terms, which are not impossible to find, but you likely won't end up with your ideal building unless you're ready to commit to longer terms. Something else to note is that landlord's are rarely negotiable for short term leases, often requesting a premium rental rate as a result.

For tenant's with questions about the commercial real estate leasing process feel free to contact me for more information.