Commercial property goes in cycles from full occupancy to overbuilt with vacancies. When it has been difficult to rent, various concessions have been made to get tenants in and paying rent.
Free rent concessions have been used sometimes to help fill a building. This may have created more problems than it solved.
As an example, suppose there is a building where office space is offered at $25 a square foot on a five-year lease. The lease can be renewed for an additional five-year term at a negotiable renewal rate. To get tenants into the property, the owner gives a concession of free rent for the first two years. This may sound like an acceptable, though extreme solution, but might not be good for either the owner or the tenant.
The bookkeeping and tax preparation for these two years can be a major problem for both the tenant and the owner.
The landlord has no income from this tenant during the two-year period of the rent concession. This can create a cash flow problem for him,
The tenant’s cash flow is incredible during the first two years, since he is paying no rent at all. Then it jumps up to the $25 a square foot level for the remainder of the lease. This can cause a cash flow crisis for the tenant.
Since the property has such a severe vacancy problem that the owner considered the free rent concession in the first place, he might consider a new manager, or a sit down session with the current manager on how to solve this vacancy problem with some creative ideas other than free rent.