Aug 7, 2013 9:29:00 AM

A Tenant's Guide to Rent Abatement

By Don Catalano

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While a rent abatement is one of the more valuable concessions that a corporate real estate tenant can receive, it's also one of the least expensive ones that an owner can give. With this in mind, some landlords will use rent abatements as a way to get a tenant to settle for a less valuable package of concessions than might otherwise be available. Furthermore, rent abatements can come with varying terms and may not save you as much as you think.

How CRE Rent Abatements Work

On their face, rent abatements are relatively simple - for a period of time, the landlord agrees to not charge you rent. In fact, they're frequently referred to as "free rent." Usually, rent abatements are front-loaded to the beginning of the lease, so if you sign a seven-year agreement, it's entirely possible that your first six or so months could be free. Needless to say, this can be great for your organization's corporate real estate budget.

Abatements aren't always created equally, though. Some landlords will abate rent, but not CAM charges. Others put conditions on the abatement, such as requiring you to fully fulfill the lease to not have to face a clawback in the future. If you have a total rent abatement in a building with a master meter, you won't pay for your utilities, but if you're separately metered, you will. These variables make the value of rent abatements vary from building to building.

 

Why Owners Love Rent Abatements

Everyone loves rent abatements. They lower your corporate real estate occupancy costs, but for a landlord, they're a way to give away something for nothing. Right now, any space that you're considering is either already vacant now or will be relatively soon. The owner knows that he'll be sitting on a vacancy if you or a competing tenant don't lease the space, . He also knows that the incremental cost of putting you in the space is relatively minimal. In other words, while the value of the free rent to you is roughly equal to your monthly rent multiplied by the number of months, the cost to him could be as little as zero.

Buildings usually have high fixed costs but relatively low variable costs. Whether or not you're in the space, the owner will still have to light and heat the common areas, pay the property taxes, and plow the parking lot in winter. If he's not covering your utilities and janitorial service under a full service lease, there aren't any meaningful outlays to get you in the building. In fact, if the owner abates your rent but not your CAMs, you'll probably be profitable to him the instant your tenancy commences. 

 

Rent Abatement Negotiating Strategy

The key to negotiating a lease with a rent abatement is to remember that corporate real estate landlords aren't giving anything up when they offer abatements. As such, an abatement should be saved as a bargaining tool. Once you get in real concessions up front, like lower rents or tenant improvement contributions, you can always throw in abatements to sweeten the deal. 

As negotiations extend, abatements become even more powerful bargaining tools for you. When you reach an impasse, consider asking for an abatement then. After explaining to the landlord that you realize that it won't cost him anything, point out that if he has to go back to square one with a new tenant, the space will sit vacant anyways. An experienced corporate real estate service broker can also help you with these negotiations to ensure that you get everything you can from your landlord.

Here are some other articles to check out:

The Future of Office Space

Is The Private Office Dead?

Understanding Usable vs. Rentable Square Footage

 

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Topics: Lease Negotiations

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Don Catalano

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