In my article, Rent Free or Die, I explained how rental abatement in commercial leases typically works and showed the powerful impact it can have on the net effective rent over the lease term. At the end of the day, rental abatement has an economic value and, as a result, can be structured differently based on the tenant or landlord’s situation.
Half rent doubles the length of the reduced rent period. If a tenant is able to negotiate 6 months of rental abatement (on a 6 to 7-year lease, total 78 to 90-month lease), they might consider requesting the abatement be spread out over a year. This provides the tenant with a longer “ramp up” period, which can be particularly useful for retail tenants and/or new businesses. The concept behind leasing commercial space is that it contributes to the business’ ability to generate revenue. By increasing the time in which the tenant enjoys beneficial occupancy of the property, they are increasing the time in which they are able to grow their business and revenue.
Landlords may prefer half rent to full rental abatement because they begin collecting rent day one. Depending on the deal, asset class, etc. landlords may be required to provide sizable tenant improvement allowances to attract tenants. There is always the risk that a tenant will default before the landlord is able to recover their initial investment. Half rent allows landlords to provide the same economic incentives to lease their space while incurring less risk. The time value of money states that a dollar today is worth more than a dollar tomorrow. As a result, the income received during the (half) rental abatement period is more valuable than the income that would be received months later. This money can be reinvested or used to pay down the landlord’s out-of-pocket leasing costs.
Not every deal fits into a neat, little box. Oftentimes the difference between getting a deal done or not is the expertise and creativity of the broker negotiating it. Understanding one’s client’s needs as well as those of the opposite party is crucial in reaching a mutual agreement. If one can identify and address each party’s concerns, constraints, etc., they can effectively mitigate such issues through creative deal structuring and extract the maximum concessions from the other party.