WHAT ARE LEASE CONCESSIONS?
In commercial real estate, lease concessions are incentives, discounts or benefits given by landlords and received by tenants in a lease transaction. Offering concessions to a prospective tenant or a renewing tenant is a competitive way for the landlord to market their property and keep their tenants from locating elsewhere.
Lease concessions can be realized in any number of the deal points. Here are a few of the most common areas that incentives are offered to healthcare tenants:
- Free rent during the build-out period
- Free rent after the build-out is complete (often used to off-set moving or start-up costs)
- Base lease rate discounts
- Lower annual escalations
- Substantial tenant improvement allowances
- Increased “deliverables” (including HVAC, electrical, demising walls, and more)
- Permitted transfers of the lease during a practice transition (Assignments and Subleases)
- Personal guaranty burn-offs
- Right of first refusal to lease contiguous space
- Right of first refusal to purchase their space or the entire building
The financial position and desire to acquire or retain a healthcare tenant will vary among properties and landlords based upon the current market, current or upcoming vacancy, and other factors. For example, one landlord may prefer to offer a tenant two years of free rent in lieu of a build-out allowance, while another landlord may prefer to offer $60 per square foot in a tenant improvement allowance and only a few months of free rent.
A renewing tenant should aim to receive similar lease concessions to what any new tenant would be offered. This effort will likely be met with significant resistance from the typical landlord, so the success of the negotiation strategy hinges not only on the tenant having exclusive and expert representation, but more importantly, the game plan that the tenant representative brings to the table.