Lease Concessions
Lease Concessions
Lease concessions are the financial incentives, lease terms, and conditions that a landlord may use as incentives to move a prospective or existing tenant forward at rent-up or renewal to initiate or renew a lease agreement.
Lease concessions may also be called rent concessions, landlord concessions, or tenant inducements. A lease concession is any benefit a landlord offers as part of lease negotiations to accommodate a tenant in making a rental decision, as example, a rent discount.
Should a landlord offer a lease concession? The reason most cited by landlords in offering a lease concession is simply that a concession is a business decision that allows a vacancy to be filled as quickly as possible, as vacancies also cost money.
Local market conditions often drive a landlord to offer lease concessions to remain competitive with other housing providers in the area. For landlords with rental property in less desirable neighborhoods, a lease concession could attract renters who may not otherwise consider the property.
Property location cannot be changed but property condition can be. If a landlord is in the process of renovating his property, a lease concession may be offered to tenants to offset any inconvenience until construction has been completed. Or, if the condition of the rental property cannot be effectively changed, as example, the property is in escrow to a new buyer, a lease concession of flexible lease terms may fill an unexpected vacancy until escrow is closed and planned updates completed.
Understanding the rental market supply and demand conditions and the local demographics aids a landlord in his business decisions for lease concessions. A change in rental policy should be a strategic business decision that makes good business sense. Lease concessions should not be offered routinely or without regard to the business bottom line. Small changes in the market do not necessarily call for automatic across the board policy changes by housing providers.
Landlords should consider lease concessions as a tool to help manage their properties. A lease concession to the tenant is an expectation of value returned to the landlord. Without mutual benefit, the landlord has exposed his business to potential loss or liability. Concessions should not be wasted on installing a tenant who is not fully qualified to usual rental standards. The tenant will fill a vacancy but there is likelihood the tenant may default once the benefit of concession has been expended.
Rental surveys in many markets show housing affordability is the most important criteria to renters when considering a move. A lease concession that allows the tenant to better manage his rental expenses will generate more interest than any other type of rental incentive.
Types of Incentives
The following types of incentives are some of the most common lease concessions. A landlord can choose to offer the type of concession that is most effective for his business and the market served.
Rent discount
A tenant may request a lower monthly rate as a discount for signing a multi-year lease. If the tenant defaults on the lease, moving out before lease expiration date, a landlord has lost rent by having offered a lease concession and has an unexpected vacancy. A landlord may want to consider including a clause in the lease regarding tenant default on concession terms stating what remedies will be taken to cure the default.
Free month of rent
For some tenants a lease concession of one month of free rent is very attractive, particularly if they have problems coming up with required deposits, fees, and rents at move-in. However a landlord should make sure his lease terms and conditions clearly state how this concession will be applied and what the renter must do to earn the concession. For example, the free month of rent may be earned after the tenant has paid full and timely rent for the previous 11 months. Tenant screening of the renter’s financial ability to pay should always be conducted.
Flexible lease terms
Many landlords offer fixed-term leases, usually for a term of one year. A landlord could be willing to offer a shorter term lease or to consider a month-to-month agreement.
Security Deposit
A lesser amount of a security deposit amount or a waiver of security deposit may be a concession for larger rental complexes but is not a good business practice for an independent landlord. A security deposit is the landlord’s protection against a tenant’s property damage or unpaid rent. Waiving the deposit or allowing the tenant to pay less than one month rent is risky business. If a new tenant is unable to pay required fees, deposits, and rents at time of move-in, it could be a red flag to the landlord of potential rent default after move-in.
A landlord might consider a tenant’s request to pay the security deposit amount in monthly installments. This could indicate a cash flow problem and usually is not a good business practice. Be aware however that some states do address this issue by statute and the tenant is allowed to pay the security deposit in installments in compliance with statute provisions.
Property upgrades
Improvements to the rental property can be attractive to many tenants particularly so for tenants renewing their lease or considering a renewal. Property upgrades benefit both the landlords and tenants and can contribute value to the rental property. Upgrades can be a landlord’s choice or a tenant may be able to choose from a list of landlord offered upgrades.
Online Tenant Services
Online tenant services make it easy for tenants to pay rent, schedule maintenance, report items needing repair, and communicate with a landlord. Rather than a lease concession, online tenant services are incentives to conduct business efficiently and effectively over a variety of devices. For some tenants a tenant portal is a requirement for their lifestyle.
Documentation
A landlord who provides a lease concession as a tenant incentive should make sure that documentation is kept of relevant information, acknowledgement, and delivery of the concession. An offer must be provided to eligible tenants in a fair and consistent manner to avoid claims of discrimination. Additionally it can be a best practice to keep records by date and detail of offers made, responses received and confirmed acceptances. The records should include a copy of the offer as published or communicated in any media, including dates advertised, beginning and ending date of the offer and terms and conditions of the offer.
The lease agreement should include clear language regarding a concession, details of the terms and conditions to earn the concessions, and the available remedies if the terms and conditions are not met by the tenant.
Notification and Disclosure
A landlord should conduct due diligence to determine if his property is covered by state and local laws regarding requirements for notification and disclosure of tenant incentives or lease concessions.
As an example, in the state of Illinois, the Illinois Landlord Tenant Act includes a Rent Concession Act (765 ILCS 730/).
Sec. 1. That the purpose of this Act is to regulate the prevalent practice of making or using written leases of real estate, which, because of concessions to the lessees, do not truly state the real net rent being paid, it being recognized that such practice can be, and frequently is, used to mislead prospective purchasers and lessees, and lenders of money on the security of such real estate, into a belief that the rental value or market value thereof is greater than it really is.
Sec. 2. A rent concession is made within the meaning of this Act, when, in case of a written lease of real estate or a part thereof, the lessor before or at the time the lease or any agreement therefor is entered into, and in consideration of such lease or agreement therefor, directly or indirectly, gives, or agrees or promises to give, to the lessee, without express mention thereof in the lease, any of the following: (1) any credit upon the rent reserved by the lease between the parties, or rebate of such rent or any part thereof after payment thereof by the lessee, or (2) the right, privilege or license to occupy the leased premises for a period other than the term created by the lease, rent free or for a rent less than the average rent fixed by the lease for the entire term, or (3) any other valuable thing, right or privilege.
Sec. 3. When a rent concession shall be made in the case of any lease hereafter entered into, it shall be the duty of the lessor, at the time or immediately after the lease is made, to cause such lease to bear a legend across the face and text thereof plainly legible and in letters not less than one-half inch in height consisting of the words “Concession Granted,” and to bear a memorandum on the margin or across the face of such lease stating the amount or extent and nature of each such concession, and any failure on the part of a lessor so to do shall be unlawful and a violation of this Act.