“So we need to lease a warehouse - how much free rent can you get us?” That is a common question I get from my clients. It generally does not matter if they are local or global, $100k/year or $100mm/year, everyone wants to feel they got the upper-hand or a good “deal.” But what does “free rent” really mean?
Free rent is, in most circumstances, a period of time where the tenant pays no rent or partial rent during the lease. This period is usually front loaded on the lease term. This is a great marketing ploy for landlords and is generally a win for the tenant too. It is pushed as a savings in rent to offset move-in and set-up costs incurred by the tenant. Free rent is also called “Rental Abatement” - which is, as a description, generally more palatable to Landlords. Owners hate to give away money. At the end of the day, owners want to lease their properties up and if they can lease it now, give a few months of free rent and eliminate the risk of additional months of vacancy, then it ends up being a wash for the owner.
Let me explain the tricks around Free Rent. Typically, free rent is never free. Rental abatement is recouped later in the lease. While time value of money may be gained, the Landlord will generally pad his proposal to account for any opportunity costs. As an example, if you as the tenant want to rent 10,000 SF for 60 months and the Landlord gives you 3 months free rent, he will typically add the months to the term of the lease - so 63 months. Now the Landlord will want rental increases in later years and will start those “bumps” in month 13 of the lease. Now the added three months will be at the highest rate in the term, thereby increasing the average rate over the lease.
Free rent up front is a plus for the tenant, provided the tenant does not have to pay more in rate over the term in order to get the free rent.
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