Understanding Rental Concessions: Meaning, Types, Pros, and Cons

Successful property management requires consistent tenant retention and attraction. However, the rental market is beyond anyone's control.

So, what can one do if they are having trouble renting out available units? This is where rental concessions come in handy.

So, here is an extensive guide on rental concessions that cover all crucial aspects of this concept. So, let's delve deeper. 

What is a Rental Concession?

A rental concession is a compromise a property owner makes to the terms of a lease agreement intended to entice tenants.

Concessions are typically a discount of some kind and are offered by property owners to prospective tenants in the hope of luring them to move into their rental property.

The vast majority of rental agreements are documented in written form and include specifics regarding the security deposit, fees, rent levels, and incentive services.

The concession will typically take the form of a temporary decrease in one or more of these requirements. Alternatively, it may take the form of a momentary incentive service or a value-added item that is supplied to the tenant.

Concessions are offered with the idea that the revenue they would cost is normally lower than the expenses that would be incurred due to the absence of a rent-paying tenant residing in the property.

It is in the best interest of landlords to have new tenants move in as soon as possible to prevent vacancies and the associated financial losses.

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How Do Rental Concessions Work?

It's not to the financial benefit of landlords to have rental properties vacant. The landlord not only loses income on the rent but also loses money on other expenditures, such as mortgage payments, utility payments, and taxes.

When added up over time, these expenses can have a significant impact on a landlord's available cash flow. Therefore, it is of the utmost importance that a vacant unit gets occupied as quickly as feasible.

• Rental concessions generally attract tenants more quickly, which helps avoid a monetary outflow. They can work in different ways and take up many shapes, be either permanent price reductions or periodic price breaks.
• Landlords offering rent concessions nevertheless seek to persuade tenants and prospective applicants to sign a lease or request a rental unit.
• This form of concession is most useful when negotiating a brand-new lease or a renewal, but it has other applications as well. When concessions are offered, the standard lease agreement terms remain in effect.

To learn more about how they work, let's move on to the types of rental concessions. 

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Prominent Types of Rental Concessions

1. Free or Reduced Rent

A property owner may lure renters by offering a certain number of months of free rent or rentals at a discounted rate.

For instance, this provision is frequently included in apartment leases, where the landlord may offer the tenant one month's free rent in an effort to persuade the tenant into moving in.

2. A Lower or Completely-Waived Security Deposit

A security deposit is a payment that a tenant is obligated to pay to the property owner in order to compensate for any damages that may occur to the property while it is being leased out.

When the term of a lease agreement comes to an end, the property owner will conduct an inspection of the area, and if they discover no problems, they will refund the security deposit. 

However, security deposits can be extremely costly, which adds to the initial outlay of cash required when moving into a new location.

As a result, the property's owner may choose to forego them as part of an attempt to convince the renter to sign a lease or extend an existing one.

3. Tenant Improvement Allowances

Sometimes tenants, especially those who lease commercial and retail spaces, require some interior renovation in order to meet the requirements of operating their businesses successfully.

Since these can be costly, the property owner may grant a lease concession in the form of a "tenant improvement allowance" that will compensate for all or a portion of the buildout expenses.

4. Custom Lease Period

It is always in the best interest of a property owner to have a lease that is for a lengthier term. However, the requirements of a renter may vary.

As a consequence of this, they might be willing to make a concession in the form of a tailored lease period.

One tenant might, for instance, be given the option of an eight-month lease rather than a 12-month lease due to a particular requirement that the tenant may have.

5. Free Access to Amenities 

As a form of rental concession, a landlord may provide a complimentary use of an amenity to a tenant if the rented property includes a facility that the tenant would have been required to pay for in other circumstances, such as a fitness center, swimming pool, basketball court, laundry room, or storage facility.

Also, free parking is a perk that is frequently offered by business buildings in urban locations where there is a likelihood of a shortage of parking spaces.

This concession is beneficial to the tenant as well as their employees, who are eligible to receive the incentive of free parking.

6. Move-In Allowance

A move-in allowance will likely cover the expenses associated with the tenant physically moving from one place to another. It could be utilized to pay for services like movers, packers, transporting, packing, and unpacking.

Moving a larger organization's assets can be a very expensive endeavor. But if the company is willing to accept a few concessions, a portion of these costs might be reduced.

7. Consent to Sublease

A tenant may decide to sublease a portion or the entire space they are renting during the period of their lease for a plethora of reasons.

It is possible that a standard commercial lease will not permit this, but the property's owner can make this provision as a concession to allow the tenant greater flexibility if they so wish.

8. Brokerage Fee Payment

When a property is listed with a real estate agent, it is customarily the responsibility of the tenant to pay the broker's fee. If the tenant gets into the rental property soon, the landlord may offer to cover this fee on the tenant's behalf. 

Again, the specific rental concession that the property owner makes available to the tenant is partially contingent not only on the specific requirements of the tenant but also on the property at the time the lease is being evaluated.

What Are the Pros and Cons of Rental Concessions?

1. Benefits of Rental Concessions

• The most important advantage is, of course, that it speeds up the process for landlords to fill vacant properties.
• If local property owners provide rental concessions in the hope of quickly filling their vacant units, the occupancy rate in the neighborhood as a whole will increase, which is a beneficial move.
• As a direct consequence of this, the percentage of homes available for rent in that particular neighborhood as a whole will go up, mainly because an increased number of prospective tenants will be seeking property there.
• This, in return, will result in fewer vacant properties and fewer choices for tenants who are searching for somewhere to rent, which, in the future, should hopefully cause rental costs to rise.

2. Disadvantages of Rental Concession

• Rental concessions can come with significant negatives of their own. Although it might be simple to make these concessions to draw in new tenants, one should be prepared for resistance from existing tenants once the offer has run its course.
• The tenant may decide not to extend their lease for the new term as a consequence, and then you'll have to start the process all over again of striving to bring in new tenants or keep the existing ones.
• When property owners offer a free deposit as a rental concession, they get exposed to a significant additional risk.
• There is a risk, albeit a remote one, that the tenant would vacate the premises, do significant damage to the property, or pay their rent late, which will result in the tenant being evicted.
• If this happens, there won't be enough money to pay for the necessary repairs.

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When to Offer Rental Concessions?

During times of economic unpredictability and a stagnant market, several tenants may be forced to close their businesses or look for new employment.

As a direct outcome, they might be required to abandon a particular spot. If this plays out, property owners might be left with vacant properties with low demand from potential tenants.

In circumstances like these, offering rental concessions can help a property differentiate itself from the competition and save its owners from having to cope with the exorbitant costs that come with having lengthy vacancies.

So, if you are up against stiff competition for tenants, offering an incentive might do miracles for the business.

Conclusion

Rental concessions can keep tenants from moving out and help landlords fill vacated units faster. You can't use an all-purpose approach to offer the ideal rental concession for a tenant.

Leverage your network and perform market research to arrive at the best solutions for your tenants. Plus, these discounts could be offered on a recurring monthly, annual, or one-time basis.