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Commercial Lease Concessions Explained

A guide to know what to ask for

As a commercial tenant or someone who has found yourself in the field of commercial real estate, perhaps you’re familiar with Letter Of Intents (LOIs) and that they’re used for negotiating important deal points prior to drafting a lease.

But what exactly is contained in an LOI? Besides the basic property information, LOIs outline the lease concessions the landlord is willing to offer the tenant, and because lease concessions can be critical for a business’s operations and easily save a tenant tens to hundreds of thousands of dollars, we put together a short list explaining each one and their benefits.

Tenant Improvement Allowance (TIA)

A designated amount of money provided by the landlord to the tenant to contribute to the construction costs of the tenant’s space build out. These funds can only be used for actual construction labor and materials – not equipment or furniture items. Construction can be very extensive and expensive for a space to work for a new tenant, especially if the new tenant’s use is drastically different than the previous tenant’s or the space lacks crucial infrastructure.

Buildout or Construction Period

An established period of time for the landlord’s and/or tenant’s work to take place prior to the tenant declaring possession of the premises. This saves the tenant money on rent while their space is not yet usable.

Rent Abatement

The official title of a free rent period. Commonly in commercial leases, the tenant will be granted a certain number of months which they will not owe the base rent. The free rent period is most often at the very beginning of the lease term to offset the upfront costs of construction and moving for the tenant. However, depending on the lease type, the tenant may still owe operating expenses during the free rent period.

Use Exclusivity

Also known as a non-compete, a clause in a lease which provides the tenant the right to a particular use, while denying all other tenants to operate in the same way or sell the same types of goods and services. This is an important request to some businesses, but not to others.

Right Of First Refusal (ROFR)

A lease clause which grants the tenant first priority to either purchase a property or lease other space at a building in the event it becomes available. Either or both scenarios can be included as opportunities in the ROFR clause and is most important to tenants who project future growth or desire to own their space.

Signage

There are typically three categories of signage offered: suite signage (an entrance sign, often a decal on the front door), monument signage (a shared sign with all tenants listed outside the building), and building signage (physically on the building itself). Tenants need to prioritize the importance of each and include their requests in the proposal.

Reserved Parking

The number and location of designated parking spaces for the tenant. These spaces are often marked as such onsite to ensure others do not use them. If not reserved parking, the parking ratio or the number of total parking spaces at a property can also be included in an LOI for a tenant to determine if the parking situation is going to suitable for them.

Lease Renewal Options

Included within many leases as a clause, renewal options provide the tenant a right to extend the lease period past the lease expiration date. Lease renewal clauses vary. The clause may be brief with vague language, such as “then market rates” for the renewal period rent, or the clause may have already pre-negotiated rents for each year of a defined extension period. Any pre-negotiated terms can be renegotiated later on if the tenant believes a better deal is achievable, but the landlord is obligated to honor the terms contained in the lease renewal clause at a minimum. Regardless, renewal option clauses will have a deadline for the tenant to exercise this right or else the landlord can deny the request to renew the lease all together.

Feel free to share the downloadable PDF of this list with anyone who may find it helpful.

Now you may be wondering how a commercial tenant receives these lease concessions. Well, when we first meet with tenants, we undergo a needs analysis to prioritize which lease concessions are the most important to them, so we can adapt our proven approach accordingly to achieve their goals.

For example, a specialty doctor is going to require a complex buildout with high equipment costs, so they will likely prefer a large Tenant Improvement Allowance with a long construction period. Meanwhile, a retail store is going to require a certain number of parking spaces for customers, excellent building signage, and exclusivity to protect themselves against the competition.

Structuring the best lease terms for a tenant is definitely a science, and it’s what we are good at! We are market experts and professional negotiators, so you don’t have to be.

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