Lease incentives are benefits added to encourage tenants to enter into lease agreements. Landlords may advertise lease incentives along with the property in order to attract potential tenants, or they may agree to additional lease incentives during negotiations. If you’re in the market to lease a property, you can sweeten the deal by negotiating for the right incentives.
Lease incentives come in a variety of forms. Here are a few common examples:
- Reimbursement for fees incurred from breaking a pre-existing lease commitment
- Relocation costs related to moving from one property to another
- Rent-free or reduced-rent periods
- Purchase of leasehold improvements
- Upfront payment of cash
In this article, we’ll discuss how businesses negotiate for lease incentives and how to account for them in your financial records.
How to negotiate for lease incentives
When negotiating a new lease, you have an opportunity to advocate for the terms that matter most to you. If the landlord is especially motivated to get you to sign, they may be willing to change their terms to accommodate some of your needs and desires. But if you don’t go into negotiations intentionally, you may end up missing out on what you could have received. Here are a few tips to help you out.
Plan your non-negotiables and “nice-to-haves”
Before you even start looking for a property, you should clearly define exactly what you’re going to need out of it. This should include not only the physical characteristics of the facility itself, but also any incentives that you can make a case for. It helps to examine your real estate portfolio to identify things your best locations have in common, lease incentives the landlord has agreed to in any other leases you have with them, and incentives nearby lessors (their competitors) have agreed to.
Consider the big picture
While staying firm on your non-negotiables, it helps to be flexible about everything else. Keep in mind that although lease incentives come in a wide variety of formats, all of them ultimately come down to a monetary value you can calculate. Landlords may be willing to give you a much better deal, financially speaking, via one format over another.
For example, if you have the option between upfront cash or specified leasehold improvements, be sure to calculate the true value of those improvements. By leaving the lesser option on the table, you could get a better deal in the long run.
Research market conditions
Don’t go into negotiations unprepared. Your site selection process should include research into similar properties and the kinds of lease incentives you’ve obtained in nearby locations. And as you apply your location strategy, you’ll get a better grasp of how valuable the location is to your business, and which criteria you may be able to leverage to negotiate for better incentives.
How do local demographics and traffic flows align with your ideal customer? How visible and accessible is the location in relation to other nearby sites? Is it on an endcap of a strip mall, a standalone store, or only accessible through another store’s entrance? The location’s characteristics will have a measurable impact on your bottom line. With advanced site selection software like Tango Transactions, it’s easy to leverage this kind of analysis to negotiate better terms.
Pursue multiple options
Site selection is about acquiring the best possible locations for your business. While you can’t pursue every opportunity, it helps if you begin the process with a few options at once to get a better sense of what incentives each landlord is willing to put on the table. When one landlord gives you an offer, you can then counter with what the other landlord offered. Even if one location is clearly the best, you may get a better deal on it by keeping other options open.
How to account for lease incentives
Because lease incentives have monetary value, you have to factor them into your overall lease accounting. This hasn’t always been the case, but ASC 842, the accounting standard codification issued by the Federal Accounting Standards Board (FASB), has offered a lot of clarification for recognizing lease incentives.
However, accounting for lease incentives can be complicated, as different kinds of incentives are treated differently.
For one thing, you need to consider whether the landlord pays the lease incentive up front or in the future. If the payment is made up front, then ASC 842-20-30-5 (b) explains that you should reduce the opening balance of the ROU asset by the amount of the lease incentive, and it does not affect the opening lease liability.
But if the payment is made in the future, then ASC 842-10-30-5 (a) explains that you should subtract future lease incentives from scheduled lease payments, and the the opening balance of the lease liability and ROU asset will be based on the net present value of scheduled lease payments.
Furthermore, if the lease incentive comes in the form of a leasehold improvement, then you need to determine whether the improvement is a lessee asset or a lessor asset. This can be a tricky determination to make, but essentially, it’s a question of whether the lessee (the tenant) or the lessor (the landlord) is the one to most benefit from the leasehold improvement.
For example, if the improvement is made to the building in such a way that the landlord will keep the improvement once the tenant leaves, then it is likely a lessor asset. On the other hand, if the improvement is a specialized request made specifically for the tenant’s unique needs, then it is likely a lessee asset. However, these are just examples and many more factors can affect the determination. Your lease accountants will need to navigate the nuances of ASC 842 in the context of each lease.
Simplify your lease accounting
Accounting for lease incentives becomes much easier with dedicated software. Tango Lease gives you the tools to handle all of it, streamlining your processes to save valuable time. And accounting is just one of the business areas that depends on lease information. You’ll also need to keep track of important dates, manage renewals, review clauses, prepare lease abstracts, and much more.
With Tango Lease, all of your lease-related information gets organized into intuitive dashboards, equipping you to manage lease accounting schedules, avoid overcharges, maintain compliance with the latest lease accounting standards, and perform lease activities. With Tango Lease, your team can analyze and explore your entire lease portfolio from the same place.
See what our lease administration and accounting software can do for your organization.