A rental concession is a compromise by a landlord made to the original terms of a lease. Concessions are usually some form of rebate that a property owner offers to try to persuade a tenant to move into the residence. They can be monetary compensation, some type of a discount, or a physical good or service.
The concept behind concessions is that the money they might cost is typically less than the expense of not having a rent-paying tenant in residence. Landlords want people to move into a rental quickly, thus avoiding a vacancy and the losses that come with it.
What Is a Rental Concession?
A rental concession is any adjustment a landlord makes to a lease agreement to attract tenants. Most rental agreements are set in writing, with a defined deposit, fees, rent amounts, and incentive services. The concession is often a temporary reduction in one or more of these provisions, or it might be a temporary incentive service or an item of value provided to the tenant.
How Does a Rental Concession Work?
Vacancies reduce the amount of capital an owner receives, so it becomes imperative that a vacant unit become occupied as soon as possible. Vacancy holding costs such as utilities, mortgage payments, and taxes, can add up very quickly, eating into a landlord's cash flow. Rental concessions typically bring tenants in more quickly to avoid this cash drain.
Types of Rental Concessions
Rental concessions generally take one of two forms. They're either a temporary reduction in costs to a new tenant or they're a material item offered for signing a lease.
Often, the first month's rent is free or some other charges are waived. If there's a popular place for children to play nearby, such as a trampoline park, a landlord might offer a number of paid visits to the park for tenants with children.
The options are virtually endless for rental concessions. Some of the most common involve letting tenants keep a bit more of their money in their own pockets, but others might enhance the property itself.
A Free Month's Rent
The free month would typically be the last month of the lease contract to hedge against the tenant moving out early. The tenant would pay the normal rate for the first 11 months of a yearly lease, and would pay nothing for month 12. After the original lease term is over, the tenant would be responsible for paying the full rent amount each month under a new lease.
A landlord might decide to offer the tenant a reduction in the amount of monthly rent if the tenant agrees to move into the rental before a certain date. The tenant would be able to pay reduced rent for each of the 12 months of a yearly lease, such as paying $925 instead of $1,000 a month—provided that the rent is paid on time.
The National Apartment Association suggests linking concessions with good behavior by the tenant. They'll lose the concession if they fail to abide by lease terms.1
Reduced Security Deposit
Another option would be for a landlord to reduce the amount of the required security deposit. A landlord might decide to only collect one month’s rent instead of one and a half months.
Help With Moving Costs
Another concession might be to help the tenant with one or more of the costs associated with moving into the property. This could mean paying for a moving van, a storage locker, or paying for the moving company the tenant would like to hire.
Upgrades to the Rental Property
An additional draw would be to offer the tenant an upgrade to their rental unit. This might mean installing a new countertop, a tiled floor, a vanity, a new appliance, or light fixtures.
Payment of the Broker's Fee
A tenant is usually responsible for paying the broker’s fee if the property is listed with a realtor. A landlord might offer to pay this fee if the tenant moves into the rental quickly.
Merchandise or a Service
The landlord could offer the tenant merchandise, such as a free television, or provide the tenant with a service, such as a free year of Netflix.
Free Access to Amenities
If the property has amenities such as a gym, pool, tennis court, parking space, laundry, or storage unit that the tenant would have otherwise have to pay for, the landlord can offer this amenity to the tenant for free as a rental concession.
Pros and Cons of Rental Concessions
The greatest benefit of a rental concession is that it helps landlords fill vacancies sooner. The occupancy rate in an area will increase if local landlords use rental concessions to get their vacancies filled quickly. This will in turn lead to fewer vacant units and fewer options for tenants who are looking to rent, and will hopefully drive rental prices up in the future.
But some concessions can be difficult to take away. For example, you might have offered the tenant a free parking space for their first year, and you want the tenant to pay for space after the initial lease term. Your tenant might be upset that they now have to pay for something that was free and might look to find another residence.
You'll have to serve the tenant with a notice of rent increase when their lease expires if you offered reduced rent for the first lease term, or you could sign a new lease with the tenant with an adjusted rent price. But again, the tenant might not be happy about this and decide to move out of the unit.
You can put yourself at risk if the tenant damages the property or doesn't pay their rent and you offered a reduced security deposit.
It can affect your chances of refinancing at a decent interest rate if a lender calculates how much your property is really bringing in after the concessions are financially accounted for.2
Finally, you might attract the wrong type of tenant. Rental concessions tend to attract individuals who are looking for freebies. These tenants might stop paying their rent or could break other lease terms, and then you'll have to deal with the eviction process.
One way to hedge against problems is to state in the lease that the tenant has to pay back the full amount of the concession if they move out before the lease term ends or violate other terms of the lease.
When to Use Rental Concessions
Rental concessions aren't common in a strong rental market. They're typically used when a landlord has had a prolonged vacancy and they haven't been able to find a tenant.
The Financial Accounting Standards Board has indicated that an increased number of tenants are asking for concessions in response to the 2020 coronavirus pandemic, and many are getting them.3
A landlord might offer a tenant a concession when the tenant’s lease comes up for renewal in the hope that the tenant will renew their lease instead of moving out, or to attract renters to their property when there are more available units in an area than there are interested tenants. They might also do so when they have a larger rental property that they're renting out for the first time.
- Rental concessions are an enticement by landlords built into a lease to attract tenants.
- Common concessions include reduced rent for the first year, one month’s free rent, or the free use of property amenities for a period of time.
- Rental concessions should ideally be tied to good behavior on the part of the tenant, such as paying rent on time.
- Concessions can fill a vacant property more quickly, but they can sometimes be difficult to take back when a rental agreement or lease is up for renewal
- See article: https://www.thebalancesmb.com/rental-concessions-4172961