Office lease incentives: how they work

The four forms

Rent-free period. A block of months at the start of the term with no rent payable. Simple, and it helps most when your cash is going into a fitout at the same time.

Fitout contribution. The landlord funds part or all of the fitout, either by building it or by reimbursing your spend against invoices. Often the most valuable form, because fitout is the largest up-front cost of moving.

Rent abatement. A reduction spread across the term rather than taken up front — for example paying a percentage of the rent for the first two years. Smoother for budgeting than a rent-free block.

Cash. A lump sum paid on commencement. Less common, and it has different tax and accounting consequences to the other three, so take advice on it.

Face rent versus effective rent

Face rent is the number in the lease. Effective rent is what the landlord actually earns once the incentive is spread over the term — and it is the only number that lets you compare two proposals.

The arithmetic is straightforward. Take 500m² at a face rent of $600/m² per year on a five-year term: gross rent over the term is $1.5m. A 30% incentive is worth $450,000, so effective rent is $1.05m over five years, or $420/m² per year. A competing building at $560/m² face with a 10% incentive works out to $504/m² effective — more expensive, despite the lower headline.

Why landlords give incentives instead of cutting rent

A building is valued off its rental income. Cutting the face rent reduces the income line and therefore the asset's value, and it sets a benchmark that every other tenant in the building will point to at their next review. An incentive is a one-off cost that leaves the face rent — and the valuation — intact.

That is useful to know at the negotiating table: a landlord who will not move on rent may have considerable room to move on incentive.

Clawback clauses

Incentives are almost always conditional. If you default, or if you exercise an early termination right, the unamortised portion of the incentive typically becomes repayable immediately. Read how the clawback is calculated, when it ceases to apply, and whether it survives an assignment of the lease to a buyer of your business.

What to ask for

Ask for the incentive as a percentage of gross rent over the term, so you can compare buildings directly. Ask whether it can be taken as a fitout contribution rather than rent free if fitout is your real constraint. Ask what happens to the unamortised balance on assignment. And ask what the number becomes at a longer term — incentives scale with commitment, and a seven-year term usually buys a materially better deal than a three.

Across the Australian CBD markets we transact in, incentives on long leases commonly land somewhere between 20% and 50%. Where your building sits in that range depends on its grade, its vacancy and your covenant.