During COVID-19, many of our clients have been asking about various rent relief structures and wondering how they can get short-term rent relief. Every landlord, tenant and situation is different but amortized rent abatement might be a good strategy to help your company conserve cash in the short term.
In this article, we explain:
- What rent abatement is
- How amortized rent abatement can provide short-term rent relief
- How you can approach your landlord for rent abatement
What Is Rent Abatement?
Rent abatement is when the landlord agrees to not charge rent for a certain amount of time. This is commonly called “free rent.”
The term free rent can be a little misleading, however. It often does not mean the tenant is paying nothing for those months. In most cases, it is the base rent that does not have to be paid, while the tenant still pays for operating expenses and other costs not associated with the base rent. Typically it is a concession given by landlords during the lease negotiation process to cover the cost to move offices.
How Amortized Rent Abatement Can Provide Short-Term Rent Relief
Normally, abated rent is given at the beginning of a lease, either to offset moving costs or to help the tenant avoid paying double rent while the space is built-out. During COVID-19, it can be a potential rent relief structure to talk to your broker about.
Your landlord may be willing to offer you amortized abated rent, providing you a set number of months of abated rent today in exchange for a slightly higher rental rate for the remainder of your lease term. This means that the total value of the rent relief you receive during this time will be added to your base rent payments in the future. You wouldn’t need to extend your lease, but your monthly rent would increase in the future to essentially “pay-back” this rent over the life of your lease.
For example, if your monthly rent payments are $50,000 per month and your landlord gives you two months of abated rent, that $100,000 ($50,000 x 2 months) would be paid back over the life of the remainder of your lease. If you have five years remaining on your lease, you would end up paying an additional $1,667 per month in rent over the remaining lease term ($100,000 ÷ 60 months).
If you have more than three years of term left, this could be an attractive option since the rent would be amortized over a long enough period of time as to not dramatically affect your monthly occupancy cost.
Abated Rent in Exchange for Lease Extension
Another option landlords may consider is upfront rent abatement in exchange for an extension of your lease. For example, if you extend your lease for an additional 18 months, they may be willing to offer three free months now.
This provides short-term relief for you, the tenant, while also helping the landlord avoid potential upcoming vacancy. Typically, this approach makes sense if you have less than three years left on your lease.
How to Approach Your Landlord for Rent Abatement
When you are preparing to approach your landlord for rent abatement, you should first talk to your broker. They can help you understand if asking for amortized rent abatement makes sense for you and help you understand your options.
If you decide that rent abatement is the right option for your company, the first thing you should do is prepare the typically required business documents.
The documents that your landlord may ask to see include but are not limited to:
- Financial statements
- Business plan
- Current year budget
- Year-to-year sales and revenue comparisons
- Operating expenses
The amount of time spent in negotiations varies case by case. Once you present the landlord with all of the aforementioned financial documentation, we typically see them propose a solution within a couple of weeks.
If you have further questions regarding amortized rent abatement or any other rent relief structures, AQUILA is here as a resource, and we are ready to help.
To get more information on your unique situation, schedule a consultation with our tenant representation experts.