Tenant Leasing Illustrated – November 2018 – Freebies and Nyet Rent

There is something about Russia that is endlessly fascinating.

And no, notwithstanding my interest in Russia, Leasing Illustrated is not despite the obvious similarities put together by a Russian army bot intent on influencing the midterm elections (although we have been reading your emails so please watch what you say).

The Wall Street Journal recently reported about a Domino’s Pizza promotion in Russia offering lifelong free pizza to anyone who got a tattoo with the company’s logo. The promotion had to be curtailed from its intended two-month duration because too many people were signing up!

Really? Does the Wall Street Journal come up with these things just to help those poor pathetic souls stumbling along looking for newsletter topics

Dominos said that if the promotion went the full two months they expected that more than a million Russians would have demanded free pizza!

I love pizza too, especially free pizza, but a tattoo is kind of permanent and a bit extreme (even I in weak moments regret my 1970’s Farrah Fawcett tattoo – why didn’t I just get a poster like everyone else?!).

Economic hardships may have conditioned Russians to jump on a good deal but Dominos may be on to something.

So, I am proud to offer a free lifetime subscription to Leasing Illustrated to anyone who gets tatted up with the Mintz & Gold LLP logo.

Hurry! – because if the response goes as expected we may have to follow Dominos and pull the promotion early.

And, yes, do not worry, we will honor the promotion even for those of you who already have an M&G tattoo.

Body art may not be involved but believe it or not commercial leasing has tenant freebies of its own in the form of up-front rent abatements commonly referred to as “free rent”.

Of course, in the commercial leasing world of fake news, please realize that “free” rent is not really free.

As part of a tenant incentive package, a number of months of rent may be abated at the beginning (or sometimes over the course of) the lease term. This can be especially helpful during the construction period if a tenant is building out its own space.

But none of the tenant incentives, including any rent abatement or tenant allowance to build out the space, are really “free.” Instead these are advances by the landlord, amortized and paid back to the landlord over the course of the lease term with an interest factor.

So, for example, if the fair market rental for a certain space would be $60 per rentable square foot without any such incentives, by providing certain free rent and perhaps a construction allowance, the rental over the term might be increased to $72 per rentable square foot.

The landlord is paid back for its investment with interest over the term of the lease.Make sure you have a few free rent tricks of your own up your tattooed sleeve by following these six suggestions below:

  • It’s the econom[ics], stupid. Working with your finance group and brokers, you will first need to determine the mixture of tenant incentives that work best for you. Money is fungible and can be allocated among your fixed rent, rent abatement and tenant improvement allowance in a manner that is economically advantageous to you and your landlord. As you would expect, how this important financial piece of the transaction is structured needs to be agreed upon up-front at the term sheet stage.
  • Focus on structure. Some leases will indicate that no rent is due during the abatement period and some leases will provide for the payment of rent starting on day one but then indicate that notwithstanding the lease rent obligation the tenant is entitled to an abatement. Be careful if your lease provides for the second of these two options that you do not lose out on intended benefits. For example, if your lease provides for an initial rent of $50 per rsf that increases five percent each year and a six month rent abatement up front, you will ideally want to structure your lease so that you receive a full twelve months at the $50/rsf rental after the expiration of such six month abatement (rather than applying the abatement to the low initial rent for six months and then requiring six months at $50/rsf and six months at $52.50/rsf for the first year in which rent is actually paid).
  • Limit defaults. Your landlord will understandably not want to grant rent abatements if you are in default under your lease, but this should not apply for minor defaults. Ideally, your rent abatement should be available except in the case of monetary or material non-monetary defaults (or specified material “disabling defaults”) but, in all events, only after the expiration of applicable notice and grace periods.
  • Address additional rent. Your lease may or may not provide for an abatement of additional rent during the abatement period for fixed rent. Generally, escalations will not have kicked in yet if your lease provides for a contemporaneous base year, but there are electricity and other additional rent obligations and your responsibilities in this regard should all be specified in your lease.
  • Reinstate after cure. If your landlord claims that you are not entitled to an abatement because you are in default, your abatement should be tolled, not eliminated. After that default is cured, your free rent should pick up where it left off and be reinstated.
  • Avoid double dipping. Many leases provide that if the tenant defaults and as a result the landlord terminates the lease, the tenant is obligated to repay the rent abatement. Recognizing that in this situation a tenant (and its landlord) will likely have plenty of other problems, this still represents a double penalty since, as we said above, the “free rent” is built into the lease payments and paid back over the term. Defaulting tenants continue to owe the balance of the rent under the lease and, since these payments include the rent abatement plus interest, being obligated to repay the abatement means that the tenant is being obligated to pay this amount twice to the landlord. Some landlords will take the position that if a tenant defaults badly enough that the lease is terminated, the landlord should be entitled to whatever it can collect (including, V. Putin style, dibs on a tenant’s first born). Many tenants object since this represents an inequitable windfall to the landlord.

Well comrades, we live in a capitalist society where there is no such thing as a free lunch so why should there be such a thing as truly free rent? But if you follow the six suggestions above, you can be the tsar of your rent abatement show.