Everyone comes across the terms ‘office incentives and inducements’ in their commercial leasing agreements. However, surprisingly not everyone in business knows what they really are all about.
What are office incentives and inducements?
Businesses that operate within the commerce centres of the world operate their business from commercial buildings.
These buildings are usually owned as investment properties, and depending on the strategy of the investor(s), the book value of the asset is directly associated to the rent that building brings in. Hence, to induce tenants, landlords don’t like to drop the rent of their spaces, as it devalues their buildings. Rather they prefer to offer inducements or office fitout incentives to make their spaces more marketable and appealing to tenants without reducing the book value of the building.
The incentive rate, normally referred to as a percentage, is a market-based index rate directly correlated to the supply and demand of competing spaces.
An owner in a funky, amenity-filled, fringe suburb may not feel inclined to offer a high office incentive for rare, feature-driven space, which is typically in high demand.
Alternatively, a business tower located in a CBD in a slow economy, where local businesses are downsizing, leaving empty spaces in buildings where there is plenty of competing space available, correlates to a likely higher incentive. The building manager needs to fill his empty space.
When thinking about how an inducement will best work for you, ask yourself what incentive structures being offered suits me best?
- Cash incentive for fitout
- Rent abatement (amortised over the term)
- Rent free period
- Lease tail support
Don’t be afraid to look into a combination of incentive delivery i.e. rent free and capital combination.
Tips on office incentives and inducements
- It’s very important to keep in mind that landlords only have one pool of money to construct a viable deal from. This pool is made of marketing, incentive and agent budgets. To maximise your own incentive, give the landlord more reason to minimise the other costs he has to pay out of that pool.
- The best way to get the most out of your office incentive is to understand what you are asking for i.e. where is the market, what are the competing buildings offering and ‘be prepared to walk away’.
- Look at buildings where there is a considerable amount of space available, have had recent and high-quality refurbishment and many recent deals. This points towards an active and enterprising building owner.
- There are increased tax benefits for the landlord to perform your fitout. It is important that the incentive amount agreed to excluded from GST is paid to you in cash including GST. This way you will be able to expand GST deductions as you engaged the contractors directly.
Stay put in negotiations
Renewing your lease puts you effectively in the same position as being out of a lease. Your landlord knows this. Tenants are becoming increasingly more aware of the potentially favourable conditions when negotiating a ‘stay put’ or ‘option’.
Further consideration needs to be given to the costs of relocating, a new fitout, make good and downtime. If you decide on relocating, make sure to be aware of your make good clause obligations. As with any good negotiating position, one needs to be prepared to end up with the alternate position that you are putting forward to your landlord.
To learn more about maximising your office incentives and inducements, speak to us today!