Understanding Commercial lease incentives

When it comes to understanding commercial lease incentives, Rent in various commercial buildings, it is usually paid depending on the square meters or space. Commercial rents are usually distinctively two kinds of rents, so a valuer should be careful as it is calculated on the basis of either gross or net value (where outgoings are considered).

The floor space of a particular building or maybe the entire commercial building is used to measure older leases. So, the gross building area or net lettable area is not usually considered when it comes to older buildings.

Nature of the lease incentives

Whenever a landlord of a particular commercial property wants to encourage new tenants to sign leases or other current tenants to renew their leases, commercial lease incentives are usually providing provided. These are usually concessions or payments meant to encourage tenants to enter into a longtime arrangement, especially in this time where landlords are in competition for reliable tenants.

In Australia, the trend of commercial lease incentives seems to be an essential component in the commercial leasing landscape.  Unfortunately, most of the tenants who seek for commercial property spaces are not aware of such beneficial concessions. Therefore, if you are one of the tenants who is ignorant and lacks enough experience in the commercial market, you are prone not to benefit from commercial lease incentives.

As a tenant, before engaging in any contractual arrangement you ought to make long-term accurate calculations of the total payable rent amount to know if incentives are taken into account.

Major types of commercial incentives

All around Australia, the incentives that tenants can enjoy come in various forms depending on the prevailing market conditions. For that matter, there are usually three major incentives kinds; fit out contributions, rent abatements, and rent-free periods.

Rent free period

As the name suggests, it is the time of the lease where the tenants don't have to necessarily pay for rent. In most cases, this is usually offered by the landlord at the commencement of a particular commercial lease. For instance, the landlord can indicate a ‘6 months rent free at the beginning of a commercial lease’.

Rent abatement

A lessor of a property can also choose to offer a rent reduction, often referred to as a rent abatement, to the lessee. This amount is usually spread on the entire lease or given as a percentage reduction on the rental costs and it is expressed in dollar terms.

Fit-out contribution

A lessor may also choose to give a lease incentive known as a fit-out contribution. This kind is geared towards fit-out activities such as partitioning air-conditioning changes fittings and fixture installation and other decorative touches that tenant carries out in a particular property.

In such cases, the landlord uses reimbursement basis to contribute to the fit-out contributions, provided that the tenant has done the following:

  • Signed the particular commercial lease
  • Taken out required insurance
  • Submitted necessary receipts
  • Supplied a security deposit or a bank guarantee
  • Provided requisite plans and quotes needed for the landlord's approval
  • Other forms that incentives can take
Furnishings and equipment Cash-convertible benefits like cars, boats
Interest-free loans Holiday packages.
pegged rents  that do not arise during the lease period Cash payments
Offices without Pay-out of another building pending lease commitment
Relocation costs


Taxation of commercial lease incentives

The extent and nature of the commercial property market usually capture the interest of the Taxation Commissioner. The tax commissioner has subsequently given a ruling about the incentives that a tenant benefits as follows:

Cash incentives

This type of incentive is usually assessable as a taxpayer’s income when the taxpayer receives it after leasing a property.

Such an incentive is also assessed as a capital gain of the property when the taxpayer receives it during the start of a new business on the premise.

Non-cash incentives

A deduction for the lease incentive cost is usually allowable to the lessor by the Tax Commissioner, except in cases where:

  • Reduced rent is the benefit
  • A holiday package or any other kind of entertainment is the benefit.
  • The landlord retains fit-out (depreciation is considered in such a case).


Implications of a commercial lease incentive

As discussed above some of these leases incentives appear appealing to any tenant, for instance, the fit out or rent free period. However, there are as some traps that landlords and tenants should be aware of when it comes to these incentives.

Tax on the incentive: According to the case law, a cash incentive is considered to be a taxable income in the accounts of the tenant. But, if the incentive is given near the commencement of a newly established business, the commissioner might treat it as capital.

Rent free period commencement: A tenant might be induced to sign a lease before getting effective professional advice through the rent-free periods that landlords normally offer. Therefore, as a tenant, before you sign any lease agreement, you ought to carry out a thorough due diligence of that particular lease regardless of the rent-free period commencement date.

Repayment: Incase a lease is assigned, surrendered or terminated before the expiry of the current lease term, the law requires a tenant to repay a portion of the incentive. These are major considerations contained in incentives sub-clauses that many tenants usually overlook.

Fit out ownership: Incentives that are geared towards catering for fit-out contribution should also be examined with care. The tenant should check in the clause the person that will be responsible for the fit out activities in the event that a lease expires. The individual who is entitled to claim the tax implications of fit out depreciation is unknown and that can affect the obligations of the tenant when it comes to assignment, termination, or expiry of a particular lease.

Incentive disclosure: Sometimes the landlords may prefer to give a deed that is independent of a particular lease in granting an incentive to the tenant. Apart from being beneficial in several areas, the deed purposes to keep the incentives as confidential amongst the involved parties. However, the obligation of the landlord to disclose such kinds of concessions essential third parties like financiers.

Therefore, when it comes to leasing incentives, it is usually a complex procedure to determine the taxation and legal position. Before entering into any lease agreement, seek a legal specialist and accounting adviser to provide you useful tips of how to go about lease incentives.