We’re Giving Away Free Money! It’s FREE….yeah! Well, actually, no.
So often I hear prospective tenants ask about inducements. They say “I’ve heard that landlords will pay for my business with free rent and free money.” Or there’s a story about how “my friend got so many months for free.” As if to say that landlords are willing to give you something for nothing.
Now, while it’s true that some landlords will react to market conditions with promotions and incentives to capture a tenant, do you really believe that they are just handing out cash to anyone and for nothing?
Make it rain, right? Understanding what an inducement is and what it involves is critical to putting a deal together.
What Is an Inducement?
It’s important to note that incentives and inducements are two completely different things. An incentive is anything advertised or offered by the brokerage to attract new business.
On the other hand, an inducement can be considered as anything you offer a person to persuade them to enter into a particular mortgage transaction. Essentially, an inducement is offered to help someone close the deal.
More often than not, the amount of an inducement or “free money” that any tenant would be eligible for or a landlord would be comfortable providing depends almost entirely on the financial strength of a company, whether it’s a new company, the individuals who own it, the overall terms of an agreement and whether the landlord needs to do it to win a tenant.
Benefits of Receiving an Inducement
There’s a big picture at play here and as a tenant, you need to use your wide lens. This is not to say buyer beware. On the contrary.
Receiving an inducement from a landlord can be a very mutually beneficial and agreeable lease arrangement. The sum of which is that a landlord gets a new tenant to produce an income on their property and the tenant may get some assistance in reducing initial start-up costs.
Reducing costs at the beginning of a lease term can be a helpful and attractive strategy in keeping a company liquid.
What Are the Requirements to Offer an Inducement?
Remember there are many other business expenses involved in opening a new location so the idea of a landlord inducement can soften some of that initial blow.
So why then is a tenant inducement NOT free? To qualify for any financial offering from a landlord, a tenant must have strong credit, good business financials, a well-thought-out business plan, and certain net worth.
For companies and individuals who accept money as an inducement, it is commonplace to sign a personal or corporate guarantee on that money.
In this regard, the inducement is actually a loan and you’re exposing all of your assets to risk – in as much as the landlord is also taking a risk on you. What? It’s not free? Sorry, no. It’s a loan that you have to pay back to the landlord.
There’s an interest rate, an amortization schedule, the whole kit and caboodle. Now, all of this number crunching is hidden in your rent so as a tenant you only pay a flat monthly rate, but it is a loan nonetheless and landlords treat it that way.
Get in Touch With My Ottawa Agent
As a tenant, you’re borrowing money from the landlord and are personally responsible for it. This is one of the trade-offs. The deal just got more complicated!
A good and experienced realtor will help you navigate this critical element of your lease. I could go on, but I wouldn’t want to bore you with strategies on how to reduce your risk exposure and get a better deal.
Reach out to us today to learn more about our real estate services and let us help you through every step of the process.