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We’re Giving Away Free Money!

man spraying money in the air
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.
It’s FREE….yeah! Well, actually, no.
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. 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 actually needs to do it in order to win a tenant. Market conditions may not necessitate inducements.
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.
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? In order 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 a certain net worth. For companies and individuals who accept money as an inducement it is common place 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 actually 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 none the less and landlord’s treat it that way.
As a tenant you’re borrowing money from the landlord and 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.
Until next time.
– Mitch Gauzas

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