Concessions

What concessions mean

When a landlord and a prospective tenant negotiate a lease, the headline rent is rarely the whole story. To close the deal, the landlord often layers in benefits that reduce what the tenant pays or cover the cost of moving in. These benefits are concessions, the difference between the rent printed in the lease and the value a tenant truly receives over the term.

The most familiar example is free rent, where a landlord offers a tenant several months at no charge at the start of a lease, a period sometimes called a rent abatement. Another common form is the tenant improvement allowance, a sum the landlord contributes toward building out the space. Concessions can also include moving allowances, help unwinding an existing lease, free or discounted parking, signage rights, or a rent schedule that starts low and steps up over time.

What unites all of these is a single financial effect. Each concession reduces the cash the landlord collects, or increases the cash the landlord spends, in exchange for the tenant's commitment. A lease at a high face rent with a generous concession package can be worth less to the landlord than a lease at a lower face rent with no concessions at all.

Why concessions matter in commercial real estate

Concessions sit at the center of how leasing economics work, and understanding them is essential for owners, brokers, and tenants alike. For a landlord, they are a flexible lever that wins a deal without permanently lowering the rent on the books. For a tenant, they offset the substantial cost of relocating or building out a space. For an investor or lender, they reveal the gap between what a rent roll appears to produce and what it genuinely delivers.

The reason landlords lean on concessions rather than cutting the face rent is grounded in how buildings are valued and financed. The face rent, also called the contract rent, flows into the rent roll, which drives appraisals, loan covenants, and the comparable transactions other deals are measured against. A concession such as free rent or an allowance is often a one-time or front-loaded cost that leaves the stated rent intact, so the building still shows a strong contract rent even though the landlord has effectively discounted the deal.

This is why the concept of net effective rent exists. Net effective rent takes the total value of every concession, spreads it across the full lease term, and subtracts it from the face rent. The result is the rent the landlord truly earns and the tenant truly pays once all incentives are counted. Whenever concessions are present, net effective rent is lower than face rent, and the size of that gap signals whether a market favors landlords or tenants.

Concessions also move with market conditions in a predictable way. In a tenant-favorable market, where vacancy is high and space is plentiful, landlords compete for occupants and concession packages grow more generous, with longer free rent periods and larger allowances. In a landlord-favorable market, where quality space is scarce, concessions shrink because tenants have fewer alternatives. Tracking how concessions change over time gives owners an early read on the direction of a submarket, often before face rents move at all.

Types of concessions

Concessions come in several recognizable forms, and most lease deals combine more than one.

Free rent and rent abatement

Free rent is a defined period during which the tenant occupies the space without paying base rent, often granted at the start of the term to ease the transition. It is the most common concession because it is simple to grant and easy for a tenant to value. It may apply to base rent only, or it may also waive operating expense and tax pass-throughs, which makes the abatement considerably more valuable. The length typically scales with the lease term and the strength of the market.

Tenant improvement allowance

A tenant improvement allowance, frequently shortened to TI, is a contribution the landlord makes toward constructing or customizing the leased space. It is usually expressed as a dollar amount per rentable square foot and reimbursed as the work is completed. A larger allowance reduces the capital a tenant must spend to occupy the space, and it is one of the most influential concessions in office and industrial deals.

Moving and relocation allowances

A moving allowance helps cover the direct costs a tenant incurs to relocate, such as movers, cabling, and furniture. Closely related is assistance with an existing lease the tenant is leaving, sometimes structured as a lease buyout, in which the landlord absorbs part of the rent the tenant still owes elsewhere. These concessions remove practical barriers to a move.

Rent structure concessions

Rather than a flat discount, a landlord may agree to reduced or stepped rent, where the rent begins below market and rises over the term. This spreads the benefit across time and can align the tenant's payments with its expected growth. Stepped structures also let a landlord preserve a strong ending rent that supports renewal negotiations and valuation.

Operational and amenity concessions

Beyond rent and build-out, landlords often add concessions tied to building services, including free or discounted parking, prominent signage rights, additional storage, or expansion options. Individually modest, these extras can tip a decision when two buildings are otherwise comparable, and they carry real cost that belongs in any honest analysis of the deal.

Structuring a concession package

Assembling a concession package is a balancing act between winning the tenant and protecting the economics of the deal. A landlord weighs the credit quality of the tenant, the length of the term, the cost of leaving the space vacant, and the message a given concession sends to the rest of the building. A thoughtful package addresses the tenant's most pressing needs while keeping the landlord's exposure measurable.

When structuring and analyzing a package, the elements that matter most include the following:

• Total cost over the term, calculated by adding the value of every concession and comparing it against the rent the lease will generate, then expressing the result as net effective rent.
• Timing of the landlord's outlay, since free rent and allowances are typically spent early while rent is collected over years, which affects cash flow and the time value of money.
• Tenant credit and term length, because a longer commitment from a strong tenant can justify a richer package that pays back over more years of reliable rent.
• Form of the concession, recognizing that a tenant improvement allowance builds lasting value into the space while free rent is a pure giveaway, so the two are not interchangeable even at the same dollar amount.
• Effect on the rent roll, favoring concessions that preserve the face rent the building relies on for valuation and financing.
• Recapture and clawback terms, such as provisions that require a tenant to repay unamortized allowances or abated rent if it defaults or leaves early.

Working through these elements turns a concession package from a loose collection of giveaways into a deliberate financial instrument, and disciplined landlords model several scenarios before committing.

Concession comparison

Different concessions carry different costs and serve different purposes. The table below summarizes the most common forms and what each one accomplishes in a deal.

Best practices

Teams that handle concessions well share a few disciplined habits. They always translate a proposed package into net effective rent before agreeing to it, so the headline face rent never obscures the true economics. They document every concession clearly in the lease, including the precise period of free rent, the exact allowance amount, the reimbursement schedule, and any conditions attached. Clarity at signing prevents disputes later and gives the accounting team what it needs to record the deal correctly.

They also account for concessions properly over the life of the lease. Under standard practice, free rent and allowances are generally recognized across the full term rather than in the period they are granted, which smooths their effect and gives owners an accurate view of recurring income. Tracking the unamortized balance matters too, because it determines what a landlord can recover if a tenant defaults or terminates early, and it feeds directly into how the asset is valued.

Negotiating concessions effectively

The strongest negotiators treat concessions as a coordinated package rather than a series of isolated asks. A tenant might prioritize a larger tenant improvement allowance to fund a specific build-out, while a landlord might prefer to grant free rent that preserves the face rent on the books. Understanding which form of value each side cares about most allows both parties to trade toward an outcome that costs the landlord less while delivering the tenant more. A landlord who knows the cost of vacancy can offer a confident, well-reasoned package, and a tenant who understands net effective rent can recognize genuine value rather than chasing a high allowance paired with above-market rent.

Common pitfalls with concessions

Even experienced teams stumble in recognizable ways. The most frequent mistake is focusing on the face rent or a single concession in isolation rather than the net effective rent of the whole deal, which can make a worse deal look better than it is. Another is failing to document concessions precisely, leaving room for disagreement over how much free rent applied or what the allowance covered. A third is mismatching the form of a concession to the need, for example granting free rent when a tenant truly needed build-out capital. Each of these is avoidable with a clear process, accurate records, and a habit of reducing every deal to its true effective rent.

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