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As a result of ongoing economic uncertainties, rent concessions are becoming a more popular topic of conversation among landlords and tenants alike. Based on data from Zillow, the percentage of listings with rental concessions in the U.S. rose from 16% in January 2020 to 30.4% in June.
However, the issue can be confusing if you are not familiar with the concept and how it will affect your bottom line. Below is a discussion of rent concession basics, the pros and cons of rental concessions and how they will impact your business.
What Is a Rent Concession?
A rent concession may be a form of relief made available to help renters who are struggling to make their payments, or it may be an incentive to bring in new renters and fill vacancies.
The most common rental concessions for financial relief include reduced rent, deferred rent or a temporary “pause” on rental payments. In most cases, landlords offer these rent concessions in times of economic trouble or when individual renters are dealing with financial problems. Rent concessions offered as incentives may include free upgrades, reduced rent, reduced security deposits and other perks offered to new tenants.
How Does a Rent Concession Work?
The way a rent concession works depends on the type of relief offered. Some of the types of rental concessions you may offer to your tenants include:
- Free rent – In cases where a tenant cannot afford to make their payments at all, a rent concession may take the form of a temporary pause on rent collection. This means that your tenant will not pay any rent during the rent concession period and will resume their normal payments when the period has ended. The rent lost during this time will not be repaid or recovered.
- Reduced rent – One of the most common forms of rent concession is offering reduced rent to tenants. This means that your tenant will pay their rent every month, but the amount of rent owed each month will be lower than usual. In most cases, the arrangement will last for a specific, predetermined amount of time. Once the temporary rent concession is complete, the tenant will resume their usual payments.
- Deferred rent – If you offer deferred rent as a rental concession, this means that your tenant will not make any rent payments during the deferment period. However, at the end of this deferment period, the rental payments that were not made will become due, and the tenant will be expected to resume normal payments as well. You may structure the agreement so that all deferred payments must be made at once, or you may allow your tenant to make the missed payments over a longer period time.
Some rent concessions may be offered in order to attract new tenants, as opposed to helping out struggling tenants who are already renting your property. Some examples of rent concessions you may offer to attract a new tenant include:
- Help with the cost of moving in – You may offer to pay for storage, moving company services or other costs associated with moving into one of your rentals.
- Free access to facilities – If you operate a gym or other amenities that are usually available to tenants at an added cost, you may offer access to these benefits for free in order to attract new tenants to your property. In most cases, this will be offered as a temporary benefit. Alternatively, you may offer access to these benefits at a reduced cost, rather than providing them for free.
- Upgrades to the property – Some landlords may draw new tenants by offering free upgrades, such as a larger unit for the price of a smaller one, installation of new carpet or a fresh coat of paint.
- Other perks – Examples of other perks you may provide to entice new renters to move in include paying the broker’s fee, a reduced security deposit, free streaming services, free WiFi or even a free appliance.
This Zillow data shows that free rent accounts for 90.8% of rental concessions:
Pros and Cons of Rental Concessions
Rental concessions come with both advantages and disadvantages for landlords. Some of the advantages of offering and executing rental concessions may include:
- Keeping a tenant – In some cases, tenants may be unable to afford their rent because of temporary financial problems, such as unexpected medical bills or the loss of a job. In these cases, offering rent concessions aimed at reducing financial burdens may prevent the tenant from moving out early or being evicted unnecessarily. In general, it is better to receive some rent and avoid a vacancy than it is to receive nothing, especially if the tenant will be back on their feet eventually.
- Avoiding financial loss – Although rental concessions may lead to short-term losses, they can mitigate larger problems (such as ongoing vacancy or eviction) that would be more expensive in the long run.
- Improving the rental market overall – When multiple landlords offer rental concessions in order to fill vacancy rates faster, the rental market improves. This can drive rental prices up over time, which means greater profitability in the future.
- A better reputation – If you are offering rent concessions in order to help existing tenants who are struggling to pay their rent, your reputation as a caring, compassionate landlord will improve as a result. This may make your property more desirable to tenants in the future.
Some of the disadvantages of offering rental concessions may include:
- Loss of income – When you offer rental relief, especially in the form of free rent, you lose income. This loss of income not only harms your bottom line, but it may also make it more difficult for you to qualify for financing.
- Trouble when concessions end – Whether you have offered a rental concession as a form of financial relief or in order to attract new tenants to your property, you may face problems when the concession period comes to an end. For example, your tenants may be reluctant to begin paying a higher rent if they started at a lower rate. Likewise, if tenants who have received rental concessions because of financial problem may still be unable to pay their rent when the concession period is over.
- Attracting unreliable renters – In cases where you use rental concessions to attract renters, you may end up with tenants who are not reliable in the long run. They may not take good care of your property, or they may repeatedly miss rental payments.
- Losses related to damage – If you offer a lower or nonexistent deposit to attract new renters, your renters may be more likely to damage your property. After the renter leaves, you won’t have any money to pay for the necessary repairs, leading to financial loss.
When to Use Rental Concessions
Rental concessions are not always a good idea, but they can be useful in specific circumstances. For example, if the rental market is doing well and you have plenty of opportunities to attract tenants, making rental concessions in order to entice new renters is not generally recommended. However, in times of economic uncertainty and high vacancy rates, making rental concessions may allow you to fill vacancies faster and avoid income loss.
Likewise, in times when your renters are struggling to make their payments, offering rental concessions may be preferable to evicting tenants. Rental concessions may allow you to continue collecting rent at a reduced rate and/or to avoid long-term vacancies. Nonetheless, it is important to note that rental concessions sometimes have unintended consequences. Before deciding to use this strategy to fill vacancies or to hold onto existing tenants, you should consider all the ways in which it could impact your business moving forward.
Implications of Rental Concessions for the Multifamily Investor
The specific implications of making rental concessions will depend on the specifics of your situation. Rental concessions will always result in some initial loss of income, whether it comes in the form of free rent given to an existing tenant or accepting reduced rent payments from a new tenant. However, depending on the reasons for offering rental concessions, the income may or may not be recovered. In some cases, even if the income isn’t ever recovered, you may actually fare better in the long run because you chose to offer rental concessions.
For example, the outcome of offering deferred rent payments is typically the same as offering no deferral. When rent payments are deferred, your tenant eventually pays the full amount they owe, and no income is actually lost. However, if you have offered free or reduced rent payments, income will be lost and never recovered, which leads to lower profitability. Nonetheless, when faced with the possibility of long-term vacancies or evictions, this may the preferable scenario.
Because the results of rental concessions vary based on many different factors, it is important to consider your options carefully before you choose to offer rental concessions. If you are not sure how the possibility of rental concessions will affect you, talk to an accountant.
How to Account for Rental Concessions
The way in which you will account for a rent concession depends on the concession provided.
Under General Accepted Accounting Principles, rent is typically recorded on a straight-line-basis. That is, a free rental period will be factored in the average rent and allocated over the life of the lease.
The FASB provided specific guidance for concessions which are related to the COvid-19 pandemic. One of the most common rent concessions is deferred rent, which will be used as an example for the purposes of understanding the required accounting.
If you are offering a rent deferral, you have two options when it comes to accounting for the deferral:
- Continue with normal accounting procedures as if no deferral was provided.
- Treat the deferred payments as variable lease payments.
In the first method, the landlord would continue to record rent payments as though no deferral had been provided. The amount of income recorded will be accurate once the deferred rent is paid in full. This method results in no change to rental income.
In the second method, rental payments are acknowledged and recorded in the period they are actually received, as opposed to when they would have been received under the original lease agreement.
Because the example discussed here results in no overall change to the rental income, no loss is involved. However, other forms of rental concession in which the landlord loses expected income, accounting procedures may be different.
Accurate accounting is essential, both for tax purposes and so you can understand the truth of your financial position. If you are not sure how to treat your rent concessions for accounting purposes, consider asking a professional to help you handle this complicated matter.
Tax Implications of Rent Concessions
Some landlords may believe that they can deduct losses incurred because of rent concessions on their income for the year, which makes the idea of offering concessions seem more appealing.
Unfortunately, this is not typically the case. Unless you use accrual accounting and have already reported the rent as income, you cannot deduct losses related to your rent concessions. For more information on this topic, talk to your accountant or tax preparer.
The Bottom Line
Rent concessions can be a valuable tool, depending on the specifics of your situation as a landlord. In times where you are having trouble filling vacancies and/or your existing tenants are struggling to pay the rent they owe, you may be able to use rent concessions to improve your position.
However, rental concessions are not always the best option for every landlord. Understanding how these concessions work, how they could impact your finances and how they could change your future as a landlord is essential. If you have further questions about using rental concessions, talk to an experienced accounting professional for guidance.
https://www.thebalancesmb.com/rental-concessions-4172961, https://pocketsense.com/can-claim-unpaid-rent-expense-deduction-12053255.html, https://www.withum.com/resources/accounting-for-covid-19-rent-concessions/