Concession

Definition

A concession refers to:

Business Concession: A business that operates within the property of another business and provides complementary goods or services.
- Example: The gift shop in a hotel’s lobby, where a business rents space from the hotel to sell newspapers, magazines, and sundries, is an example of a business concession.
Financial Incentive: A reduction in price, rent, or other benefits provided to a tenant or buyer as an inducement to buy or lease.
- Example: Baker is converting apartments into condominium units. To induce tenants to purchase their units, Baker offers a concession of a 20% discount on the sales price, available only to current tenants.

Examples

A coffee stand inside a large office building. The coffee stand pays rent to the building owner, and the stand’s presence contributes to the convenience for tenants.
A retail store offering rent concessions to new businesses for the first six months of their lease to encourage occupancy during slow seasons.
A developer converting industrial apartments into high-end luxury condos offers buyers a 10% price reduction to speed up sales.

Frequently Asked Questions

What is a rent concession?

A rent concession is a reduction in rent granted by the landlord to a tenant, often to attract tenants to lease a property or renew an existing lease.

Why do landlords offer concessions?

Landlords offer concessions to accelerate leasing rates, modify property appeal, reduce vacancy rates, and provide financial relief to tenants during negotiation phases or economic downturns.

Are concessions common in commercial real estate?

Yes, especially in competitive markets where landlords need to offer additional incentives to secure tenants for vacant commercial spaces.

Can concessions apply to both residential and commercial properties?

Yes, concessions can be applied across both sectors, although the structure and terms may vary depending on market dynamics and tenant needs.

Lease Agreement: A contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset.
Rent Abatement: A period during which the tenant does not have to pay rent, usually agreed upon lease commencement and typically granted as a concession.
Rental Discount: A straightforward reduction in rent for a certain period, usually as part of a lease agreement to attract tenants.
In-kind Concession: Non-monetary benefits provided to tenants, such as free parking, utilities, or provided furnishings.

Online Resources

References

“The Millionaire Real Estate Investor” by Gary Keller.
“Commercial Real Estate Investing for Dummies” by Peter Conti and Peter Harris.
“The Real Estate Wholesaling Bible” by Than Merrill.

Suggested Books for Further Studies

“Investing in Apartment Buildings” by Matthew A. Martinez
- This book offers insight into investing in multi-family buildings and navigating negotiations, including the role of concessions in tenant attraction and retention.
“Confessions of a Real Estate Entrepreneur” by James Randel
- Randel’s book explores real-life examples of leveraging concessions to close deals and maximize investment returns.
“The Book on Rental Property Investing” by Brandon Turner
- This practical guide includes an array of strategies for managing and growing a rental property portfolio, often including the use of tenant concessions.

Real Estate Basics: Concession Fundamentals Quiz

### What is a principal reason to offer rent concessions? - [ ] To increase property taxes - [x] To attract tenants - [ ] To decrease property value - [ ] To raise rent arbitrarily > **Explanation:** Landlords offer rent concessions primarily to attract tenants, improve occupancy rates, and reduce vacancy periods. ### When might a landlord consider offering a concession? - [ ] When the property is fully occupied - [x] During high vacancy periods - [ ] After facility improvements - [ ] To lower maintenance costs > **Explanation:** During periods of high vacancy, concessions can help attract new tenants and fill empty spaces more quickly. ### Which of the following could be classified as a concession? - [x] Offering a 50% reduction on the first month’s rent - [ ] Charging tenants for complimentary water - [ ] Increasing the security deposit - [ ] Imposing late payment fees > **Explanation:** Offering a significant reduction on rent for a specified period is a common type of concession aimed at attracting or retaining tenants. ### Are concessions more common in which type of real estate market? - [ ] Booming market - [x] Competitive market - [ ] Rural market - [ ] Veteran market > **Explanation:** In competitive markets, landlords often provide concessions to differentiate their properties and attract tenants amidst high competition. ### How might a retail space utilize a concession to attract tenants? - [x] Providing reduced rent during the slower business months - [ ] Offering a larger deposit requirement - [ ] Increasing monthly rent for new occupants - [ ] Limiting the lease duration > **Explanation:** Retail spaces may offer reduced rent during slower months as a concession to attract business tenants and fill vacancies. ### What is another term for concessions provided in non-monetary benefits? - [ ] Rent increment - [ ] Fiscal penalty - [x] In-kind concession - [ ] Tenant burden > **Explanation:** Non-monetary benefits provided to tenants, such as utilities or services included in the lease without extra charge, are referred to as in-kind concessions. ### What might a landlord offer as a concession to retain a valuable tenant? - [ ] Increased base rent for flexibility - [x] One month's free rent during lease renewal - [ ] Higher deposit requirements - [ ] Stricter contract terms > **Explanation:** Offering free rent for a month can be an appealing concession to encourage valuable tenants to renew their lease agreements. ### Can offering a concession impact a landlord's return on investment? - [x] Yes, it can result in lowered immediate revenue - [ ] No, it does not affect overall revenue - [ ] Yes, but only in minor ways - [ ] No, it only benefits the tenant > **Explanation:** While conceding rent may lower immediate revenue, it can improve occupancy rates and tenant retention, thereby potentially enhancing long-term returns on investment. ### In what scenarios are concessions least likely to be offered? - [ ] High tenant turnover - [ ] Economic recession - [x] When properties are in high demand - [ ] Competitive pricing > **Explanation:** Concessions are least likely to be offered when properties are in high demand, as landlords do not have as much need to offer incentives to attract tenants. ### What is typically NOT considered a type of rent concession? - [ ] Free utilities - [ ] Discounted first month rent - [x] Increased security deposit - [ ] Provided furnishings > **Explanation:** An increased security deposit is not a concession; instead, it's a greater cost imposed on a tenant. Concessions are benefits or savings presented.