Rent concessions refer to reductions in rental payments below the base rent stipulated by the lease contract, which are agreed between the tenant and the landlord.
An example of such concessions is the so called free rent or free occupancy for a number of months, which reduces the total effective rent paid by the tenant.
Rent concessions are used by landlords as a means of attracting tenants during periods of oversupply, when demand for space is considerably lower than the vacant space that is available in the market for leasing.
For this reason, when evaluating an income-producing property investment, such as an office building, it is very important to examine very carefully all existing lease contracts in order to identify all rent concessions stipulated in each contract and determine accurately the effective rental income stream that the property will provide over the short and medium term.
Any overestimation of the property’s effective rental income will lead to misleading conclusions regarding its profitability and true investment value.
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