Definition
Free rent is a lease concession where the tenant pays no base rent for a specified period (e.g., 1–6 months) at the start of a lease, after a renewal, or during a disruption event. It is commonly used to improve leasing velocity, compete with other properties, or offset tenant costs such as relocation and buildout downtime.
What “Free†Usually Means
In most leases, “free rent†applies to base rent only. The tenant may still pay operating expenses, NNN charges, utilities, insurance, or other pass-throughs. Always confirm the lease language.
How It’s Structured
- Upfront abatement: first X months are rent-free (most common).
- Spread abatement: discounted rent over a set period (e.g., 50% for 4 months).
- Rent holiday: a later-month abatement triggered by delivery timing or performance milestones.
- Renewal concession: free rent granted to retain an existing tenant.
Why It Matters
Free rent affects cash flow timing and reduces net effective rent. Two leases with the same face rent can have very different economics if one includes meaningful free rent. In underwriting, free rent is a key component of total lease-up cost, alongside TI Allowance and Leasing Commissions.
How Free Rent Impacts Net Effective Rent
A simple way to estimate the economic impact is to convert free rent into a rent-equivalent reduction over the full lease term.
Rule-of-thumb approach
- Effective rent factor = (Lease term months − Free rent months) ÷ Lease term months
- Net effective rent (rough) ≈ Face rent × Effective rent factor
Example
A tenant signs a 60-month lease at $40.00/SF/yr with 4 months of free base rent.
- Effective rent factor = (60 − 4) ÷ 60 = 0.9333
- Net effective rent (rough) ≈ 40.00 × 0.9333 = $37.33/SF/yr
Even though the face rent is $40.00/SF, the economics are closer to $37.33/SF/yr before considering TI, LC, and other concessions.
When Free Rent Makes Sense
- High vacancy / competitive submarkets: tenants have leverage; concessions clear space faster.
- Shell or heavy buildouts: tenant needs time for permitting and construction.
- Big-credit tenants: lower risk may justify higher concessions to secure durable income.
- Lease-up strategy: filling space faster can protect the rent roll and stabilize NOI sooner.
Common Pitfalls
- Mixing base rent with pass-throughs: “free†may not include expenses/NNN.
- Overstating market rent: face rent can be inflated when concessions are common.
- Missing cash flow gaps: free rent can create liquidity stress if reserves are thin.
- Ignoring renewal expectations: once concessions become standard, tenants may demand them again.
- Not comparing apples-to-apples: always evaluate deals using net effective rent.