RENT FREE INCENTIVES (RFI) – An Alternative Strategy to TI ALLOWANCES

Landlords will often consider offering a RENT FREE INCENTIVE in order to attract Tenants on vacancies they are looking to lease. An RFI can be offered in addition to a TI ALLOWANCE or in lieu of, depending on the specific deal. However, from a Landlord’s perspective there are certain considerations that you should clearly assess, as you look to build-in a rent free period into any lease deal.

Questions to Consider:

Q: How does the RFI affect your overall cashflow for the property?
A: Cashflow – 2 months not as much a factor, as say a 6 month RFI would be.

Q: How does the RFI affect the net effective rent over the lease term?
A: Net Effective Rent is reduced from the face rate as shown on the lease (do the math).

Q: Does it include the operating cost/ft. of the property or strictly the base rental?
A: If Operating Cost/Ft. forms part of the RFI, it costs the same as if the unit were vacant.

Q: Are the TI costs being invested by the Tenant comparable to the rent free amount?
A: Tenant Investment is an ideal trade-off and helps substantiate the RFI.

Q: Is the Tenant stable and do they offer a Good Covenant?
A: Tenant Stability is a key factor and one which requires a close look.

Q: Does the RFI have to be provided at the front of the lease term?
A: RFI Upfront – not necessarily, and helps reduce the risk if it’s spread out over the term.

Q: Can RFI be conditional upon the Tenant not defaulting and otherwise becoming repayable?
A: RFI Conditional – all terms are negotiable and this ties the RFI to tenant’s performance under the lease agreement.

As with TI allowances, rent free incentives are considered to be a cost of doing business, and when offered in the right circumstances can be an effective inducement. The above Q&A gives you a good basis for assessment and ensures any RFI concessions make good business sense. RFI expectations vary  from the Tenant’s perspective and is really a market call based on your area.

In any real estate deal – a lease in this case – remember you don’t get what you deserve, but what you negotiate. RFI terms are often a key point in any lease negotiation and hopefully this gives you a better perspective as you assess a future deal.

We welcome your comments and stories about RENT FREE INCENTIVES based on your experiences – both Landlord and Broker alike. Just a click/call away from discussing our investment opportunities here in Windsor-Essex!

Taking Title on Closing - Cost-Benefit of Incorporating

Maybe one of the most debated topics that come up with Buyers, when they look to close on a rental building. It's not 'a one-size-fits-all' proposition, but we can at least highlight the major considerations.

Benefits - the major ones generally cited include limits personal liability, provides some degree of anonymity, potential tax benefits (assuming the corporate tax rate is better than one's personal rate), and dividend payments (as cash flow to the owners) may be more tax efficient.

On the liability issue, lawyers (at least those on the other side of a claim/litigation), would likely beg to differ with this position, and look to sue directors or company officers when pursuing a legal action.

With respect to anonymity, corporate searches generally reveal the owners/officers of a company, so it may not offer the level of cover you seek. The last 2 points are strictly tax matters - which need to be reviewed relative to your personal circumstances. Keep in mind 'tax laws' are continually changing and what seems practical today, may not be so tomorrow.

Costs - the major ones are accounting and legal costs, especially the expense of the initial set-up. It will vary from deal to deal and based on the corporate structure you are looking for, but rest assured you are looking at costs in the 'thousands'. In addition, you have the on-going expenses - a.k.a. annual yearly statements, legal resolutions/minute books and possibly annual meetings to consider.

Obviously any costs would become less of an issue, if the corporation is destined to acquire 3-4-10 properties, as opposed to a single property. Again - not a 'one-size-fits-all' proposition.

Other factors to consider include property financing (most often lenders want both corporate & personal guarantees}, will/estate planning, and both property/liability insurance. Ensure you consider these items as well, as you weigh your decision on incorporating.

Incorporation - Finally, we often see Buyers incorporate for all the wrong reasons. It should at a very minimum be a 'PROS & CONS ANALYSIS' and it should be realistically determined during your CONDITIONAL OFFER PERIOD. This is not a week before closing matter and best practice is THE EARLIER THE BETER.

We welcome all the horror stories you can send us on setting up corporations for both the right and wrong reasons.

And as usual, just a click/call away from discussing investment opportunities here in Windsor-Essex!

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434