Depending on your market, rental concessions have either become common or ubiquitous. They do have a lot of good qualities–they can help you close leases, lock in renewals, and keep your units full. But, like most seemingly sunny concepts in life and property management they do have a dark side. If you’re using rent concessions, or looking at them because your competition does, it’s important to remember:
1. You may be violating the Fair Housing Act
When it comes to complying with Fair Housing rules, common sense and your own innate sense of fairness will be your best guides. Concession offerings should be one size fits all, and should not be negotiated on the fly on an individual basis. To make sure this happens, put proposed perks in writing and train all employees on the specifics each time you offer a new deal. Offers should clearly state that you will not discriminate based on race, color, religion, sex, national origin, familial status, disability, or any other class factor. For the most protection, keep notes on the concessions your prospects request, as well as the arrangements offered and those that were accepted or declined.
2. Consider your concessions’ effect on your current tenants and the community
No one wants to feel like they missed the deal, and that’s exactly the sort of nasty feeling you don’t want to saddle your current loyal tenants with. Be mindful of this factor when you’re at the drawing board, and regularly think of ways to reward the residents who’ve been with you. In some markets and in some economic climates, you may have to give a little to fill a building, then give a little more to keep it full. In addition, try to look at the breaks you’re offering from an outsider’s perspective. Are you giving away the farm every time you sign a lease? If so, you may be giving the entire community the impression that you’re on your last legs. Not very good for business, and not very good for the bottom line.
3. All rent concessions should be added to the lease
Here is one dead horse that deserves another beating. Get it in writing. Always. Often called a concession addendum or a temporary rent concession rider, these little notes are extremely vital. They will clearly spell out what incentives you’re offering, when the term ends, and any additional consequences for breaking the lease (tenants are often required to pay back rent concessions if a lease is broken prematurely).
4. Reduced revenue and concessions can hurt your ability to obtain financing
Banks and lenders will look at your revenue stream in terms of the true numbers, not what you’re “supposed” to be making. Even a subtle difference like a $75/month rent deduction can have enough of an effect on your bottom line to make lenders look twice, particularly when lending is sparse. From this perspective, what may look like a small rate cut may be tremendously costly if you find yourself faced with a major repair or other unexpected expense.
5. Concessions now or updates later? Think about the long term value of your property
This is a tricky line to traverse. Nothing is quite so ugly as a vacant building, but if you’re costing your business thousands or more each year in tenant incentives it may only lead to more ugliness. Updates and improvements–beyond basic upkeep and maintenance–are generally strong draws for prospective tenants. Renting at the bargain basement rate or otherwise losing cashflow over a long period of time makes fewer of these improvements feasible and can set up a dangerous, losing cycle. Whenever you’re deciding what will woo best, always consider the long term impact.