In a lease transaction, it is quite common for landlords to offer a lease incentive to make a more attractive lease option for potential tenants. Lease incentives come in the form of rent abatement, rent reductions and, of course, fit-out contribution. But what are the benefits for a property owner when fitting out a commercial property?
As a landlord you can give a fit-out contribution as a lease incentive. Landlords have the option to add it as a contribution on reimbursement basis, where you provide full details of the fit-out, and they pay back the amount spent through additional rent, to be detailed in the tenancy agreement.
As an alternative, you can carry out a fit-out under a prior arrangement to the value of the discussed amount. If you do choose for a fit-out contribution, you can also set terms for a clawback provision; which is based on trigger event that will ensure the tenant will pay for the fit-out. The trigger event includes early termination of the lease due to a breach of the lease.
It is a standard requirement that you as a landlord do not need to pay for a fit-out contribution until the tenant has executed the lease; supplied a security deposit required under the lease, taken out appropriate insurance, and submitted plans for fit-out for approval. As a landlord you have the right to ask for several quotes for the fit-out and base your spending on these quotes.
It is best to seek accounting advice when discussing lease incentives like fit-outs, as there are tax implications that apply to each of the different incentive methods. Depreciation on the fit-out will work in your favour when it comes to taxes.