Lease incentives encourage lessees to rent
Lease incentives are generally payments made from the lessor to the lessee (either directly or on behalf of the lessee) and can include payments for moving costs or reimbursement for leasehold improvements.
With leasehold improvements, a lessee of empty office space might be allowed to update and improve the space to ensure it fits their needs. In return, the lessor agrees to reimburse the lessee for expenses related to the improvements. If the lessee owns the improvements, such as personalized branding, it’s a lease incentive.
Other lease incentives include lump-sum cash payments and lease buyouts (where the lessor agrees to make the remaining payments on another lease of the lessee’s). Payments for products or services provided by the lessee to the lessor aren't considered lease incentives.
Example:
A lessor is offering lease incentives to fill vacant office space. A local government has agreed to lease office space from the lessor. The lease is for 20 years and will require leasehold improvements. The lessor agrees to reimburse the municipality for the improvements, which include $10,000 spent on personal branding. The local government received a $10,000 lease incentive for signing the lease.
When it comes to leasehold improvements, they may or may not be considered lease incentives. Only incentives that result in lessee assets are true lease incentives. Lessee assets are generally improvements that cannot be used by later lessees or are not required by the lessor. On the other hand, if the improvement is required by the lessor, it’s not considered a lease incentive.
What’s important here?
A lease incentive is a payment or reimbursement made to a lessee by a lessor. Lease incentives are meant to encourage a lessee to sign a new lease with the lessor. Incentives can include such items as leasehold improvement reimbursements, moving costs, or cash payments. These lease incentives are included in the calculation of the initial lease liability or lease receivable balance, so it is important to identify these costs and how they apply to your agreement.
