Enter your email address for weekly access to top multifamily blogs!

Multifamily Blogs

This is some blog description about this site

What You Need To Know About Rent Concessions

 

With rent concessions on the rise nationwide we need to have an understanding what giving or offering a concession can do to your property value if not handled correctly.

Let’s start with the definition of a rent concession, a concession is any “reduction in price, rent or other benefit provided to a potential tenant as an inducement to lease your property”. There are many ways to give a concession, reducing the first month’s rent, reducing rents for a contracted time or maybe even upgrades the property they are considering ie: an accent wall or upgraded appliances. Your goal should be to have all scenarios have about the same amount of rent paid.  Also, if you can get a new tenant to accept an upgrade to the unit as a concession, it can be even more beneficial to you.

What you need to consider as you are offering your concessions is how do these concession affect my long term value of my investment.  If you find yourself wanting/needing to refi and you begin the underwriting process you will find that lenders are interested in how much income an asset is producing and how much income an asset can optimally produce. Concessions add an additional layer to the equation. When underwriting the Net Operating Income of an asset, concessions are typically subtracted from the Gross Rental Income in order to determine the Net Rental Income — which also factors in things like vacancy and unpaid rent that’s deemed ‘uncollectible’.  This may affect the borrowing power of the property, as lenders use multiples and ratios to determine the maximum loan to value.

The top 3 types of concession are- Lease-Up Concessions, Marketing Concessions and of course the old  ‘Red Flag’ Concessions.

Lets start with the Red Flag Concessions: Lenders will have some concern when you are looking at buying or refinancing a property with rents that are in line with market competition but have on-going concessions to keep the property occupied. They will wonder why there are ongoing concessions, and what hidden issues might be  there.

Lease-Up Concessions are defined as discounts offered in newly rehabbed or newly constructed apartment product during the lease-up phase as a means to stabilized occupancy (roughly 90%) as soon as possible. These one-time concessions are generally not of concern to lenders so long as there is strong lease-up velocity and that asking rents are well supported by the market.

Marketing Concessions: You will find these concession across all asset classes.  These are often more of a marketing play in that rents at the property may be slightly above market rates. The ‘concession’ brings rates more in line with the market. These types of concessions are usually of no concern as long as they keep the rents at the market rate.

No matter what type of concession you chose be sure that it is reflected properly in your rent roll as it will make it easier for potential buyers or lenders feel comfortable with your property.

Rate this blog entry:
1
 
This comment was minimized by the moderator on the site

Joe - Nice blog. One point between the lines is clearly that concessions have to help the property company as well as residents - otherwise why offer them?! Our strong belief is that concessions only make sense when communities get a lot out of...

Joe - Nice blog. One point between the lines is clearly that concessions have to help the property company as well as residents - otherwise why offer them?! Our strong belief is that concessions only make sense when communities get a lot out of the deal. Enrollment in more assured rent delivery through payroll, for example, is often offered in exchange for security deposit concessions provided prospects agree to a greatly more assured method of money management that assures installments toward monthly rent are sent to a rent budgeting account managed by a third-party throughout each month before rent is due. Lower cost for residents and better cash flow for propcos - win-win all around!

Read More
  Ellen Calmas

Comment Below

  1. Posting comment as a guest. Sign up or login to your account.
Attachments (0 / 3)
Share Your Location
Over the past decade or so, the multifamily industry has undeniably become more pet-friendly. Go to industry conferences, and you'll see pet-focused sessions with panelists who have reaped the benefits of relaxing or even eliminating weight and breed restrictions. Visit apartment communities, and you'll likely see an array of amenities – such as fenced dog parks and pet-washing stations – designed to attract and retain pet-owning residents. New data validates these general observations. Accordin...
With 2020 firmly behind us, apartment owners and operators have reasons to be optimistic about the road ahead.  To cite just one example, consumers by and large are maintaining healthy credit profiles. The pandemic has undeniably presented major economic challenges for many, but the average credit score in the U.S. increased by 1% (seven points) in 2020, according to Experian. This statistic suggests that many consumers could be well positioned to sign new leases and renew their current one...
To use Pinterest or not to use Pinterest? That is a big question on many of our clients' minds.   While yes, Pinterest can be a profitable social media platform to invest your ad dollars into, it really depends on your industry and product or service.   With more than 150 million monthly users, Pinterest provides a refreshing way to maintain and enhance your SEO efforts and reach a wider audience.   The pinning platform spurs more than 2 billion searches each month. Additionally, ...