In competitive commercial leasing markets, landlords frequently offer tenant inducements—including upfront free rent abatement, substantial Tenant Improvement (TI) allowances, and leasing commissions (LC). Underwriters scrub certified rent rolls to distinguish between face contract rent and true Net Effective Rent, establishing upfront reserves for unexpired concessions.
Key Financing Parameters & Standards
Institutional Market Reference
Free Rent AbatementTypically 1 to 6 months upfront (or spread across initial lease years)
TI Allowances (Office)$40 – $100+ per usable square foot on 7 to 10-year lease terms
TI Allowances (Retail/Industrial)$10 – $35 per square foot for vanilla box or shell finishes
Leasing Commissions (LC)4% – 6% of total gross aggregate lease value across primary term
Underwriting TreatmentConcessions straight-lined or deducted from NOI; upfront escrow holdbacks required
Lender Future FundingTI/LC proceeds held in reserve and disbursed against contractor draw applications
* Concession structures, escrow holdback sizing, and TI disbursement protocols are established during credit committee underwriting.
Contract Rent vs. Net Effective Rent
A lease may state a face rent of $36.00/SF, but if the landlord provides 6 months of free rent and a $60/SF tenant improvement allowance on a 5-year lease, the true economic return is significantly lower:
Calculating Net Effective Rent
Gross Contract Rent: $36.00/SF × 5 years = $180.00/SF total revenue.
Less Free Rent Concession: $36.00/SF × 0.5 years = ($18.00/SF).
Less Tenant Improvement Allowance: ($60.00/SF).
Less Leasing Commissions (5%): ($9.00/SF).
Net Effective Rent: ($180 - $18 - $60 - $9) ÷ 5 years = $18.60/SF per year.
How Lenders Handle Unexpired Free Rent at Closing
If a newly executed lease includes 4 months of free rent that has not yet expired at the time of loan closing, the property will experience an immediate cash flow shortfall:
The Free Rent Escrow Holdback
Lenders require the borrower to fund an upfront Free Rent Escrow at closing equal to 100% of the abated rent. Each month during the abatement window, the servicer releases funds from the escrow to the borrower to pay scheduled debt service, ensuring the loan does not default while the tenant occupies the space rent-free.
TI/LC Earnout and Future Funding Facilities
On transitional assets, lenders structure future-funding bridge lines. Instead of advancing 100% of TI/LC funds at closing, the lender holds TI/LC funds in a future-advance facility, releasing proceeds only when the tenant executes an unconditional acceptance certificate and opens for business.
Frequently Answered Questions
Common Questions About Underwriting Commercial Lease Concessions: Free Rent, Tenant Improvement Allowances, and Leasing Commissions
Direct, transparent answers regarding underwriting standards, documentation, and process.
Escrow Structures
What is a free rent escrow in commercial real estate financing?
Direct Answer
A free rent escrow is an upfront cash holdback established at closing equal to the total dollar value of unexpired free rent concessions granted to tenants, which is disbursed monthly to cover debt service until tenants begin paying full rent.
It ensures that temporary tenant rent abatements do not cause debt-service coverage deficits on the commercial loan.
Lease Diligence
How do commercial lenders treat Tenant Improvement (TI) allowances?
Direct Answer
Lenders treat TI allowances as capital obligations; on permanent loans, existing TI commitments must be funded in escrow at closing, while on bridge loans, TI funds are held in future-funding facilities released against contractor lien waivers.
This guarantees that landlords have the capital needed to complete tenant buildouts and trigger lease commencement.
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