A tenant improvement allowance, a period of free rent and a rent abatement are the three concessions landlords use to close a lease, and on a term sheet they can be made to cost exactly the same. They are not the same. A $150,000 allowance is cash out of the landlord's account in month one. Six months of free rent is $150,000 the landlord never collects. A $2,500 monthly abatement over five years is $150,000 spread across the term. The net effective rent is identical in all three cases; the present value, the cash-flow profile, the accounting entries and the effect on the building's appraised value are not.

This post works one lease through all three so the choice is made on numbers.

The three concessions defined

The vocabulary overlaps in practice, so here are the definitions this post uses.

1. Tenant improvement (TI) allowance: A fixed sum, usually quoted per square foot, that the landlord contributes toward the tenant's build-out. It's paid against construction draws, typically within the first three to six months of the lease. The tenant pays full rent from commencement.

2. Free rent: A period at the start of the lease, most often three to twelve months, during which base rent is zero. Operating expenses are usually still payable. The landlord gives up the cash it would otherwise have collected in those months.

3. Rent abatement: A reduction in rent applied over the term rather than concentrated at the start: a flat monthly credit, one abated month per lease year, or a stepped reduction. Some leases use "abatement" for the upfront version too; the distinction that matters economically is when the reduction lands, not the word.

All three reduce what the tenant pays over the lease. They differ in timing, and timing is everything that follows.

Cash-flow timing across a 60-month lease

Take a 10,000 sf office tenant at $30.00/sf, which is $300,000 a year or $25,000 a month, on a five-year lease with no escalations (escalations don't change the comparison, they just add noise). The landlord is prepared to give $150,000 of value, $15/sf, to sign the deal. Three ways to give it:

Same $1,350,000 at the end. Very different first year. Option A requires the landlord to have $150,000 available in the first quarter, which for a leveraged owner may mean a capital call or a draw on a TI reserve the lender controls. Option B requires nothing but patience. Option C keeps cash flowing from day one and is the only option that shows a positive balance at month six.

Net effective rent under each option

Net effective rent (NER) is the average rent per period after concessions, spread evenly across the term. Brokers quote it; appraisers and lenders look past it.

NER = (total base rent over term − total concessions) ÷ number of months

For all three options: ($1,500,000 − $150,000) ÷ 60 = $22,500 a month, or $27.00/sf a year.

That's the whole point of NER: it's designed to make concessions comparable, so it makes them look identical. Useful for a broker comparing two buildings. Useless for an asset manager deciding which one to offer, because NER ignores the time value of money, the accounting, and the face rent.

Present value: same headline, three different answers

Discount the landlord's cash flows at 8% a year (0.667% a month), a reasonable cost of capital for a stabilised office asset in 2026.

Option C is worth $26,704 more to the landlord in present-value terms than option A, on a concession that costs "the same" $150,000. The reason is simple: a dollar given away in month 48 costs less than a dollar given away in month one. Spreading the concession is cheaper.

Now look at it from the tenant's side, discounting at 10% because tenants generally have a higher cost of capital than their landlords:

The tenant values the upfront options most and the spread option least, by more than $32,000. Which means the two sides' preferences point in opposite directions, and that gap is the negotiation. A landlord who offers option C at a headline of $150,000 is offering the tenant something the tenant values at $117,663. To be indifferent, the tenant would need the abatement raised to roughly $3,190 a month, at which point the landlord's advantage largely disappears. The concession that's cheapest for the landlord is the one the tenant discounts hardest.

Face rent and valuation: the number NER hides

There is a fourth column most comparisons leave out, and it's the largest.

Appraisers and lenders value an income property on its in-place rent, capitalised. Option A and option B leave the face rent at $25,000 a month once the free period ends; the concession doesn't appear on the rent roll after month six. Option C writes the concession into the rent roll for sixty months: face rent is $22,500, permanently.

At a 7.0% cap rate, $2,500 a month is $30,000 a year of NOI, and $30,000 ÷ 0.07 is $428,571 of value. The abatement that saved the landlord $26,704 in present value costs $428,571 in appraised value for as long as the lease is in place, because the valuation model capitalises the reduced rent as if it were permanent.

That's why institutional owners almost never spread concessions into the face rent, and why free rent and TI allowances dominate in buildings that are being financed or sold. The abatement looks cheapest and is usually the most expensive.

Accounting treatment, briefly

The three options also land differently in the books, and the differences persist for the life of the lease.

1. TI allowance - If the improvements are the landlord's asset, the allowance is capitalised as a leasehold improvement and depreciated; rent revenue stays at face. If the allowance is a lease incentive to the tenant, it reduces straight-line rent revenue over the term. Which applies depends on who owns the improvements and how the lease is drafted. Our guides to what a TI allowance is and how it's accounted for and managing TI allowances: accounting, amortization and reporting cover both paths.

2. Free rent - Under ASC 842 the lessor recognises revenue on a straight-line basis, so the six free months still produce $22,500 of revenue each. Cash is zero, so a deferred rent receivable builds to $135,000 by month six and unwinds over the remaining 54 months. Revenue matches option C; cash doesn't.

3. Rent abatement (spread) - Cash and straight-line revenue are both $22,500 a month. No deferred rent, no incentive asset, the cleanest ledger of the three. Which is part of why it looks attractive on paper, and why the valuation effect above surprises people.

When each concession suits the tenant

Numbers decide most of it. The tenant decides the rest.

The mixed deal is common and often right: a smaller TI allowance for the essential build-out plus two or three months of free rent to cover move costs. It keeps the landlord's upfront cash lower than a full allowance and the face rent untouched.

Modelling concessions in NetSuite

The reason concessions get chosen badly is that the three views, cash, present value and face rent, live in three spreadsheets. When the lease record holds the rent schedule and the concession as structured data rather than a PDF, the comparison is a report, not a project.

In a property management system on NetSuite, a proposed lease carries its rent steps, any free period, any abatement schedule and any allowance commitment as separate lines. The straight-line calculation runs automatically for lessor accounting, the cash schedule is visible month by month, and the allowance commitment tracks against draws. Compare three versions of the same lease side by side and the PV, the deferred rent balance and the face rent are all there. That's how RIOO's property accounting on NetSuite treats a concession: as part of the lease's data, not a negotiation memo. Whatever tool you use, the test is whether you can answer "what does this deal do to the rent roll in month 30?" without rebuilding the model.

Frequently asked questions

Q1. What is the difference between a TI allowance and free rent?
A TI allowance is cash the landlord pays toward the tenant's build-out, usually in the first few months of the lease, while the tenant pays full rent. Free rent is a period at the start of the lease during which base rent is zero. The allowance costs the landlord cash; free rent costs the landlord income.

Q2. Is rent abatement the same as free rent?
In everyday use the terms overlap. Economically, free rent is concentrated at the start of the lease and rent abatement is spread across the term or applied at intervals. The spread version has a lower present-value cost to the landlord but reduces the face rent on the rent roll for the whole term.

Q3. How do you calculate net effective rent with concessions?
Subtract total concessions from total base rent over the term and divide by the number of months. On a $1,500,000 five-year lease with $150,000 of concessions, net effective rent is $22,500 a month regardless of whether the concession is an allowance, free rent or an abatement.

Q4. Which concession is best for the landlord?
On present value alone, a spread abatement is cheapest. On valuation, it is the most expensive, because appraisers capitalise the reduced face rent. For buildings that will be financed or sold, free rent or a TI allowance preserves face rent and is usually the better choice.

Q5. How does free rent affect lease accounting?
Under ASC 842 the lessor recognises rent on a straight-line basis over the lease term, so revenue is recorded during the free period even though no cash is received. The difference accumulates as a deferred rent receivable and reverses over the remaining term.

Related reading

• What is a tenant improvement allowance and how is it accounted for
• How to manage tenant improvement allowances: accounting, amortization and reporting
• Tenant improvement build-out: draws, lien waivers and timelines