What Is a Lease Inducement?

When market conditions give a potential tenant multiple options, landlords will often offer lease inducements to attract tenants to their properties. Lease inducements are found in residential, commercial and mineral rights applications. Whether it's an apartment, commercial space or an oil or natural gas lease situation, lease inducements benefit both the tenant and the landlord.

A lease inducement made by a landlord serves to entice a tenant to enter a lease. The tenant receives something of value in return for signing a lease. Inducements occur in a variety of situations, and whether it be an apartment or a commercial space, the basis is still the same.

There are many different types of inducements. The landlord may agree to buy out the tenant's previous lease obligations, pay for moving expenses, allow for fixtures or appliances, improve the property, give extra benefits, offer a rent-free period, offer a low-interest loan, give a cash payment or allow money toward the building or construction on a rental property.

Lease inducements work to eliminate competition for tenants. In a residential aspect, the lease inducement often works to attract tenants when there are more rentals than tenants on the market. Commercially, the lease inducement helps the landlord obtain tenants to attract other tenants, such as in a mall or office building situation. The tenant can also be induced in a way that will cause the tenant to improve a building or property, thus increasing the property's value. Many lenders require that landlords of commercial property maintain high-quality leases. The lease inducement helps keep a property under lease.

The tax consequences of the lease inducement can affect both the tenant and the landlord. The tenant may be required to treat the inducement as income. For example, a cash payment without specification for usage must be reported as taxable income by the tenant. However, if the payment is designated for the improvement of the property, the tenant is able to depreciate the improvement costs over time. The landlord may then treat the payment as the cost of leasing the property, amortizing the payment over the term of the lease, according to the law firm Maiello, Brungo and Maiello, LLP. Tenants and landlords should both consult tax professionals before entering into a lease arrangement involving inducements.