What is a free rent allowance in an industrial lease?

What is a free rent allowance in an industrial lease?

## What is a free rent allowance in an industrial lease? A free rent allowance is a negotiated concession where the tenant pays no base rent for a defined period at the start of the lease term. It is one of the most common financial incentives landlords offer in commercial and industrial leasing, and it functions as a way to reduce the tenant's upfront occupancy cost without the landlord formally lowering the face rent on the lease. In GTA industrial leasing, free rent periods typically range from one to six months, depending on the size of the lease, the term length, market conditions, and the landlord's current portfolio vacancy. Longer-term leases of five years or more tend to attract more generous free rent packages. A three-to-five-year lease in a mid-market industrial product might yield one to two months of free rent, while a ten-year commitment on a large-format distribution building could attract four to six months or more. ## How landlords use free rent as an incentive Landlords offer free rent for several strategic reasons. First, it preserves the face rent on the lease — the number that shows up in rent rolls and informs property valuations. A landlord who drops their asking net rent from $16.00 to $15.00 per square foot to close a deal has permanently lowered the income stream that anchors their property's value. A landlord who keeps rent at $16.00 but gives three months free has achieved the same economic result for the tenant while protecting the cap-rate math on their asset. Second, free rent helps tenants bridge the gap between lease commencement and actual move-in. In industrial leasing, tenants often need time after taking possession to install racking, run electrical, commission equipment, or complete tenant improvements. Free rent during that setup window reduces the cost of carrying a space that is not yet generating revenue for the occupier. Third, in softer leasing environments or when a building has been vacant for an extended period, free rent is a tool landlords use to signal flexibility without publicly discounting their rates. ## How tenants should negotiate free rent The most important negotiating principle for free rent is timing: ask for it before you signal strong interest, and frame it as a condition of deal structure rather than a concession you need. Landlords are more willing to offer incentives when they believe the tenant has other options. When negotiating, tenants should push for free rent to be positioned at the front of the lease term — ideally covering the fit-up and setup period. Some landlords will attempt to offer free rent at the back end of the term (a rent holiday in year four or five, for example), which has far less practical value. Tenants should also clarify what "free rent" means in the specific deal. Does it cover base rent only, or does it also include TMI (taxes, maintenance, and insurance)? This distinction matters significantly. ## Free base rent vs. free gross rent This is one of the most commonly misunderstood points in industrial lease negotiations. When a landlord offers "free rent," the default assumption is often that it applies only to the base (net) rent. In a GTA industrial lease where net rent is $16.00 per square foot and TMI is $5.50 per square foot, the total gross rent is approximately $21.50 per square foot. If the free rent period covers base rent only, the tenant is still paying TMI during those months. On a 20,000 square foot unit, that means paying roughly $9,167 per month even during the "free" period. If free rent covers the full gross rent, the tenant pays nothing. Always clarify in the letter of intent and lease whether free rent applies to net rent, gross rent, or some specific combination. A well-negotiated free rent package for an industrial tenant will typically cover the full gross rent, particularly during the initial possession and fixturing period. ## What else to consider alongside free rent Free rent is one incentive among several in an industrial lease negotiation. Tenant improvement allowances (TI allowances), early access provisions, parking and yard rights, renewal option pricing, and permitted use clauses all affect the real economics of the deal. Free rent improves cash flow at the front of the lease, but tenants should not trade away renewal rights or cap rate escalation terms to get it. If you are negotiating an industrial lease in the GTA and want to understand what incentives are realistic given current market conditions, Michael Law provides tenant representation across Toronto, Mississauga, Brampton, Caledon, Vaughan, and the broader GTA. Contact Michael at mlaw@lennard.com or (416) 569-6722.