Why Free Rent Isn’t a Concession — It’s a Financial Mechanism
CFO Series | Week 2 of 6
By Chris Rohrer & Pete Kostroski | Co-Owners
In most office lease negotiations, when concessions like free rent shows up, it feels good. It feels like progress. Free rent periods, tenant improvement allowances, and abatement schedules are framed as wins—signals that a landlord is willing to move to get a deal done.
From a CFO’s perspective, that framing often misses what actually matters.
Free rent isn’t a concession in the traditional sense. It’s a financing mechanism. And like any form of financing, its value depends on structure, timing, and risk. Without evaluating those variables, it’s easy to overestimate the benefit while underestimating the exposure.
Why Rental Rate Misses the Point
Lease discussions still tend to anchor on rental rate. It’s the most visible number, the easiest to compare, and the one landlords prefer to emphasize. But rental rate alone offers very little insight into the true financial impact of a lease.
What actually determines cost is how rent, concessions, and expenses interact over time, not how clean the term sheets look. In practice, that comes down to:
Effective rent over the full lease term
Cash flow timing, not just total value
Operating expense exposure and escalation mechanics
Re-tenanting and exit risk
Two lease proposals can look nearly identical on a term sheet and produce materially different results once these factors are modeled together.
Timing Is the Difference Between Value and Illusion
One of the easiest ways tenants’ overestimate value is by treating all concessions as equal, regardless of timing. From a financial standpoint, a dollar of free rent today is meaningfully different from a dollar of free rent delivered several years into the lease.
When free rent is back-loaded, its present value declines rapidly. More importantly, it may never be realized at all if the tenant exits early due to downsizing, consolidation, or a shift in workplace strategy.
For CFOs, the question isn’t how much free rent is offered. It’s:
When it’s delivered
How certain it is under downside scenarios
The Reality Behind Tenant Improvement Allowances
Tenant improvement allowances are another area where rental rate numbers can obscure real cost. On paper, large TI packages look attractive. In practice, many allowances are:
Capped below actual construction costs
Reimbursed only after expenditures are incurred
Subject to timing, documentation, or compliance requirements
We make sure that our clients realize this potential carrying cost before any lease is signed.
Where Identical Deals Start to Diverge
Lease structures that appear similar at first glance often separate once risk is introduced into the analysis. Differences become material when:
Free rent is back-loaded rather than front-loaded
Expansion rights reset pricing to future market rates — often without guardrails which should be negotiated at the time the lease is signed
Operating expense exposure is uncapped or loosely defined
Without modeling these variables, lease decisions rely more on narrative than numbers and narratives tend to favor the party controlling the terms.
Treating Leases Like Capital Decisions
CFOs routinely evaluate financing decisions using net present value, scenario analysis, and probability-weighted outcomes. Office leases deserve the same discipline.
If lease offers aren’t being compared on an NPV basis, including downside scenarios, then the decision is largely a guess, regardless of how competitive the headline terms appear.
The most expensive costs in a lease rarely come from rent. They come from not having negotiating flexibility that would allow for and help to moderate the costs to contract or terminate a lease.
Free rent and concessions are tools used to shape cash flow, shift risk, and preserve landlord economics.
For CFOs, the objective isn’t to maximize concessions. It’s to understand their true value under a range of realistic scenarios. Because when assumptions change, and they always do, only the structure remains.
Are you evaluating an office lease or approaching a renewal? Connect with Rokos Advisors to better understand how lease structure impacts long-term financial outcomes.
Rokos Advisors is an award-winning Minneapolis - St. Paul based commercial real estate/tenant representation firm specializing in helping businesses find the perfect office or industrial space for their company.