Lease incentives, and what a fitout contribution really buys
Rent-free periods, cash contributions and landlord works are not the same thing, and they are not worth the same to you.
The short answer
Incentives are normal in Australian commercial leasing, and in a soft market they are large. What trips practices up is treating three quite different things as if they were one, because the agent presented them all as a percentage.
Key points
- An incentive is a discount on the deal, not free money. It is priced into the face rent.
- Cash, rent-free and landlord works are taxed and clawed back differently. Ask which you are getting.
- Almost every incentive carries a clawback if you leave early. Read the amortisation period.
- If the landlord builds it, they usually own it, which changes make good and depreciation.
Incentives are normal in Australian commercial leasing, and in a soft market they are large. What trips practices up is treating three quite different things as if they were one, because the agent presented them all as a percentage.
The three forms, and what each is worth
Rent-free period. You occupy without paying rent for an agreed number of months, usually at the start. Simple, and it helps exactly when a practice needs it most, during construction and the slow first months of trading. It gives you nothing towards the capital cost of the fitout.
Cash contribution. The landlord pays you a sum towards the fitout, generally on completion and against evidence of spend. This is the most useful form for a practice because it lands where the money is actually going, and you keep control of the build.
Landlord works. The landlord builds some or all of the fitout. It sounds like the best deal and is often the worst, because you have handed over control of scope, program and quality on a building that has to satisfy an accreditor.
Why the form matters more than the headline number
A quoted incentive of, say, thirty per cent means something different in each of those three shapes, and the difference is not marginal.
A rent-free period preserves cash flow but leaves you funding the entire fitout. A cash contribution reduces the capital you have to raise, which for a practice borrowing against equipment as well as building is usually the binding constraint. Landlord works reduce your capital too, but the fitout is then the landlord’s asset, which changes who depreciates it and what happens at make good.
The one thing all three have in common is that the incentive is priced into the face rent. A higher incentive with a higher face rent is a financing arrangement, not a gift, and the effective rent is the only number worth comparing between two tenancies.
Clawback, and the year you actually leave
Nearly every incentive is amortised across the term and clawed back if you go early. The clause is usually short and easy to miss.
The mechanics matter. Straight-line amortisation over the full term is the common and reasonable version: leave in year three of a seven year lease and you repay roughly four sevenths. Less reasonable versions accelerate the repayment, or claw back the whole incentive on any breach rather than on early surrender only.
This bites hardest on the exits nobody plans for. A practice sold to a corporate, a partner leaving, an assignment to a new owner. Check whether the clawback survives an assignment, and whether it is triggered by assignment at all, because if it is, it comes straight off your sale price.
Who owns the fitout
This is the question that decides the tax treatment and the make good exposure, and it follows from which form of incentive you took.
If you fund the fitout, it is your asset. You claim capital works and depreciation on it, and you carry the make good obligation. If the landlord builds it, it is generally theirs, you claim nothing, and the make good position changes because the works were never yours to remove.
A cash contribution sits between the two and depends on how it is documented, which is exactly why it should be documented deliberately rather than left as a line in a letter of offer. Get your accountant across the wording before it is signed, because the treatment of an incentive is not something you can adjust afterwards.
What to ask for, in order
- The effective rent, not the incentive percentage, so you can compare tenancies honestly.
- Cash contribution over landlord works, paid progressively against certified claims rather than entirely on completion, so it does not become a cash flow problem during construction.
- Straight-line clawback over the full term, triggered by early surrender only, and surviving assignment so a sale is not penalised.
- Rent-free that covers construction plus a genuine ramp up, rather than a period that expires while you are still waiting on an occupancy certificate.
- Clarity on ownership of the works, in writing, before the accountant has to guess.
One practical note on timing. A rent-free period that starts at lease commencement while your approvals are still running can be half consumed before a trade is on site. Where you can, tie its start to handover rather than to the date the lease begins.
Sources and further reading
Retail leasing disclosure requirements and ATO guidance on capital works and depreciating assets.
The Retail Leases Act 1994 framework and the disclosure a landlord owes a tenant, including on make good and outgoings. Every state has its own equivalent.
Capital works deductions and depreciating assets, which is how a fitout and a landlord contribution are actually treated at tax time.
Building activity and construction cost data, useful for sanity-checking where trade pricing is heading.
Questions
What is a normal lease incentive in Australia?
It varies with market, building grade and term, and it is quoted as a percentage of gross rent over the term. The percentage matters less than the form it takes and the effective rent it produces, which is the only figure that lets you compare two tenancies properly.
Is a fitout contribution better than a rent-free period?
For most practices, yes. A rent-free period helps cash flow but leaves you funding the whole fitout, while a cash contribution reduces the capital you have to raise, which is usually the binding constraint when you are also financing equipment. The exception is a practice that is capital rich and worried about the first year of trading.
Do I have to pay back a lease incentive if I leave early?
Almost always. Incentives are amortised across the term and clawed back on early exit. Look at whether the amortisation is straight line, what triggers it, and critically whether it survives an assignment, because a clawback triggered by assignment comes directly off the price when you sell the practice.
Should I let the landlord build the fitout?
Usually not for a clinical tenancy. It surrenders control of scope, program and quality on a building that has to satisfy accreditation, and the fitout generally becomes the landlord's asset, so you cannot depreciate it. A cash contribution with you running the build keeps the money and the control in the same place.
Is a lease incentive taxable?
The treatment depends on the form and the documentation, which is the reason to have your accountant read the wording before signing rather than after. A cash contribution, a rent-free period and landlord works are not treated the same way, and the position cannot be adjusted retrospectively.
Send us the floor plan
A site assessment tells you what the tenancy can take and what it will cost to get there, ideally before you have signed for it.