CanopyWhat Is Fitout Contribution & Who Does It Benefit?
True or False: Your landlord can cover the costs of your fitout.
Not many things in life are free, but in the land of commercial leases, monetary incentives abound. Fitout contributions are not uncommon for businesses entering into multi-year lease agreements. And in competitive markets, you’d be surprised to find out how far landlords are willing to go to secure a long-term tenant. But is everything as rosy as it seems?
Below, we’ll explore fitout contributions inside and out, along with other lease incentives you may come across when searching for new space for your business. We’ll also cover why landlords offer contributions, helping you determine whether this free money is a win-win for both parties or more of a complicated ordeal.
In the end, you should be one step closer to successfully negotiating your lease agreement.
What Are Lease Incentives?
Lease incentives are concessions offered by landlords to attract tenants. These can come in various forms, with fitout contributions being a common incentive offered to commercial clients.
Some tax implications may encourage landlords to offer a rent incentive. Yet ultimately, incentives are primarily used to help a property stand out in a competitive market. Whether a business is large or small, moving into a new space is a time-consuming and costly process. Tenants will be more likely to commit to a long-term lease if a landlord is willing to support them during this transitory phase.
It’s also worth noting that incentives don’t always have to be tied to fitouts. See the most common types of incentives below.
Types of Lease Incentives
- Fitout contribution towards the cost of your fitout
- Contribution towards amendments of a preexisting fitout
- Rent abatement either as;
- A rent-free period at the start of a long-term lease, or,
- A yearly percentage reduction on rent throughout the lease.
- A combination of two or more of the above incentives.
What is a Fitout Contribution?
At its core, a fitout contribution is a financial incentive provided by landlords to tenants strictly for the purpose of enhancing or customising the leased space. Contributions can be partial or complete. They can also be paid out in a variety of ways.
Why Does It Matter?
Fitout contributions empower businesses to create a bespoke environment without shouldering the entire financial burden. A strategic partnership between landlords and tenants fosters a win-win scenario where both parties benefit. The landlord retains a consistent stream of income (the long-term tenant), and the tenant gets to create their dream office or commercial space.
Rent-Free Periods and Reduced Rent
Since the tenant can’t use the space while the fitout is built, landlords often tack on a rent-free period at the start of a lease. During this period, tenants enjoy a reprieve from rental payments, allowing them to redirect funds toward the fitout process. Sometimes this rent-free period is provided in addition to the fitout contribution. At other times only one or the other will be offered.
Reduced rent (or rent abatement) is an alternative to rent-free periods. They are an attractive option for tenants seeking security and stability during a lease period. In this setup, a portion of the rent is reduced throughout the lease (or period during the lease).
How Contributions Influence Make Good Obligations
If you choose to receive financial assistance from your landlord to build your fitout, you should also be very clear on the make good obligations. A make good clause will always be in a lease agreement, indicating the condition the space should be returned to at the end of the lease.
Assuming the landlord takes ownership of the fitout works, they may only want your personal property removed (e.g. furniture, filing cabinets, computers, etc.). The clause can also request that the property be restored to its original state at the time the lease started. This may involve a deep clean of the entire space or a complete strip out of the current fitout.
If a landlord made a significant investment into your fitout, chances are they may want to retain it for a new tenant. Your make good obligation will reflect this, requiring that you only remove the property that you own.
A Note on Clawbacks
Read your contract thoroughly. Then read it again. Then a few more times. And if you can, get an expert opinion on top of that. You don’t want to be stuck in a sticky situation once the agreement is signed.
If your landlord chooses to contribute to your fitout, beware of any clawback provisions (and the situations that enable them) in your contract. If you break your contract early, for example, you could be owing back any contributions made up to that point. Make sure you have a clear understanding of these provisions and negotiate any obligations that you believe are unfair.
Is a Fitout Contribution Taxable?
Disclaimer: We are not tax experts, it's essential to consult with professionals who can provide guidance tailored to your specific situation. Generally, fitout contributions may have tax implications, and understanding these nuances is crucial for effective financial planning.
The tax treatment of fitout contributions can vary based on several factors, including the nature of the contribution and how it is accounted for in the financial records.
If your lease agreement states that you, the tenant, own the fitout, the ATO will likely see the fitout contribution as income. On the other end, the tenant will likely receive a tax deduction, further incentivising them to make you the owner of the build. If done this way, you could be hit with major tax owing in the following year.
If the lease agreement states that the landlord owns the fitout (up to the cost contributed), you don’t receive income, can’t claim a deduction, and won’t be taxed on the contribution. The landlord can claim a deduction but at a much lower rate.
As we cannot provide tax advice, we suggest reading this as well as contacting a tax expert for advice specific to your situation.
Leverage Contributions in Your Upcoming Fitout
Fitout contributions are great incentives for businesses and landlords. For businesses, they ease the transition into a new space. And for property owners, they help attract and secure long-term renters. It can be a win-win situation for both sides provided the lease agreement is thoroughly examined and negotiated.
Ready to negotiate your commercial lease but don’t know where to start? Check out these tips. Already decided on a location and want to start your fitout? Speak to our team today and we’d be more than happy to give you advice on cost, budgets, requirements, and timeframes for your office or commercial fitout. Give us a call at 1800 434 868 or email info@canopyfitouts.com.au.
