What are Lease Incentives?

Lease incentives, sometimes called tenant inducements, are enticements lessors provide to encourage lessees to sign a lease. The most common type of inducement is the tenant improvement allowance (TIA), which reimburses or pays lessees for property improvements. Other examples of lease incentives are listed below:

• Paying cash to a lessee at or before lease inception
• Providing a period of free rent
• Paying for moving expenses
• Paying a lessee’s termination penalty on an existing lease
• Buying out a lessee’s existing lease obligations
• Paying key money

How to Account for Lease Incentives

When the lease incentive is paid up front, lessees should adhere to ASC 842-20-30-5 (b), on page 103 of FASB Accounting Standards, February 2016, which states that the opening balance of the ROU asset should be reduced by the amount of the incentive. When the lease incentive is paid up front, the opening lease liability is not affected.

However, if the incentive is to be paid in the future, both the lease liability and the right-of-use asset are affected. When incentives are to be paid in the future, lessees should follow ASC 842-10-30-5 (a), on page 35 of FASB Accounting Standards, February 2016, which states that future lease incentives should be subtracted from scheduled lease payments. The net present value of scheduled lease payments is the basis for the opening balance of the lease liability and ROU asset.