Real Estate Accounting Made Easy, 2nd Edition

7LEASE INCENTIVES AND TENANT IMPROVEMENTS

LEASE INCENTIVES

Lease incentives are payments made by a lessor to or on behalf of a lessee to entice the lessee to sign a lease. Lease incentives may include up-front cash payments to the lessee, payment of costs on behalf of the lessee (such as moving expenses), termination fees to the lessee's prior landlord, or the lessor's assumption of the lessee's lease obligation under a different lease with another landlord.

Lease incentives are sometimes called tenant inducements and should be accounted for as reductions of the right-of-use asset by the lessee. The lessor should account for it as reductions of rental revenue on a straight-line basis over the term of the lease.

In a lease incentive arrangement in which the lessor agrees to assume the lessee's prior lease with a prior landlord, any estimated loss from the assumption of that lease by the lessor would need to be recognized over the term of the new lease by the lessor. Financial Accounting Standards Board (1988), Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases, allows the lessor and lessee to independently estimate any loss as a result of the lessor's assumption of the lease; thus, both parties can have different measurements and record different estimated losses.

According to paragraph 8 of the Technical Bulletin No. 88-1:

the lessee's estimate of the incentive could be based on a comparison of the new lease with the market rental rate available for similar ...