This is how you can apply rental discount.
By keeping the base rent the same, but adding a invoice item with a negative amount, you index the base rent and the discount will automatically end over time.
The Situation
Have you agreed on a rent reduction with your tenant? In this article, we will explain the two ways in which you can process this discount in OWNER and what the advantages and disadvantages are.
To make it concrete, we will use the following example:
EXAMPLE LEASE AGREEMENT
At the start of the contract, the rent is €50,000 per year. The contract indexes every year by 3%, starting from 1 year after the start of the lease. The tenant receives the following rent reductions:
Year 1: € 10,000.-
Year 2: € 5,000.-
Year 3: € 1,000.-
These are the two options.
To process the above lease agreement in OWNER, you have the following two options:
1. Create the following invoice items on the lease agreement:
- Rent: € 50,000 (ongoing & indexing on)
- Rent: € -10,000 (only for year 1 & indexing off)
- Rent: € -5,000 (only for year 2 & indexing off)
- Rent: € -1,000 (only for year 3 & indexing off)
2. Create the following invoice items on the lease agreement:
- Rent: € 40,000 (only for year 1 & indexing off)
- Rent: € 45,000 (only for year 2 & indexing off)
- Rent: € 49,000 (only for year 3 & indexing off)
- Rent: € 50,000 (ongoing after year 3 & indexing on)
What is the big difference between both methods?
With method 1, you can index the basic rent of €50,000 immediately after the first year. With method 2, the rents for the first 4 years are fixed and therefore not indexable. To make the difference clear, we have prepared a table below with the rental prices for the first 5 years for both methods:
| DIFFERENCE METHOD 1 & 2 |
||
| Rent | Method 1 | Method 2 |
| Year 1 | € 40,000 | € 40,000 |
| Year 2 | € 46,500 | € 45,000 |
| Year 3 | € 53,045 | € 49,000 |
| Year 4 | € 54,636 | € 50,000 |
| Year 5 | € 56,275 | € 51,500 |
| Total | € 250,459 | € 235.500 |
| Difference | € 14,959 | |
Choosing method 1 or 2 in this example results in a difference of €14,959 over the period of 5 years.
Note: check how the rent reduction agreement is described in your lease agreement. You may not have the freedom to choose between method 1 or 2.
If your lease agreement only indexes after the rent reduction, it does not matter which method you choose. Both methods will result in an equal rental stream.