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A Lease Incentive is a payment made directly to or on behalf of a lessee from a lessor.
One important thing to distinguish is that lease incentives do not include payments from the lessor to the lessee for any good or service that the lessee is providing to the lessor. Also, there must be a cash exchange. While a free rent period, or rent abatement, does incentivize you to sign the lease, since there is no cash movement from the lessor to the lessee, this would not be considered an incentive under ASC 842/IFRS 16.
To summarize- a Lease Incentive is a payment made to a lessee by a lessor to incentivize the lessee into entering the lease.
A few common examples of Lease Incentives are:- A cash payment made to the lessee upon execution of a lease
- A tenant improvement allowance provided to the lessee by the lessor during a lease
- A lessor paying for a lessee's moving expenses and/or termination penalties when executing a lease
Why are Lease Incentives important?
Lease Incentives are important to identify since they directly impact the calculation of the ROU Asset and potentially lease liability balances.
There are two common types of lease incentives:
- Paid: An incentive that was paid on or before the lease commencement date. These incentives will directly reduce the ROU Asset balance.
- Payable: An incentive that will be paid after the lease commencement date. These incentives will decrease the lease payment in the period the incentive is expected to be received. This reduces the initial Lease Liability balance, which also reduces the ROU Asset balance.