The quick read: Commercial free rent creates a dated cash gap between lease delivery and rent commencement. Reconcile the first twelve months of base rent, operating bills and debt payments, then add landlord improvements and commissions on their payment dates. A signed lease helps define future rent but does not fund the months before it is payable.
When does the tenant become obligated to pay cash rent?
A commercial tenant becomes obligated to pay cash rent when the executed lease's commencement conditions and concession period require that payment, rather than when its signature or possession alone occurs. Abstract landlord delivery, tenant acceptance, base-rent waiver and reimbursable charges separately, then reconcile the assumed start date with the evidence still needed.
Free rent is a lease concession, but the exemption may cover base rent without covering utilities or reimbursements. Start with the actual contract rather than the broker’s lease summary. Confirm the concession period, payment commencement conditions, reimbursable charges and whether completion of tenant improvements changes the start date.
The OCC’s Commercial Real Estate Lending handbook emphasizes analysis of leases, sustainable property income and re-leasing costs. Its office discussion specifically identifies leasing commissions and tenant improvements as cash requirements. A signed tenant can therefore improve future leasing certainty while still leaving the owner responsible for a period of expenses and debt payments without base-rent cash.
Separate occupancy from collections. A tenant may occupy and fit out the space before base rent begins, or rent commencement may depend on delivery and acceptance. Prepare a dated timeline showing lease signature, possession, landlord work, rent commencement and the end of concessions. Those events need not occur together.
An accounting statement can also differ from cash receipts. Ask the accountant to identify recognized rent that has not been collected and reconcile it to the lease ledger. Do not label the accounting total as money available to make mortgage payments. A lender can evaluate future contractual rent, but its treatment depends on the loan product, documentation and interim liquidity.
What does a complete twelve-month commencement schedule show?
A complete twelve-month commencement schedule shows the cash required before a commercial tenant pays base rent and reconciles that need with the annual operating forecast. Put concession months, recurring bills, debt service and landlord work on the same calendar, then calculate both the cash trough and full-year result instead of mixing unexplained monthly and annual expense assumptions.
Hypothetical office property, January–December 2027: Assume $20,000 monthly face rent, three free base-rent months and payments beginning April 1 after the required delivery evidence is satisfied. Assume no reimbursements or additional delays. Annual operating bills total $80,000: $5,000 in each first-quarter month, $7,000 April–November and $9,000 in December. Debt service is $10,000 every month.
| Month | Collected base rent | Operating bills | Debt payment | Work / commission due | Monthly cash after all lines |
|---|---|---|---|---|---|
| Month January | Collected base rent $0 | Operating bills $5,000 | Debt payment $10,000 | Work / commission due $20,000 work | Monthly cash after all lines ($35,000) |
| Month February | Collected base rent $0 | Operating bills $5,000 | Debt payment $10,000 | Work / commission due $10,000 work | Monthly cash after all lines ($25,000) |
| Month March | Collected base rent $0 | Operating bills $5,000 | Debt payment $10,000 | Work / commission due $12,000 commission | Monthly cash after all lines ($27,000) |
| Month April | Collected base rent $20,000 | Operating bills $7,000 | Debt payment $10,000 | Work / commission due $0 | Monthly cash after all lines $3,000 |
| Month May | Collected base rent $20,000 | Operating bills $7,000 | Debt payment $10,000 | Work / commission due $0 | Monthly cash after all lines $3,000 |
| Month June | Collected base rent $20,000 | Operating bills $7,000 | Debt payment $10,000 | Work / commission due $0 | Monthly cash after all lines $3,000 |
| Month July | Collected base rent $20,000 | Operating bills $7,000 | Debt payment $10,000 | Work / commission due $0 | Monthly cash after all lines $3,000 |
| Month August | Collected base rent $20,000 | Operating bills $7,000 | Debt payment $10,000 | Work / commission due $0 | Monthly cash after all lines $3,000 |
| Month September | Collected base rent $20,000 | Operating bills $7,000 | Debt payment $10,000 | Work / commission due $0 | Monthly cash after all lines $3,000 |
| Month October | Collected base rent $20,000 | Operating bills $7,000 | Debt payment $10,000 | Work / commission due $0 | Monthly cash after all lines $3,000 |
| Month November | Collected base rent $20,000 | Operating bills $7,000 | Debt payment $10,000 | Work / commission due $0 | Monthly cash after all lines $3,000 |
| Month December | Collected base rent $20,000 | Operating bills $9,000 | Debt payment $10,000 | Work / commission due $0 | Monthly cash after all lines $1,000 |
| Month Annual total | Collected base rent $180,000 | Operating bills $80,000 | Debt payment $120,000 | Work / commission due $42,000 | Monthly cash after all lines ($62,000) |
The first-quarter trough is $87,000: $45,000 operating/debt carry plus $30,000 landlord work and $12,000 commission. With $87,000 starting cash and no other flows, cash reaches zero at March end and ends December at $25,000. The $62,000 annual deficit is not another $62,000 funding use on top of the trough; it is the net result of the same monthly schedule.
The annual current-year income case is $180,000 rent less $80,000 bills, or $100,000 before debt, yielding about 0.83 coverage on $120,000 debt service. A later twelve-payment case at $240,000 rent, holding the same expense assumption for comparison, yields $160,000 and about 1.33. Neither is an approval threshold.
If delivery conditions postpone payments for April and May too, first-year rent falls another $40,000 to $140,000 under this separate stress. Keeping those months' $7,000 bills and $10,000 debt payments unchanged adds $34,000 to the cash trough, reaching $121,000. Work and commission dates remain unchanged solely for this sensitivity. Actual lease amendments or contractor timing could change the schedule.
Which lease triggers must be resolved before using the rent date?
Lease triggers must be resolved before using a commercial rent date when payment depends on landlord delivery, tenant acceptance or another documented condition, because a forecast date cannot substitute for the contractual event. Abstract the responsible party, evidence and consequence of delay, then have counsel confirm the payment obligation while the financing team checks the carrying-cash source.
Commencement checklist for the hypothetical schedule: Lease signed in December 2026; possession begins January 1, 2027; landlord work is due by March 31; rent is assumed payable April 1 after the required evidence. These are invented contract assumptions, not an actual lease or a legal interpretation applicable to another property.
- Identify the delivery condition and the document proving completion or acceptance.
- Confirm whether free rent covers base rent only, and which reimbursements remain payable.
- Locate commission and improvement payment dates, including amounts paid before reimbursement.
- Record any delay extension, tenant remedy or revised commencement date under the signed documents.
- Match the cash source to each month and preserve reserve release conditions separately.
The bank real-estate lending guidelines call for institution-specific cash-flow, debt-coverage and pre-leasing standards. They do not prescribe this worksheet's free-rent reserve or require a lender to recognize the later rent case. Ask the proposed lender which dated case and carrying funds it accepts.
How should an investor compare concession funding in two offers?
Compare concession funding by the lender’s recognized income period, reserve requirement and treatment of landlord obligations before rent commencement rather than by stabilized debt coverage alone. The investor needs to know whether the offer supplies spendable cash during the ramp and which documents must exist before any held funds are released.
Ask each lender to show first-year and stabilized income separately. A higher stabilized figure does not answer how three concession months are funded. If the lender uses a later stabilized case for sizing, obtain the actual requirement for carrying expenses until that case produces rent.
Identify whether landlord work is paid before closing, reimbursed afterward or funded through a controlled account. A reimbursement structure can require the investor to advance cash even when a reserve is funded. Put the payment date and earliest permitted release on the same calendar.
For a commencement delay, give the lender the $121,000 hypothetical trough alongside the original $87,000 case and ask whether the required reserve changes. Use the actual lease condition and work status rather than a generic additional-vacancy percentage. A construction delay can postpone both rent and a financing release milestone without changing the tenant’s contractual face rent.
The interagency appraisal guidance supports distinguishing documented lease facts from appraisal assumptions. Supply the commencement conditions rather than asking valuation to resolve an unfinished delivery milestone.
Use the DSCR calculator for the first-year collection case and stabilized case on the same assumed debt payment. Keep the monthly carrying budget visible beside them. The key decision is whether the acquisition can fund the gap, not whether a later annual ratio looks favorable.
What should you submit for commercial free-rent funding?
A commercial free-rent request should include the delivery and payment conditions alongside the monthly carrying budget, because the lender must distinguish future lease rent from cash available during the concession. Send the executed lease, amendments, completion evidence, landlord-work budget and commissions schedule with the transaction, requested debt, closing date and identified cash source.
Include the original and delayed commencement cases. Where evidence is pending, identify the party responsible and date needed; do not describe an anticipated completion certificate as delivered.
YieldStack is a commercial mortgage brokerage. Submit the lease-commencement and carrying-cash package. Every credit decision is made by the lender; YieldStack arranges the introductions and negotiates on the borrower's side, and no loan, rate, or closing is guaranteed.
The bottom line
Commercial commencement is a dated cash decision. Use the lease triggers and twelve-month calendar to reconcile rent, carrying bills, landlord work and commissions. Keep the cash trough separate from the annual result, and submit the delayed case before depending on a later stabilized income figure.