What is a lease inducement or lease incentive?
A lease incentive, which is also commonly referred to as a lease inducement, is when the landlord (lessor) offers a deal to the lessee to sign the lease. Common examples include free rent for 3, 6, or 12 months, or you could see reduced rent for the first year if the lease term is multiple years. The key thing to understand is that this results in a difference between cash rent and rent expense in the financial statements.
To calculate monthly rent expense, you must calculate the total cash paid for rent over the entire lease life and then divide by the number of months (i.e. 4 years = 48 months). For example, if you are charged $3,000 per month in Year 1, $4,500 in year 2, and then $6,000 in years 3 and 4, your monthly rent expense under U.S. GAAP would end up being $4,875.
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