Summary of What is Rent free period, Meaning, Definition
- How do you account for rent free periods?
- What is a free rent period?
- How to account for rent abatements?
- What is the 90% rule in leasing?
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AI Overview
AI Overview
Rent-free periods are accounted for by
spreading the total cash payments over the entire lease term using the straight-line method, rather than recognizing expense only when cash is paid. A “deferred rent” liability or accrued lease payment asset is recorded to reflect the difference between recognized expense and cash paid.
Key Accounting Principles (ASC 842/IFRS 16)
Total Lease Value: Calculate the total rent payable over the full lease term, including any periods where no cash is exchanged.
Straight-Line Method: Divide the total cost by the total number of periods in the lease to determine the monthly expense.
Recording Expenses: Recognize a constant, monthly rental expense even during the rent-free period.
Balance Sheet Impact: In early, rent-free months, record a “deferred rent” liability, as the expense recognized exceeds the cash paid.
Rent Incentives: Free rent is treated as a lease incentive (or reduction/abatement), reducing the overall cost per month.
Example
A 12-month lease with the first month free at
$
1
,
000
/
month
$
1
,
0
0
0
/
m
o
n
t
h
:
Total Payments:
11
months
×
$
1
,
000
=
$
11
,
000
1
1
m
o
n
t
h
s
×
$
1
,
0
0
0
=
$
1
1
,
0
0
0
.
Monthly Expense:
$
11
,
000
÷
12
months
=
$
917
/
month
$
1
1
,
0
0
0
÷
1
2
m
o
n
t
h
s
=
$
9
1
7
/
m
o
n
t
h
.
Entry (Month 1): Debit Rent Expense
$
917
$
9
1
7
, Credit Deferred Rent/Liability
$
917
$
9
1
7
.
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A commonly accepted timeframe, typically spanning a few weeks or months, in which a tenant is permitted to utilize the designated property without the obligation of rent payment. This is known as a rent-free period or a rent holiday. It provides a financial break for the lessee while they set up their business or make necessary renovations to the space.