Yes. A rent-free period, cash contribution, fit-out payment or stepped-rent arrangement can make a seller’s recent profit and loss statement—or its cash rent history—a poor guide to the buyer’s future occupancy cost. The incentive does not automatically make the earnings wrong, but it can make them easy to misread.

A buyer should separate three views: cash paid in each historical month, the expense or lease amounts recorded in the accounts, and the occupancy cost expected after settlement. Reconcile all three to the lease and incentive deeds before deciding what earnings are maintainable.

Why the seller’s profit can look stronger than the buyer’s future position

Lease incentives take different forms. The ATO’s income-tax ruling identifies examples including cash, rent-free or discounted periods, free fit-outs and removal-cost payments. A stepped lease can also defer part of the cash burden by starting at a lower rent and increasing later.

These arrangements can distort comparison in several ways:

  • a rent-free period lowers bank payments during the seller’s review period but may have expired by settlement;
  • a landlord contribution may appear as other income, reduce fit-out cost or sit elsewhere in the accounts, depending on the accounting basis and facts;
  • stepped rent can make an early trading year look cheaper than the buyer’s first full year;
  • outgoings, promotion levies or other occupancy charges may continue during a rent-free period; and
  • a remaining incentive may be personal to the seller, conditional on continued compliance or recoverable after assignment, default or early termination.

Do not assume that “face rent less incentive” is the same as cash rent, reported expense or maintainable cost.

Build a lease cash-flow bridge

Request the executed lease, disclosure statement where applicable, incentive deed, variations, side letters and assignment documents. Then build a month-by-month schedule from lease commencement to at least the end of the buyer’s forecast period.

For each month, record:

  • face rent and the operative rent after any abatement;
  • fixed or market-review increases and each stepped-rent date;
  • outgoings and other recurring premises charges;
  • rent-free, rent-reduced or deferred amounts;
  • cash and fit-out contributions: entitlement, invoice, receipt and use;
  • GST treatment used in the source records, kept on a consistent basis;
  • general-ledger entries, landlord statements and bank payments; and
  • any repayment, clawback or loss-of-benefit condition.

Investigate every difference. It may reveal timing, an accrual, a credit not yet received, a disputed amount, a related-party payment or an incomplete record. The Australian Government’s ownership-change guidance notes that leases can have different transfer conditions; the incentive documents therefore matter alongside the lease itself.

Keep cash, accounting and maintainable earnings separate

The accounting presentation depends on which standards and policies apply to the seller. For accounts applying AASB 16, a lessee generally recognises a right-of-use asset and lease liability; lease incentives affect their measurement, with depreciation and interest then recognised over time. Management accounts or other reporting bases may present the same commercial arrangement differently.

That means an EBITDA figure can become misleading if it is compared with another business—or adjusted for a purchase price—without first identifying how lease costs were treated. Ask the seller’s accountant for the relevant journal entries, reconciliations and accounting policy, but do not substitute an accounting label for the underlying cash schedule.

For acquisition analysis, show at least these views:

View Question it answers Common error
Historical cash What actually left the seller’s bank? Treating temporary rent relief as recurring savings
Reported accounts How did the seller recognise the lease and incentive? Mixing rent expense with AASB 16 depreciation and interest
Forward contractual cash What will the buyer pay under the transferred or replacement lease? Ignoring steps, reviews, outgoings or expired relief
Maintainable earnings case What occupancy cost is appropriate for comparing sustainable performance? Using whichever view produces the highest profit

A simple normalisation test

Hypothetical example: a seller paid $60,000 cash rent during a year containing six rent-free months. The annualised face rent was $120,000, and the lease steps to $130,000 shortly after the proposed settlement. Outgoings continued throughout.

It would be unsafe to capitalise earnings using the $60,000 cash figure as though it recurs. But mechanically replacing it with $130,000 is also incomplete if the buyer validly receives remaining relief or if the accounts already contain a lease-related charge.

Model three cases instead:

  1. Transferred benefit: landlord consent is obtained and every remaining incentive continues for the buyer.
  2. No transferred benefit: future cash follows the lease without seller-specific relief.
  3. Downside: the assignment triggers repayment, extra security, revised terms or another documented cost.

Show the earnings and cash consequences separately. The maintainable adjustment should be traceable, avoid double counting and state whether it is based on contractual cash, an effective lease cost or another adviser-approved measure.

What must survive assignment

Ask a leasing lawyer to confirm who receives any unpaid contribution, whether the incentive deed can be assigned, which landlord consents are required, and whether a business asset sale or change of control triggers different provisions. Also test early-termination, default, demolition, relocation and make-good consequences against the incentive’s repayment wording.

Retail leasing law varies by state and territory. For example, the Victorian Small Business Commission describes specific disclosure and consent steps for Victorian retail lease assignments. Obtain advice for the premises and transaction rather than applying one jurisdiction’s process nationally.

Tax is a separate workstream. The ATO maintains distinct guidance on the income-tax and GST treatment of commercial lease inducements. Ask a tax adviser to assess the actual documents and transaction; do not infer a tax outcome from the cash or accounting presentation.

Sources

Disclaimer

This article provides general information only. It does not constitute legal, tax, accounting, financial, credit, valuation or other professional advice. Circumstances differ. Obtain advice from appropriately qualified advisers before acting or entering a transaction.