The Real Deal

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Lowering the rent, for real

80 DeKalb in Downtown Brooklyn

They're giving it away. Hundreds of buildings these days tout one, two and sometimes three months of free rent on new leases. But most of the time, the "base rent" stays the same, even as rental agents talk about "net effective" rents -- the apartment's cost once the free rent is amortized over the life of the lease. It's sort of like a no-money-down offer.

Brokers say that despite their popularity, net effective rents are something of a gamble for landlords: Lower the initial sticker prices, fill apartments and pray that the market rebounds and tenants stay after their lease expires.

But there are signs that lenders may be allowing landlords to lower the base rent instead of relying on concessions, thus recognizing that market-rate rent levels have lowered.

"What's started happening very recently is that the landlords who were dropping rents through lease riders have finally begun decreasing base rents," said Kevin Ellerton, CEO of Blackstone Properties, a brokerage that focuses on rentals in the Financial District and Battery Park City. "I take that as a sign that banks are starting to wake up to market reality."

Many landlords have joined the net effective bandwagon because it's a way to meet requirements from their lenders. That's because when a bank lends money to someone to buy a building, it requires that they maintain a certain base rent, Ellerton explained.

"Landlords report how much they're charging for an apartment by showing lenders the leases. So what ends up happening is that landlords are not able to drop the rent beyond a certain point," he said. "What they can do, though, is add riders to the lease to drop rents to market value by including free months as an incentive."

Traditionally, lenders don't weigh in on rent concessions, said Patrick Hanlon, a principal with capital advisory firm Ackman Ziff. But in today's cautious financing environment, lenders "are weighing in on everything," including net effective rents, he said.

While net effective rents might be losing favor with some lenders, they remain popular as a marketing tool.

Clifford Finn, the managing director of new development marketing at Citi Habitats, noted that net effective rents are particularly popular in new development rentals, such as Silverstein Properties' Silver Towers at 42nd Street and 11th Avenue and Forest City Ratner's 80 DeKalb in Downtown Brooklyn.

Developments like Silver Towers and 80 DeKalb received tax abatements through the 421-a program, which means units there are rent stabilized. Other new development rentals currently on the market, such as Downtown Brooklyn's Avalon Fort Greene and the Clarett Group's Brooklyner, are also 421-a recipients and therefore stabilized.

"Owners of rent-stabilized buildings are especially inclined to give free rent, because they can't really control how much rent is increased after a lease is signed" and therefore want to lock in the highest possible base rent, said Finn.

Last month, Avalon Fort Greene's Web site touted three months of free rent, with base rents on studios starting at $1,962.

At the same time, other rental brokers say almost every landlord is behooved by offering free rent these days, whether the building is stabilized or not.

"Two years ago, there were maybe only a handful of buildings in all of Manhattan that offered a month or two of free rent," said Dan Ivanov, an agent with Anchor Realty who specializes in Manhattan rentals. "Now they have tons of available apartments, and they need to find a way to fill them up."

And it has gotten to the point where many renters won't even consider apartments that don't come with a month or two of free rent.

"When I advertise apartments, if I don't say that they come with free rent or other incentives like a free gym membership, I don't get any calls," said Ivanov.

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