Are rental landlords shooting themselves in the foot with big concessions?

When Two Trees Management chief Jed Walentas began leasing up 300 Ashland amid a slumping rental market, he eschewed the now-common reel-’em-in-with-huge-concessions gambit. Instead of handing prospective renters three months of free rent like other landlords, Walentas opted to sit tight and wait for renters willing to pay close to the full market-rate rents.

It would take significantly longer, but it would be better for both Two Trees and the renters in the end, he said.

“Filling buildings up with people that can’t really afford to be there is bad for everybody,” he told The Real Deal last week. “We don’t want to fill the building up with people who are just there for the concessions and can’t really afford to be there when their lease is up, so we’ve changed that model a little bit.”

Welcome to the shadowy world of rental concessions, where landlords are trying to undercut each other on rents by offering to pay months of free rent and absorb brokers’ fees in order to lower net-effective rents and attract tenants amid a new development supply glut. In many cases, the increasing concession levels are not made public, since landlords don’t want to upset existing tenants in their buildings by signing on new renters at much lower rates. They’re also wary of spooking the banks, who often provide refinancing terms based on gross rents.

Now, sources say the incentives in the Manhattan and Brooklyn rental markets have become so dramatic in some instances that they’ve rendered market-rate rents meaningless and endangered renters who sign on for the concessions but can’t actually afford to pay the rents in the long run.

“Tenants are applying these free rents and it plays into a psychology of affordability,” said Town Residential CEO Andrew Heiberger. “They can justify that higher price in their mind.”

No sign of a concession slowdown

Major rental concessions have been prevalent in the market for more than a year now, sources said. As of March, there were 2,200 active listings in Manhattan offering either free rent or brokerage fees paid by the landlord, according to a report by Town. Approximately 64 percent of those incentives were on units priced between $2,500 and $5,000 a month.

Citi Habitats reported that 35 percent of new leases it brokered in March included some form of concession, up from 31 percent in February. The month-over-month increase was particularly noteworthy, since incentives typically become less prevalent as spring approaches, the firm said.

Several major landlords continue to offer large incentives at their buildings. The Durst Organization is still offering two to three months of free rent and covering broker fees at Via 57 West, the 709-unit Hell’s Kitchen rental it launched last year. In some cases, sources said the company had offered to pay the bulk of broker commissions plus three months of rent on three and four-bedroom units.

At Sky, the Moinian Group’s 1,175-unit rental complex at 605 West 42nd Street, the developer has been offering two or three months free rent on new leases, sources said. Celebrities who live there have also been given a free ride, including the likes of Carmelo Anthony and former “Million Dollar Listing New York” cast member Luis Ortiz, sources said.

Neither a spokesperson for Durst nor the brokers for Sky immediately responded to requests for comment.

“About a year and a half ago, I turned on two months free in some circumstances, because I didn’t like the traffic that was coming through my buildings,” said Dave Maundrell of Citi Habitats, whose firm is marketing projects such as the American Copper Buildings on First Avenue and Myrtle & Steuben in Clinton Hill.

New Financial District buildings such as 180 Water Street and 70 Pine Street have also been offering concessions, such as two to three months free on a two-year lease. Meanwhile, older buildings with existing tenants such as Forest City Ratner’s 8 Spruce Street have struggled to match those prices.

“They’re in a quandary,” Heiberger said. “If they offer two to three months rent to new tenants, the other people will find out and say, ‘I want that same rate if I’m going to stay.’”

Stop the spread?

“When you go beyond two months free, the spread between net effective and gross rent is pretty substantial,” Maundrell said. “Some people don’t read the fine print and have difficulty budgeting for that on a monthly basis.”

Heiberger agreed: “Once you go over two months free, you may even start meeting resistance up front, where you scare away tenants who can read through the lines,” he said. “They might say, ‘I don’t want to be in an insecure position two years from now, where the landlord expects me to pay the face value of the rent plus a potential 2 to 5 percent rent hike. I don’t expect my financial position to be much better than it is currently in two years time.”

There are always renters who are willing to jump from one new building to another every two years in search of the latest concession package, but many don’t like that instability.

These days, Maundrell said he offers developer clients a menu of potential options when it comes to leasing up a new building, from leasing up at gangbusters pace but giving away the farm, to going slow and steady for greater rents overall. Clients who bought their land in the last few years typically want to go the latter route, since they need to show investors and potential lenders that they’re getting their projected numbers, he said.

They may also need to take a full building to the bank, so they can refinance sooner rather than later.

Banks are wising up

Lenders are becoming more savvy about the concession game and the differential between net effective and gross rents. They’re also factoring in other incentives, such as free gym memberships and other perks, source said.

“I’ve heard of banks sending people out to leasing offices to shop the concessions being offered,” said one broker who spoke on the condition of anonymity. “They don’t want to be taken for a ride.”

In Walentas’ case, he said he’s seen the benefits of going the slow and steady route already, with a project Two Trees completed a few years ago at 60 Water Street in Dumbo. Tenants are renewing their leases more often, rather than jumping ship upon expiration, he said.

As for 300 Ashland in Fort Greene, it’s almost 45 percent leased, Walentas said. It launched leasing in July.