A deferral collects more if the tenant survives the repayment year; the arithmetic is whether the extra burden makes it fail.
Compare the two on expected present value, not on the cash they promise: a deferral collects more rent if the tenant survives the repayment, but it also makes the tenant more likely to fail. On an illustrative tenant paying 400,000 a year that asks for two quarters of help, deferring the rent and recovering it over a year is worth 40,655 more to the landlord than a 50 per cent concession, even though the deferral raises the tenant's 18-month failure probability from 18.4 to 24.9 per cent. The deferral stops winning once that probability passes about 35.0 per cent.
Worked in full in The Real Estate Asset Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
When a tenant asks for rent relief, the asset manager usually has two levers. Defer the rent and have it repaid later, which keeps the headline rent and the full amount owed. Or waive part of it, which costs money for certain but leaves the tenant with less to find in the following quarters. The intuition that a deferral always beats a write-off ignores that repayments land precisely when a struggling tenant is weakest.
| Input | Value |
|---|---|
| Rent, a year, paid quarterly in advance | 400,000 |
| Relief period | 2 quarters |
| Deferral: rent repaid over | 4 quarters |
| Concession: share of rent waived in the relief period | 50% |
| Probability of failure each quarter, relief period (both options) | 4.0% |
| Same, during repayment: deferral / concession | 5.0% / 3.0% |
| Same, afterwards (both) | 1.0% |
| If the tenant fails: void before re-letting | 3 quarters |
| Re-letting fees and incentive | 80,000 |
| Discount rate, a year | 8.0% |
| Horizon | 40 quarters |
The deferral asks the tenant for nothing for two quarters, then 150,000 a quarter for four: the 100,000 rent plus 50,000 of arrears. The concession asks for 50,000 a quarter during the relief period, waives 100,000 in total, then goes back to 100,000. The higher failure rate under the deferral is the whole question: the tenant's burden is 50 per cent higher for a year.
For each quarter t: probability the tenant is still trading and pays = previous probability × (1 − failure rate for that quarter).
At failure the landlord loses every remaining payment, including any arrears, and re-lets: three quarters of void, 80,000 of costs, then the same rent to the horizon. Valued at the start of quarter 3 that re-letting is worth 2,347,268, which is 374,319 less than the same rent from a tenant who stays.
EPV = Σ [P(pays in t) × rent due in t + P(fails in t) × re-letting value at t] ÷ (1 + 1.94%)t−1, with 1.94 per cent the quarterly equivalent of 8.0 per cent a year.
| Quarter | Deferral: due | Still paying | Concession: due | Still paying |
|---|---|---|---|---|
| 1 | 0 | 96.0% | 50,000 | 96.0% |
| 2 | 0 | 92.2% | 50,000 | 92.2% |
| 3 | 150,000 | 87.6% | 100,000 | 89.4% |
| 4 | 150,000 | 83.2% | 100,000 | 86.7% |
| 5 | 150,000 | 79.0% | 100,000 | 84.1% |
| 6 | 150,000 | 75.1% | 100,000 | 81.6% |
| 7 | 100,000 | 74.3% | 100,000 | 80.8% |
Expected present value over the 40 quarters is 2,639,661 for the deferral and 2,599,006 for the concession. The deferral is worth 40,655 more, about 10.2 per cent of a year's rent. If the tenant were certain to pay, the gap would be the 87,971 of extra present value the deferral collects over six quarters. Failure risk, and the higher risk the deferral creates, eats more than half of it: by quarter 6, 24.9 per cent of deferral tenants have failed against 18.4 per cent of concession tenants, and every failure costs a void, fees and the arrears.
The number to argue about. The answer rests on the failure rate under the deferral. Solve for the quarterly rate at which both options are worth the same: 8.36 per cent during the repayment year, a cumulative failure probability of 35.0 per cent by quarter 6. If the tenant's own cash flow forecast cannot show the extra 50,000 a quarter, assume you are above it.
| Failure rate a quarter under deferral, repayment year | Failed by quarter 6 | Deferral advantage |
|---|---|---|
| 3.0% | 18.4% | 66,727 |
| 5.0% | 24.9% | 40,655 |
| 7.0% | 31.1% | 15,985 |
| 9.0% | 36.8% | −7,335 |
The depth of the concession matters as much. Holding the failure rates as assumed, a full two quarters rent-free is worth 133,857 less than the deferral and a 75 per cent concession 87,256 less, but a 25 per cent concession is worth 5,946 more than the deferral: the landlord collects 75,000 a quarter straight away and keeps the tenant stronger for the year after.
A deferral leaves the passing rent and the headline evidence intact, which protects the valuation and comparable evidence for the rest of the estate. A concession is usually documented as a side letter or a temporary variation; if it is drafted as a permanent rent reduction it changes the passing rent and the reversion, and costs far more than the 100,000 waived. Whichever is chosen, tie it to something: removal of a break option, a guarantee or a longer term, which is the subject of how much rent-free to give for a lease regear.
Comparing 200,000 of deferred rent with 100,000 of concession as if the deferral were certain to be repaid. That treats the tenant who asked for help as a risk-free borrower. Arrears from a weak tenant are a loan to that tenant, and they rank no better than the rent did.
A deferral is the better deal only while the tenant is likely to survive the repayment year; here that is true up to a cumulative failure probability of about 35.0 per cent. Size the repayment to what the tenant's cash flow can carry, and consider a smaller concession if it does much for survival. For collection reporting during the relief period, see how to calculate a rent collection rate; the vacancy and holding-cost workbooks are on the free companion page for this book.
Whichever has the higher expected present value once the tenant's chance of failing is included. In the illustrative case a deferral repaid over four quarters beats a 50 per cent concession by 40,655, but a 25 per cent concession beats the deferral by 5,946, because the landlord collects 75,000 a quarter straight away and the tenant carries less into the following year.
It becomes an unsecured arrear, usually recovered in part at best, and the landlord also faces a void and re-letting costs. In the example a failure in quarter 3 leaves the landlord with a re-letting worth 374,319 less than the same rent from a tenant who stays, on top of any deferred rent never repaid.
A temporary concession documented in a side letter normally leaves the passing rent and headline evidence intact, so the valuation impact is limited to the cash waived, 100,000 in the illustrative case. A permanent rent reduction is different: it lowers the passing rent and the reversion and costs far more than the relief itself.
This article is one calculation from The Real Estate Asset Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 1614 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.