Net effective rent calculator

The formula above is the simple version. It adds up every concession and spreads the total evenly across the term. It treats a dollar paid at signing and a dollar of rent received in year seven as the same amount. They are not, and the discounted version corrects for it.

Take a 10,000 SF space quoted at $30 per SF per year for 7 years, with 4 months of free rent at the start, a $25 per SF tenant improvement allowance, and a 5% commission on the rent actually payable.

The simple answer is $23.57 per SF per year, 21% below the $30 face rate. Now discount the cash flows. The TI and commission are paid up front, while the rent arrives month by month over seven years. At an 8% annual discount rate, the net cash flows are equivalent to a level rent of $21.61 per SF per year.

The discounted figure is $1.96 lower, 8.3% below the simple one, because the concessions are paid early and the rent is collected late. The gap widens with a higher discount rate, a longer term, or heavier up-front concessions. The simple version is fine for a quick comparison of similar deals. Use the discounted version when the deals differ in when the concessions are paid or when the term is long. The rate to use is the landlord's cost of capital or required return on the property.

The point of the measure is to compare deals that look different on the surface. A tenant is choosing between two 7-year offers for 10,000 SF. Commission is left out of both.

Offer A has the higher face rent by $4 per SF, and it is the cheaper deal. Its net effective rent is $2.57 per SF per year lower on the simple basis, which is $25,714 a year, or $180,000 over the term. It also gives the tenant $300,000 more of TI. On a discounted basis the gap is $4.54 per SF.

One check before you act on it: a large TI allowance only helps if you need the work. If the tenant would not have spent the money on build-out anyway, a concession paid in improvements is worth less than a rent discount. Compare what each offer gives you against what you need.

Most commercial leases raise the rent annually. Escalations shift rent toward the later years, so a lower starting rate with escalations can beat a higher flat rate.

With 3% bumps over 7 years, the factor is ((1.03⁷ − 1) ÷ (0.03 × 7)) = 1.0946. A $28 starting rent averages $28 × 1.0946 = $30.65 over the term, higher than a flat $30. A $30 start averages $32.84. When you compare a flat offer with an escalating one, compare the averages, then subtract concessions. If you enter a single rent per SF into the calculator, use the average rent for the term, not the first-year rate.

Where free rent falls in the term matters for the discounted figure. Four months of free rent on the same $30 lease, with no other concessions, gives a simple net effective rent of $28.57 whenever it is taken. On a discounted basis it is $28.16 if the free months come at the start and $28.92 if they come at the end. Free rent up front costs the landlord more in present-value terms, because the money is given up sooner.

TI works the same way. The landlord pays the $25 per SF at signing and recovers it through rent over seven years. Spread evenly, that is $25 ÷ 7 = $3.57 per SF per year. Treated as a loan repaid monthly at 8%, the annual cost is $4.68 per SF. The extra $1.11 is the interest on the money the landlord advances. That is the reason a landlord will often trade TI for a longer term: a longer lease gives more time to recover the advance.

Landlords use net effective rent to underwrite a lease and to compare it with the return they need. They also protect the face rate: a building's stated rent shows up in comparables and appraisals, so concessions are often used to keep that number high. That is why the same market can quote a face rent that looks strong and a net effective rent that looks weak.

Tenants use it to compare offers, and to see how much room exists to negotiate. A landlord at the limit on face rent may still have room on TI, free rent or term. Ask for the landlord's total concession package, including what it pays in commission, since that cost sits in the same budget. To see the full cost of occupancy beyond base rent, run the NNN lease calculator.

Apartment landlords use a simpler form, since there is usually no tenant improvement allowance and the concession is months of free rent. The formula is monthly rent × (lease months − free months) ÷ lease months.

On a $4,000 unit, one free month on a 12-month lease gives $4,000 × 11 ÷ 12 = $3,667 a month. Two free months on the same lease give $3,333, a discount of 16.7%. The same two free months on a 24-month lease give $4,000 × 22 ÷ 24 = $3,667, only 8.3% below the quoted rent. That is why landlords who offer concessions often ask for a longer lease: spreading the same free rent over more months keeps the effective rent higher.

• Comparing face rents. In the two-offer example the higher face rent was the cheaper deal.
• Leaving out commission. It is a real concession for the landlord. In the first example, it took $1.43 per SF per year off the result.
• Charging commission on rent that is never paid. Calculate it on the rent net of free months, as the example does.
• Ignoring escalations. A first-year rent understates what a tenant pays in the later years.
• Using the simple version for very different deals. When the timing of concessions differs, the discounted figure gives the fairer comparison.
• Treating net effective rent as the tenant’s cash cost. It averages concessions over the term. A tenant with free rent still faces higher payments in later years, and the TI is a benefit only if it is used.