Net effective rent is the true rental rate a landlord earns over a lease after subtracting concessions such as free rent, tenant improvement allowances, and other inducements, then spreading the result evenly across the term. It converts a headline face rent into the rate that reflects what the tenant actually pays. It is a standard measure for comparing lease deals in commercial real estate.
How Is Net Effective Rent Calculated?
Net effective rent is calculated by taking the total rent a tenant pays over the full term, subtracting all concessions, and dividing by the number of periods in the lease. The basic formula per Wall Street Prep is Net Effective Rent = (Total Gross Rent minus Total Concessions) divided by Lease Term. The result is a per-period rate lower than the face rate.
Concessions include free rent months, tenant improvement allowances, and leasing commissions the landlord funds. On a simple basis, the calculation spreads only free rent across the term. On a fuller basis used in commercial deals, it nets out all landlord costs and can be run on a present-value basis to account for the time value of money.
Input | Definition |
Face rent | Stated contractual rate before any concession |
Free rent | Months at the start or within the term with no base rent |
Total gross rent | Face rent times the number of paying periods |
Total concessions | Free rent value plus TI, commissions, and other inducements |
Net effective rent | Total gross rent minus concessions, divided by lease term |
The two most common versions are the simple net effective rent, which nets only free rent, and the full net effective rent, which also nets tenant improvement allowance and leasing commissions. A present-value net effective rent discounts each period's cash flow before averaging, producing a rate below the simple version.
Why Net Effective Rent Matters
Net effective rent matters because face rent overstates what a landlord actually earns and understates what a tenant actually saves. Two leases can quote the same face rate yet deliver very different economics once free rent and allowances are netted out. Net effective rent is the only apples-to-apples number for comparing offers.
Concessions are largest when tenant demand is soft, so the gap between face and effective rent widens in weak markets. Per Wall Street Prep, an office lease at $20 per square foot face rent with three months of free rent in years two and four produces a net effective rent near $18 per square foot, a 10% discount to the headline rate. Landlords quote the high face number; the effective number is what hits the pro forma.
The quotable point for an operator: face rent is the sticker price and net effective rent is the transaction price. A landlord protecting a headline rate with heavy free rent may be earning far less than the quote implies.
Example
A landlord signs a five-year office lease at $50 per square foot per year face rent on 10,000 square feet, with six months of free rent spread over the term and no other concessions. Gross rent over five years is $50 times 10,000 times 5, or $2,500,000. Six months of free rent equals half of one year, worth $250,000.
Step | Calculation | Result |
Total gross rent | $50 x 10,000 x 5 | $2,500,000 |
Free rent concession | 6 months at $500,000/year | $250,000 |
Net total rent | $2,500,000 - $250,000 | $2,250,000 |
Net effective rent per year | $2,250,000 / 5 | $450,000 |
Net effective rent per SF | $450,000 / 10,000 | $45.00 |
The $50 per square foot face rent becomes a $45 net effective rent, a 10% discount. If the landlord also funds a $30 per square foot tenant improvement allowance, that adds $300,000 in concessions. Net total rent falls to $1,950,000, and net effective rent drops to $39 per square foot, a 22% discount to the face rate.
Variations and Edge Cases
Net effective rent is not a single number: its value depends on which concessions you include and whether you discount for time. The same lease can show three different effective rents under simple, full, and present-value methods. The table below shows how the treatment changes the result.
Method | What it nets out |
Simple net effective rent | Free rent only, averaged across the term |
Full net effective rent | Free rent plus TI allowance and leasing commissions |
Present-value net effective rent | All concessions, with each period discounted for time value |
Per-square-foot basis | Net effective rent divided by rentable area for comparison |
Escalating rent | Steps in base rent must be totaled before averaging |
The common mistake is comparing a simple net effective rent from one deal to a full net effective rent from another. Always confirm which concessions the number includes. A landlord quoting simple net effective rent looks stronger than one quoting a full or present-value figure on the same lease.
Net Effective Rent vs Face Rent
Net effective rent is often confused with face rent, and the two describe the same lease from opposite ends. Face rent, also called asking or gross rent, is the stated contractual rate before any concession. Net effective rent is what remains after free rent and allowances are netted out and spread across the term. Face rent is the quote; net effective rent is the earning.
Both appear in lease negotiations, but they serve different purposes. Face rent sets the headline and often anchors escalations and renewal options. Net effective rent measures true economics and drives the pro forma. In a soft market with heavy concessions, the gap between the two can exceed 20%, as in the example above.
Frequently Asked Questions
What is the formula for net effective rent?The formula for net effective rent is total gross rent minus total concessions, divided by the lease term. Total gross rent is the face rate times the number of paying periods, and concessions include free rent, tenant improvement allowances, and leasing commissions the landlord funds. The result is a per-period rate below the face rent.
What is the difference between net effective rent and face rent?Face rent is the stated contractual rate before any concession, while net effective rent is what the landlord actually earns after free rent and allowances are netted out and spread across the term. Face rent is the quote; net effective rent is the true economics, and in soft markets the gap can exceed 20%.
Why is net effective rent lower than face rent?Net effective rent is lower than face rent because it subtracts concessions the landlord grants, such as free rent months and tenant improvement allowances, then averages the result over the full lease term. The more concessions a landlord offers to protect a high headline rate, the wider the gap between face and net effective rent.
Related Terms
Tenant Improvement Allowance
Leasing Commissions
Market Rent
Loss to Lease
Gross Lease