Net Effective Rent

Net effective rent strips away the noise of lease concessions to reveal the true economic rent a tenant pays over the life of the lease. In competitive markets, landlords often offer inducements -- free rent periods, above-market TI allowances, moving allowances, or early termination options -- to attract tenants. These concessions reduce the landlord's actual income below the stated face rent. Net effective rent amortizes these costs over the lease term to calculate the true average rent.

For example, a 5-year lease at $30 PSF with 6 months of free rent has a face rent of $30 PSF but a net effective rent of approximately $27 PSF (54 months of rent spread over 60 months). If the landlord also provides $15 PSF in TI above market standard, that cost further reduces the net effective rent. Understanding net effective rent is essential for accurate property valuation because it reflects the actual income the property generates, not the headline number in the lease.

Investors and analysts should always convert face rents to net effective rents when comparing leases, properties, or markets. A property advertising $35 PSF rents with 12 months of free rent and $50 PSF in TIs is not truly comparable to a property at $30 PSF with no concessions. Market research firms increasingly report net effective rents alongside asking and face rents, but investors should verify the methodology and calculate their own net effective figures when conducting detailed underwriting.