What is effective rent in a commercial lease?

Effective rent is the average rent a lease really produces over its full term after concessions are spread across every month, including the free ones. Face rent is the rate written in the lease. Effective rent takes the total rent actually collected over the term, subtracts landlord concessions such as the tenant improvement (TI) allowance, and divides by the full term. In the worked example on this page, a 5,000 SF space at a $24.00/SF face rent with 3% annual bumps totals $637,096 over 5 years; 3 months free ($30,000) and $100,000 of TI bring the net effective total to $507,096, an average of $20.28/SF per year against a $25.48/SF face average.

How do you calculate net effective rent?

Net effective rent = (total rent collected over the term minus TI and other landlord cash concessions) divided by the term, then divided by square feet. Worked example, made-up numbers: scheduled rent over 5 years is $120,000 + $123,600 + $127,308 + $131,127 + $135,061 = $637,096. Three free months at the starting rent are worth $30,000, so the landlord collects $607,096. Subtract the $100,000 TI allowance ($20/SF on 5,000 SF) and the net effective total is $507,096. Divided by 5 years and 5,000 SF, that is $20.28/SF per year. The same lease quoted on face rent averages $25.48/SF. This page uses the straight-line average, the convention most Georgia brokers quote first; a present-value version discounts each year and produces a slightly lower figure.

Why do landlords give free rent and TI instead of lowering the face rent?

Because the face rent is what the building is valued and lent on. A rent roll at $24.00/SF supports a higher appraised value and loan than the same space written at $20.28/SF, even when the economics to the tenant are identical after concessions. Concessions also expire: free months end and TI is paid once, while a lower face rent compounds through every escalation and renewal negotiation for years. That is why two leases with the same face rent can be very different deals, and why anyone buying or lending on a building recalculates effective rents from the actual lease files instead of reading the rent roll at face value.

What should a tenant compare when two spaces quote different face rents?

Compare net effective rent per SF on the same term, then compare what the average hides. A longer term spreads the same free rent and TI over more months, so a 7-year quote can show a lower effective rent than a 5-year quote at a higher face rent. Also check: whether free rent is base-rent-only or also abates NNN pass-throughs; whether TI is paid as a lump sum, in draws, or only against invoices, and what happens to unused TI; the escalation rate, because 3% bumps quietly raise the later years; and any leasing commission the landlord recovers. Run both quotes through the same formula on this page before you negotiate anything else.

Tiền thuê hiệu dụng (effective rent) là gì, người thuê và chủ doanh nghiệp người Việt cần lưu ý gì?

Effective rent là tiền thuê trung bình thật sự của một hợp đồng sau khi trải đều mọi ưu đãi — tháng miễn phí và tiền TI — trên toàn bộ kỳ hạn, kể cả những tháng không trả tiền. Face rent là mức ghi trong hợp đồng. Ví dụ trên trang này (số liệu giả định): mặt bằng 5.000 SF ở Gwinnett, face rent $24,00/SF/năm, tăng 3% mỗi năm, kỳ hạn 5 năm, tổng tiền thuê theo lịch là $637.096. Ba tháng miễn phí trị giá $30.000 và TI $20/SF = $100.000 làm tổng hiệu dụng ròng còn $507.096, tức trung bình $20,28/SF/năm, trong khi face rent trung bình là $25,48/SF. Ba lưu ý: (1) chủ nhà thích cho tháng miễn phí và TI thay vì giảm face rent vì face rent quyết định giá trị thẩm định và khoản vay của tòa nhà; (2) kỳ hạn càng dài, cùng một ưu đãi trải ra càng mỏng, nên đừng so effective rent của hợp đồng 5 năm với 7 năm; (3) phải hỏi rõ tháng miễn phí có miễn cả phần NNN hay không, và TI trả một lần hay theo hóa đơn. Đây là thông tin giáo dục chung, không phải tư vấn tài chính hay pháp lý.

CRE 101 · deweyluong.realtor

Effective Rent Explained: Face Rent vs the Rent a Georgia Lease Really Pays

Two spaces can both quote $24 a foot and be $5 a foot apart in reality. The difference is concessions: free months and TI dollars that never appear in the headline rate. This page defines face rent, gross effective rent, and net effective rent, and works one 5-year lease all the way from the quoted rate to the $20.28/SF the deal actually produces. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

Túy “Dewey” Luong, CCIM, Founding Broker, SERHANT. Atlanta

The worked example uses made-up, rounded numbers to teach the mechanics. This page is general education, not financial or legal advice.

Three rents, one lease

Face rent: the rate written in the lease and printed on the rent roll — $24.00/SF in the example. It is the number buildings are marketed, appraised, and lent on.
Gross effective rent: total rent actually collected over the term, after free rent, divided by the full term. It answers: what does the tenant really pay per year on average?
Net effective rent: gross effective rent with the landlord's cash concessions — the TI allowance and any moving or takeover money — also subtracted. It answers: what does the landlord really keep per year on average?
Why buyers and lenders care: a rent roll read at face value overstates income whenever leases carry concessions. Underwriters rebuild effective rents lease by lease from the actual files, the same way they rebuild OpEx before pricing NOI.

Worked example. The numbers below are made up and rounded to teach the mechanics. This is not a real property.

The space: 5,000 SF in Gwinnett. Face rent $24.00/SF/yr, 3% annual escalations, 5-year term.
Scheduled rent: Year 1 $120,000; Year 2 $123,600; Year 3 $127,308; Year 4 $131,127; Year 5 $135,061. Total scheduled: $637,096. Face average: $637,096 ÷ 5 ÷ 5,000 SF = $25.48/SF/yr.
Free rent: 3 months abated at the start = 3 × $10,000 = $30,000 never collected. Total collected: $637,096 − $30,000 = $607,096. Gross effective rent: $607,096 ÷ 5 ÷ 5,000 = $24.28/SF/yr.
TI allowance: $20/SF × 5,000 SF = $100,000 of landlord cash out at signing.
Net effective total: $607,096 − $100,000 = $507,096. Net effective rent: $507,096 ÷ 5 ÷ 5,000 = $20.28/SF/yr — $5.20/SF under the face average, on the same lease.
Read it both ways: the tenant comparing this quote against a $22/SF space with no concessions is actually looking at the cheaper deal here; the landlord quoting it keeps a $24 face rate on the roll for valuation and lending.

Why landlords prefer concessions to a lower face rent

Valuation: buildings trade on income. A roll full of $24 leases appraises higher than the same roll at $20.28, even when collections are identical — the concession is invisible on the roll, the rate cut is not.
Lending: lenders underwrite the roll too. A lower face rate can cut the loan; a concession package usually does not cut it the same way.
Concessions expire, rate cuts compound: free months end in month 4 and TI is paid once. A $2/SF rate cut, by contrast, is re-bumped by every escalation and becomes the starting point of the renewal negotiation.
The tenant's mirror image: concessions are worth the most on short terms and the least on long ones, because the same dollars are divided by more months. Always compare quotes on the same term.

Four effective-rent traps

Comparing different terms: $100,000 of concessions is $3.33/SF/yr on a 5-year deal and $2.38/SF/yr on a 7-year deal. A longer quote is not a better quote until both are run on one term.
Free rent that is not free: many abatements waive base rent only; the tenant still pays taxes, insurance, and CAM from day one. Ask what exactly is abated.
TI that never arrives: TI paid only against paid invoices, with a deadline and a holdback, is worth less than TI paid at signing — and unused TI is usually forfeited, not credited to rent.
Ignoring escalations: a flat $22 quote and a $21 quote bumping 3% cross over during the term. Average both over the full term before deciding; the year-1 rate is the most expensive number to shop on.

Cho nhà đầu tư người Việt

Effective rent (tiền thuê hiệu dụng) là tiền thuê trung bình thật sự của một hợp đồng sau khi trải đều mọi ưu đãi — tháng miễn phí và tiền TI — trên toàn bộ kỳ hạn. Trong ví dụ trên trang này (số liệu giả định): mặt bằng 5.000 SF ở Gwinnett, face rent $24,00/SF/năm tăng 3% mỗi năm trong 5 năm, tổng tiền thuê theo lịch $637.096 (trung bình $25,48/SF). Ba tháng miễn phí trị giá $30.000 và TI $100.000 đưa tổng hiệu dụng ròng xuống $507.096, tức $20,28/SF/năm. Ba lưu ý: chủ nhà thích cho ưu đãi thay vì giảm face rent vì face rent quyết định giá trị thẩm định và khoản vay; kỳ hạn càng dài, cùng một ưu đãi càng mỏng, nên chỉ so sánh các báo giá trên cùng một kỳ hạn; và phải hỏi rõ tháng miễn phí có bao gồm phần NNN hay không, TI trả một lần hay theo hóa đơn. Đây là thông tin giáo dục chung, không phải tư vấn tài chính hay pháp lý.

Frequently asked questions

What is effective rent in a commercial lease?: Effective rent is the average rent a lease really produces over its full term after concessions are spread across every month, including the free ones. Face rent is the rate written in the lease. Effective rent takes the total rent actually collected over the term, subtracts landlord concessions such as the tenant improvement (TI) allowance, and divides by the full term. In the worked example on this page, a 5,000 SF space at a $24.00/SF face rent with 3% annual bumps totals $637,096 over 5 years; 3 months free ($30,000) and $100,000 of TI bring the net effective total to $507,096, an average of $20.28/SF per year against a $25.48/SF face average.
How do you calculate net effective rent?: Net effective rent = (total rent collected over the term minus TI and other landlord cash concessions) divided by the term, then divided by square feet. Worked example, made-up numbers: scheduled rent over 5 years is $120,000 + $123,600 + $127,308 + $131,127 + $135,061 = $637,096. Three free months at the starting rent are worth $30,000, so the landlord collects $607,096. Subtract the $100,000 TI allowance ($20/SF on 5,000 SF) and the net effective total is $507,096. Divided by 5 years and 5,000 SF, that is $20.28/SF per year. The same lease quoted on face rent averages $25.48/SF. This page uses the straight-line average, the convention most Georgia brokers quote first; a present-value version discounts each year and produces a slightly lower figure.
Why do landlords give free rent and TI instead of lowering the face rent?: Because the face rent is what the building is valued and lent on. A rent roll at $24.00/SF supports a higher appraised value and loan than the same space written at $20.28/SF, even when the economics to the tenant are identical after concessions. Concessions also expire: free months end and TI is paid once, while a lower face rent compounds through every escalation and renewal negotiation for years. That is why two leases with the same face rent can be very different deals, and why anyone buying or lending on a building recalculates effective rents from the actual lease files instead of reading the rent roll at face value.
What should a tenant compare when two spaces quote different face rents?: Compare net effective rent per SF on the same term, then compare what the average hides. A longer term spreads the same free rent and TI over more months, so a 7-year quote can show a lower effective rent than a 5-year quote at a higher face rent. Also check: whether free rent is base-rent-only or also abates NNN pass-throughs; whether TI is paid as a lump sum, in draws, or only against invoices, and what happens to unused TI; the escalation rate, because 3% bumps quietly raise the later years; and any leasing commission the landlord recovers. Run both quotes through the same formula on this page before you negotiate anything else.
Tiền thuê hiệu dụng (effective rent) là gì, người thuê và chủ doanh nghiệp người Việt cần lưu ý gì?: Effective rent là tiền thuê trung bình thật sự của một hợp đồng sau khi trải đều mọi ưu đãi — tháng miễn phí và tiền TI — trên toàn bộ kỳ hạn, kể cả những tháng không trả tiền. Face rent là mức ghi trong hợp đồng. Ví dụ trên trang này (số liệu giả định): mặt bằng 5.000 SF ở Gwinnett, face rent $24,00/SF/năm, tăng 3% mỗi năm, kỳ hạn 5 năm, tổng tiền thuê theo lịch là $637.096. Ba tháng miễn phí trị giá $30.000 và TI $20/SF = $100.000 làm tổng hiệu dụng ròng còn $507.096, tức trung bình $20,28/SF/năm, trong khi face rent trung bình là $25,48/SF. Ba lưu ý: (1) chủ nhà thích cho tháng miễn phí và TI thay vì giảm face rent vì face rent quyết định giá trị thẩm định và khoản vay của tòa nhà; (2) kỳ hạn càng dài, cùng một ưu đãi trải ra càng mỏng, nên đừng so effective rent của hợp đồng 5 năm với 7 năm; (3) phải hỏi rõ tháng miễn phí có miễn cả phần NNN hay không, và TI trả một lần hay theo hóa đơn. Đây là thông tin giáo dục chung, không phải tư vấn tài chính hay pháp lý.

This page is general education, not investment, legal, tax, lending or financial advice. Every figure in the worked example is made up and rounded to teach the mechanics. Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 678-707-2498 · dewey.luong@serhant.com

Comparing two lease quotes and want both run on effective rent before you sign? Reply and ask for the analysis. 678-707-2498 · dewey.luong@serhant.com

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