Lease Parameters

$ /SF/yr
Annual rent per square foot
SF
Total rentable square footage
years
Total lease duration
%
Annual compounding increase
months
Rent abatement at lease start
$ /SF
Landlord's TI contribution per SF
%
Lease cash-flow discount rate

Model Assumptions

  • Rent escalations compound annually on the base rent
  • Free rent occurs at the beginning of the lease (first N months)
  • TI allowance paid at lease commencement (t=0, not discounted)
  • Discount rate reflects the lease's cash-flow risk (tenant credit, intralease risk)
  • All rents received at year-end (payments in arrears)
  • Rents assumed on same expense basis (no expense normalization)
  • Excludes leasing commissions, default risk, and renewal/cancellation options

For educational purposes. Not financial advice. Market conventions simplified.

Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Effective Rent Analysis

Effective Rent ($/SF/Year) $27.56 Level annuity equivalent of lease cash flows
Effective Rent as % of Initial Face Rent 91.9%
Rent Collected $3,289,164
PV of Rents $2,235,971
TI Cost (t=0) $300,000
Net PV to Landlord $1,935,971

Year-by-Year Rent Schedule

Year Rate ($/SF) Rent Received PV of Rent

Formula Breakdown

Effective Rent = Net PV to Landlord / Annuity Factor
Where Net PV = PV of Rents - TI Cost, and Annuity Factor = (1 - (1+r)^-n) / r

Understanding Effective Rent

What is Effective Rent?

Effective rent is the level annuity equivalent of a commercial lease's expected cash flows, discounted at the appropriate rate. Per Geltner Chapter 30, it converts the complex stream of lease payments (with escalations, free rent, and TI concessions) into a single annual figure that enables apples-to-apples comparison across leases with different structures.

Core Formulas (Landlord Perspective)
Net PV to Landlord = PV of Rent Payments - TI Cost
Effective Rent = Net PV / Annuity Factor
Annuity Factor = (1 - (1+r)-n) / r

Why Concessions Matter

In competitive leasing markets, landlords offer concessions to attract tenants. The two most common are:

  • Free rent (rent abatement): Months at the start of the lease where the tenant pays no rent. Reduces the landlord's total revenue.
  • Tenant improvement (TI) allowance: An upfront cash payment by the landlord to fund buildout of the tenant's space. Paid at t=0.

Both concessions reduce the landlord's net revenue below the stated "face rent." Effective rent quantifies this gap.

Comparing Lease Structures

High Face Rent + Large Concessions

A lease with $35/SF rent but 12 months free and $50/SF TI may have a lower effective rent than a simpler lease at $28/SF with no concessions.

Lower Face Rent + No Concessions

A straightforward lease with no free rent and no TI may deliver higher effective rent to the landlord despite the lower stated rate.

Practical Applications

  • Lease comparison: Compare offers from different tenants on an equivalent basis
  • Property valuation: Use effective rent (not face rent) to estimate sustainable NOI for cap rate analysis
  • Negotiation: Understand the true cost of concessions when structuring lease terms
  • Portfolio analysis: Assess the quality of rental income across a portfolio of leases
Note: This calculator assumes full lease-term performance. It does not account for tenant default, early termination, renewal options, leasing commissions, or expense-structure differences between leases. All rents should be on the same expense basis for valid comparison.

Frequently Asked Questions

Effective rent is a level annuity that has the same present value as the lease's actual cash flows to the landlord. It accounts for concessions like free rent periods and tenant improvement allowances, giving a single comparable figure that represents the true net revenue per year. Per Geltner Chapter 30, this metric enables apples-to-apples comparison of leases with different concession structures.

This calculator analyzes effective rent as the net present value of revenue the landlord receives, minus the upfront costs of concessions (TI allowance). The landlord perspective is the standard in commercial real estate valuation because it reflects the property's income-generating capacity, which drives property value.

Concessions (free rent and TI allowances) reduce the landlord's net revenue. Free rent means zero income during those months, reducing rent received in affected years. If free rent exceeds 12 months, it spans into Year 2 and beyond. TI allowances are an upfront cash outlay at lease commencement. Both reduce the Net PV to the landlord, which lowers the effective rent below the face (stated) rent.

The discount rate should reflect the risk appropriate to the lease's cash flows. For investment-grade tenants on long-term leases, rates near the risk-free rate plus a credit spread may apply. For typical commercial leases, the property's going-in cap rate or a rate reflecting intralease risk (typically 6-10%) is common. The rate should match the certainty of the specific tenant's payment stream.

Free rent reduces income proportionally in the affected period. For example, 6 months of free rent on a $30/SF lease means Year 1 rent received is only $150,000 (half of the full $300,000). If free rent exceeds 12 months, it carries into subsequent years. For instance, 18 months of free rent means Year 1 is fully free and Year 2 has 6 months of abatement. The remaining years receive the full escalated rent. This reduction flows through to a lower PV and lower effective rent.

A negative effective rent means the landlord's concession costs (TI allowance plus lost rent from free periods) exceed the present value of all rent received. This can happen with very generous concessions on short leases. It indicates the landlord is paying more to attract the tenant than they will receive in rent over the lease term. If both concessions are zero and base rent is zero, effective rent is zero (not negative).
Disclaimer

This calculator is for educational purposes only. Effective rent analysis is one tool for evaluating commercial lease economics. Actual lease decisions should consider additional factors including tenant creditworthiness, market conditions, expense structures, leasing commissions, renewal options, and local market conventions. Consult a qualified real estate professional or financial advisor for leasing decisions.

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