Net Effective Rent: What the Deal Is Actually Worth
Face rent is the number in the proposal. Net effective rent is what is left once the free months and the tenant improvement allowance are taken out of it — and on a typical five-year deal that gap is nearly 20%.
The formula, and what belongs in it
Net effective rent
(Base rent paid − concessions) ÷ SF ÷ years
Concessions means free rent and the tenant improvement allowance — not operating expenses
Every part of that has a reason to be there. Base rent paid is the rent scheduled across the whole term with the escalations applied, counting only the months the tenant actually pays for — abated months contribute nothing, which is the point of abating them. Concessions is what the landlord hands back: the free months, valued at what they would have cost, and the tenant improvement allowance, which is real capital contributed to the deal. Dividing by square feet and years turns the whole arrangement into one rate you can hold against another proposal.
Operating expenses do not belong in it. Net effective rent measures the rent. In a triple net lease the operating expenses are explicitly not rent, so adding them produces a different metric — effective occupancy cost — which is genuinely useful, and is the only fair way to compare an NNN proposal against a full service one. It is simply not this number, and labelling it this way is the most common mistake in lease comparison.
Example: 10,000 SF over five years
Sample inputs
- Rentable SF
- 10,000
- Term
- 60 months
- Face rent
- $24.00/SF/yr NNN
- Escalation
- 3% a year
- Free rent
- 3 months
- TI allowance
- $25.00/SF
Scheduled across the term with 3% annual steps, the rent totals $1,274,193. Three abated months give back $60,000 of that, so the tenant actually pays $1,214,193. The landlord also contributes a tenant improvement allowance of $250,000 — $25.00 across 10,000 SF.
Net the allowance against the rent paid and spread the result over 10,000 SF and five years: $19.28/SF/year. Against a $24.00 face rent that is a 19.7% discount — and none of it is visible in the quoted rate.
Which is the whole argument for the metric. A competing building quoting $22.00 with no free rent and no allowance is asking more, not less, despite the lower headline number. Compare the face rents and you pick the wrong deal.
The check that catches a wrong answer
Net effective rent is the face rent with concessions removed. So it can equal the face rent — when there are no concessions — and otherwise it must be lower. That gives you a one-second audit of any net effective rent anybody hands you, including your own:
The rule
If the net effective rent is at or above the face rent, a concession has been missed or something has been added that is not rent. It is not a close call and it is not a rounding question — it is arithmetically impossible.
It catches real errors. On the example above, netting out the free rent but forgetting the tenant improvement allowance gives $24.28/SF/year — above the $24.00 face rent, because three free months out of sixty do not offset five years of 3% escalations. The number looks plausible. It is impossible.
The other way it goes wrong is folding operating expenses in. Do that on the same deal, at $9.50/SF of expenses, and you get something near $29 — well above face, and now measuring occupancy cost rather than rent. Both errors announce themselves the same way, which is why the check is worth running before you take any effective rent figure to a client.
Where it stops being the right metric
Net effective rent treats a dollar in month 60 as identical to a dollar in month 1. That is fine when two proposals run the same length and shape. It is misleading when they do not.
A ten-year deal and a five-year deal do not compare on this basis at all, and neither do two proposals where one front-loads its concessions and the other spreads them — the second is worth more to the landlord and less to the tenant, and net effective rent cannot see the difference. Net present value can. The practical rule is net effective rent when the terms match, present value when they do not, and the lease comparison calculator computes both side by side so you do not have to decide in advance which one the deal will need.
Why landlords give free rent instead of cutting the rate
It looks like the same thing to a tenant and it is not the same thing at all to the landlord.
A building’s value is derived from the income on its rent roll. Cut the face rate and you cut that income permanently, visibly, and in a form the next appraiser and the next buyer will both read. Give three months free and you spend real money once, the quoted rate survives intact, and the concession is buried in a lease document rather than printed on the rent roll.
Net effective rent is how a tenant sees through that. It is also how a buyer sees through it: a rent roll full of face rents propped up by concessions supports a NOI that will not survive the first renewal, and underwriting that reads the leases rather than the summary is what catches it.
Frequently asked questions
What is net effective rent?
Net effective rent is the face rent with the landlord's concessions taken out, spread across the whole term. Take the base rent the tenant actually pays over the lease, subtract what the landlord gave back — free rent, the tenant improvement allowance, any moving allowance — then divide by the square footage and the number of years. The result is a single $/SF/year rate that can be compared against another proposal with a different concession package.
How do you calculate net effective rent?
Schedule the rent month by month across the full term, applying the escalations, and add up only the months the tenant actually pays for — abated months contribute nothing. Subtract the tenant improvement allowance and any other capital the landlord is contributing. Divide the result by the rentable square feet, then by the term in years. Two proposals with the same face rent and different free rent or TI will produce different net effective rents, which is the entire reason the metric exists.
What is the difference between face rent and net effective rent?
Face rent is the number in the proposal. Net effective rent is what the deal is actually worth once the giveaways are accounted for. A landlord can hold face rent high — which protects the building's quoted rate and its valuation — while competing on concessions instead. That is why two buildings can advertise the same rate and offer very different deals, and why comparing face rents tells you almost nothing.
Can net effective rent be higher than face rent?
No. Net effective rent is the face rent with concessions removed, so it can equal the face rent when there are no concessions at all, and otherwise it must be lower. If your calculation produces a number above the face rent, something has been left out or added in — most often the tenant improvement allowance was forgotten, or operating expenses were folded in, which makes it an occupancy cost rather than a rent. That is a useful check to run on any net effective rent you are handed.
Should operating expenses be included in net effective rent?
No. Net effective rent measures the rent. Operating expenses are a separate charge, and in a triple net lease they are explicitly not rent. If you add them in you get effective occupancy cost, which is a legitimate and useful number — it is the only way to compare an NNN proposal against a full service one — but it is a different metric and must not be labelled net effective rent. Mixing the two is the most common error in lease comparison, and it always shows up the same way: a figure that exceeds the face rent.
Does net effective rent account for the time value of money?
No, and that is its main limitation. Net effective rent treats a dollar in month 60 as identical to a dollar in month 1, which is fine when two proposals run for the same term but misleading when they do not, or when one front-loads its concessions and another spreads them. For those, use net present value instead. The practical rule: net effective rent when the terms match, NPV when they do not.
Why do landlords offer free rent instead of just lowering the rent?
Because face rent is the number the building is valued on. A property's income, and therefore its value at a given cap rate, is derived from the rents on the rent roll. Cutting the face rate lowers that permanently and visibly. Giving three months free costs the landlord real money once, keeps the quoted rate intact, and is far less legible to the next appraiser or buyer. Net effective rent is how a tenant sees through that, and how a buyer sees through it when underwriting the building.
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NNN, gross, modified gross and full service — and who pays the operating expenses.
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Where every one of these lease terms is recorded.
What is NOI?
What those rents become once expenses come out.
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Why a landlord protects the face rate so carefully.
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Every CRE metric explained in one place.
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The full process behind the numbers.
The concessions are in the lease, not on the rent roll.
DealWise AI reads the leases and records the free rent, the allowance and the escalations suite by suite — then models what the income is actually worth across the hold, not what the quoted rate says it is.