Net effective rent: how to compare lease offers fairly

General information, not tax or legal advice. The numbers here are illustrative. Talk to your lawyer and accountant before you act on them.

The idea

Net effective rent is the average base rent you really pay per square foot per year, after you subtract the value of the landlord’s incentives over the term.

Net effective rent = (total base rent over the term − free rent − TI allowance) ÷ (rentable area × years)

Two offers for the same 2,300 sf space, five years

Item	Offer A	Offer B
Base rent	$30 /sf	$27 /sf
Free rent	4 months	none
TI allowance	$20 /sf	none
Total base rent	$345,000	$310,500
Less free rent	−$23,000	$0
Less TI allowance	−$46,000	$0
Net cost	$276,000	$310,500
Net effective rent	$24.00 /sf	$27.00 /sf

Offer A looks $3 more expensive and is actually $3 a foot cheaper, about $34,500 over the term, provided you were going to spend that TI money on the build-out anyway.

Why landlords like Offer A

Their building is valued on the rent roll, so they’d rather keep the face rent high and give you incentives up front. How landlords think explains the math.

Fine print

• This simple version ignores the time value of money. A more precise version discounts each year’s payments, which favours incentives you get early.
• Additional rent usually still applies during free base rent months. Check.
• A TI allowance is only worth its full value if you’d spend it anyway, and if it’s paid on time. Read how and when it’s paid.

The lease calculator works out net effective rent for you.

Questions people ask

Does free rent include additional rent?

Not always. Many leases give free base rent while you still pay additional rent (taxes, insurance and operating costs). The wording decides, so check it before you sign.