Leasing
The $15 Deal That Is Really a $12 Deal
Face rent is a headline. Net effective rent is what you collect. The gap between them is where lease comparisons go wrong.
Two tenants offer you the same rent per square foot. One wants forty dollars a foot in tenant improvements. The other wants nothing. Those are not the same deal, and comparing them on face rent tells you nothing useful.
Net effective rent is the number that makes them comparable: total rent over the term, less free rent, less the improvement allowance, less the leasing commission, spread back across the term.
A worked example
Thirteen thousand square feet at fifteen dollars, ten-year term, two percent annual escalations. Total base rent over the term is about $2.14 million. Now the concessions: twelve dollars a foot of allowance is $156,000, three months free is roughly $48,750, and a four percent commission is about $85,000. Net effective rent lands near $14.19 straight-line, about 14 percent below the average face rent.
Change one variable. Same fifteen dollar face rent with forty dollars of allowance produces a net effective rent of roughly $11.39. A thirteen dollar deal with no allowance produces $13.67. The lower face rent is worth $2.28 a foot more to you, every year, for ten years.
Straight-line versus present value
The straight-line figure spreads every cost evenly across the term. The present value figure discounts future rent back to today, which is more honest, you write the allowance check before the tenant opens, and you collect the rent over the following decade. On long terms with large allowances the two diverge substantially, and the present value number is the one to trust.
Why it matters beyond comparing offers
Because net effective rent, not face rent, is what should feed a valuation. A center marketed on face rents with heavy concessions behind them is worth less than the rent roll suggests, and the difference is not small. When you are the buyer, ask for the lease abstracts and the allowance history. When you are the seller, understand that a sophisticated buyer will do exactly that.
Compare two offers on one line: Net effective rent calculator, straight-line and present value, with concession payback.
Related notes
How to read this. These are working notes. Figures come from public reporting and from the models on this site, and market conditions change, check anything time-sensitive against the source before you rely on it. Nothing here is investment, tax or legal advice, and no note is a substitute for diligence on a specific property.
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