CRE glossary
Effective rent
Effective rent is the present-valued average rent the tenant pays over the lease term, net of free rent, TI allowance, and other concessions. It is the apples-to-apples way to compare two lease offers with different headline rents, free rent periods, TI levels, and escalation structures.
Headline rent (what gets quoted in marketing) and effective rent diverge because of concessions. A $58/SF deal with 6 months free and $80/SF TI is materially cheaper than a $54/SF deal with no concessions, but both show up in the comp record at their respective base rents. Tenants pick the wrong building all the time when they compare on headline alone.
The standard effective-rent calculation: total rent paid over the term, minus the value of free rent (months free × rent), minus the TI allowance, divided by the term length and the rentable square feet. More sophisticated calculations discount future cash flows back to present value at the tenant's cost of capital (typically 5–8% for established companies, 10–12% for early-stage).
Most LOI templates don't include effective rent. The broker calculates it separately. DealDesk's LOI Builder produces effective rent automatically and shows the spread vs comparable deals in the same submarket, turning a normally hand-calculated metric into a real-time decision tool.
Simple effective rent
Effective rent = (Total base rent paid − Free rent value − TI) ÷ Term ÷ Premises SF
Example
- Deal A: headline $58/SF
- 6 mo free, $80/SF TI
- Deal A: effective rent
- $48.20/SF
- Deal B: headline $54/SF
- 0 mo free, $25/SF TI
- Deal B: effective rent
- $52.30/SF
- Winner
- Deal A by ~$4.10/SF/year
Broker perspective
Always pitch your tenant on effective rent. Always compare offers on effective rent. Document the calculation in writing (spreadsheet or DealDesk model) and walk them through it. Tenants who understand effective rent never go back to headline-rent comparisons. Tenants who don't get it will hate you when the 'cheap' building turns out not to be.
Frequently asked
People also ask
Why isn't effective rent in the LOI?
It's a derivative metric. Brokers calculate it separately. Tools like DealDesk auto-generate it from LOI inputs.
What discount rate should I use?
Tenant's WACC. Established companies: 5–8%. Early-stage / VC-backed: 10–12%. Match the tenant's actual cost of capital.
Should I use simple or NPV effective rent?
NPV is more accurate, especially on long terms (10+ years). Simple is fine for shorter deals.
Do landlords pitch on effective rent?
Rarely. Landlords protect headline rent because it sets future comps. Brokers do effective-rent math on the tenant side.
Related terms
Base rent
The headline rent before pass-through expenses, usually quoted in $/SF/year and the starting point for every comp.
Free rent (abated rent)
A period at the start of the term where the tenant pays no base rent, used to offset move-in costs and competitive pricing.
Tenant improvements (TI / TIA)
Money the landlord contributes toward customizing the space for the tenant, usually expressed as $/SF.
Letter of intent (LOI)
A non-binding outline of the major business terms, rent, term, TI, options, that becomes the basis for the binding lease.
See effective rent extracted from a real lease.
Drop a 60-page lease, get a 38-field abstract in 90 seconds, every value cited back to the source page.