Effective rent adjusts the face rent (stated monthly rent) to account for landlord concessions — free rent periods and tenant improvement (TI) allowances. Comparing effective rent across different lease proposals gives a true apples-to-apples comparison.
Effective Annual Rent = (Total Rent over Term − TI Allowance − Free Rent Value) ÷ Lease Term in Years
TI allowance reduces the landlord's effective income. Free rent periods reduce the total rent collected. Both should be factored into effective rent when comparing competing lease proposals.
| Face Monthly Rent | $8,500/month ($102,000/year) |
| Lease Term | 5 years |
| Free Rent Period | 3 months |
| TI Allowance | $75,000 |
Result
Effective Annual Rent = $73,500 ($14.70/sq ft on 5,000 sq ft)
| Line Item | Value |
|---|---|
| Total Face Rent (5 years) | $510,000 |
| Less: Free Rent Value | −$25,500 |
| Less: TI Allowance | −$75,000 |
| Net Rent over Term | $409,500 |
| Effective Annual Rent | $81,900/year |
| Effective Rate per sq ft | $16.38/sq ft/year |
| Discount from Face Rate | −19.7% |
Stated monthly rent before any concessions
Number of months with no rent due
Tenant improvement allowance from landlord
Result
$81,900/year effective rent ($6,825.00/month)
| Line Item | Value |
|---|---|
| Total Face Rent (5 years)$8,500 × 60 months | $510,000 |
| Less: Free Rent Value$8,500 × 3 months | −$25,500 |
| Less: TI AllowanceLandlord concession | −$75,000 |
| Net Rent over TermLandlord's actual income | $409,500 |
| Effective Annual Rent÷ 5 years | $81,900/year |
| Effective Monthly Rent÷ 12 | $6,825.00/month |
| Discount from Face RateEffective concession value | −19.7% |
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Effective rent is the true economic cost of a lease after accounting for landlord concessions such as free rent periods and tenant improvement allowances. A lease with a $10,000/month face rent and 6 months free rent on a 3-year term has an effective monthly rent of $8,333, reflecting the actual cost per month of occupancy over the full term.
Convert both proposals to effective annual rent per square foot: (Total rent − free rent value − TI allowance) ÷ lease term ÷ leased square footage. A proposal with a higher face rent but more concessions may have lower effective rent than a proposal with a lower face rent and fewer concessions. Always compare effective rent, not face rent.
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