Definition
Effective Rent is the actual economic rent received by a landlord after accounting for concessions, such as free rent, tenant improvement allowances, or other leasing incentives.
It reflects the true income generated by a lease rather than the advertised or face rent.
Face Rent vs. Effective Rent
- Face (or Gross) Rent: The stated rent in the lease agreement.
- Effective Rent: Face rent minus the value of concessions, averaged over the lease term.
Basic Formula
Effective Rent = (Total Lease Payments – Total Concessions) ÷ Lease Term
Example
A tenant signs a 12-month lease at $2,000 per month but receives 1 month free.
- Total scheduled rent = $2,000 × 12 = $24,000
- Free rent value = $2,000
- Total received = $22,000
- Effective rent = $22,000 ÷ 12 = $1,833 per month
Why It Matters to Investors
- Accurately measures true income for underwriting
- Reveals market softness masked by high face rents
- Impacts Net Operating Income (NOI)
- Affects valuation and refinancing outcomes
Market Implications
In competitive or oversupplied markets, landlords may maintain high face rents but increase concessions to attract tenants. Effective rent often provides a more accurate indicator of real market conditions.
Common Pitfalls
- Ignoring concessions in underwriting
- Assuming face rent equals market rent
- Not annualizing short-term incentives properly
- Failing to track renewal concessions