Effective Rent

Effective rent cuts through the concessions to reveal what a lease actually costs. A landlord may advertise a low base rent but attach an escalation clause that raises it every year; another may quote a higher rate but offer months of free rent and a large tenant improvement allowance. Effective rent normalizes these by averaging the total cost — base rent across all years, minus the value of free rent and TI, plus escalations — over the full term. This is the only fair way to compare two offers whose headline rates look different but whose real costs may be reversed. For a healthcare tenant weighing multiple spaces, the deal with the higher sticker rent can easily be the cheaper one once concessions are counted. Calculating effective rent, ideally on a present-value basis, is a core part of evaluating any lease proposal.

Comparing headline rents leads tenants to the wrong deal. Effective rent counts the concessions and escalations that determine true cost, revealing which lease is actually cheaper over the term.

Space A quotes $28/sq ft flat for 5 years. Space B quotes $32/sq ft with 6 months free rent and a $40/sq ft TI allowance. Averaged over the term, Space B’s effective rent falls below Space A’s — the opposite of what the headline rates suggest.