Quick Summary
A lease proposal's headline rate tells you almost nothing about what the space will cost. What matters is effective rent, the average you actually pay after concessions like free rent, tenant improvement allowances, and escalations are counted across the term. A $32 rate with four months free and a $60 TI allowance can beat a $28 flat rate. Always reduce a proposal to one number: net effective rent over the full term.
Why Listen to Us
Mike Wolson is a commercial real estate broker and an Illinois-licensed attorney, rated 4.9 across 71 Google reviews. Most brokers present the proposal as the landlord wrote it. As founder of +CRE, affiliated with Compass, he represents dental practices, healthcare providers, and service businesses across Chicago and its suburbs (tenants and buyers, never landlords) and rebuilds every proposal into the number the landlord would rather you not calculate.
The Headline Rate Is Marketing
A lease proposal, or letter of intent, arrives looking simple: a rate per square foot, a term, a few lines about concessions. That simplicity is the point. The headline rate is the number the landlord wants you to anchor on, and it is almost never what the space costs. Between the quoted rate and your real cost sit escalations that raise it, concessions that lower it, and pass-throughs that vary it, and a proposal is designed so those move in the landlord's favor unless you do the math.
This guide shows how to read a proposal the way a tenant's advisor does: by rebuilding it into effective rent, the single figure that lets you compare offers honestly and negotiate from a position of knowledge.
This guide covers:
- What effective rent is and why it beats the headline rate
- How concessions (free rent, TI, turnkey) change the real cost
- How escalations quietly work against you
- A step-by-step way to reduce any proposal to one number
- What to renegotiate once you see the real figure
Effective Rent: The Only Number That Compares
Effective rent is the average rent you actually pay over the full term after every concession and escalation is counted. It exists because the headline rate hides too much: a low rate can carry steep escalations that make later years expensive, while a higher rate can come with concessions that make it genuinely cheaper. Only by averaging the true cost across the term, ideally on a present-value basis, can two proposals be compared.
The rule of thumb: never compare headline rates. A $32 proposal with real concessions frequently beats a $28 flat one. The tenant who signs the $28 space because the number looked lower has been out-negotiated before the lease is even drafted.
Concessions: Where Real Value Hides
Concessions are the landlord's tools to win a tenant without lowering the headline rate, and they are where a tenant's real savings live. The main ones:
- Rent abatement (free rent): months of no rent, usually to cover the buildout period. Directly lowers effective rent, and should span the full construction time so you are not paying for space you cannot use.
- Tenant improvement allowance: dollars per square foot the landlord contributes to your buildout. On a medical space this can be worth more than a rate reduction.
- Turnkey buildout: the landlord delivers finished space at its cost. Different from a TI allowance, since it shifts construction risk to the landlord.
A proposal with a slightly higher rate and strong concessions almost always beats a bare low rate. The concessions are the negotiation; the rate is the distraction.
Escalations: The Cost That Compounds
Every proposal has an escalation clause, often a flat 3% a year, sometimes tied to an index. It looks minor on paper and is anything but. A 3% annual escalation on a $30 rate reaches roughly $39 by year ten, a 30% increase built in from the first day. A 4% escalation nearly doubles the rent over fifteen years. Because escalations apply to the rentable figure and compound, they can quietly become the most expensive term in the lease.
When reading a proposal, the escalation rate matters as much as the starting rate. A low opening rate with a steep escalation can cost more over the term than a higher rate that stays flatter. Model it out before you react to the headline.
A Proposal, Rebuilt: Effective Rent vs. Headline Rate
The difference between the two numbers is the whole game. The headline rate is year-one base rent per square foot. Effective rent is the total of every year's base rent (grown by escalation), plus tenant-paid operating costs, minus the value of free rent and the TI allowance, averaged across the term. The headline is one input into that calculation, and usually the least informative one, because it is the number the landlord controls and presents.
Put concretely: a proposal at $28 flat for five years has an effective rent near $28 (before pass-throughs). A proposal at $32 with four months free and a $60 TI allowance on a five-year term can drop below $28 effective once the concessions are spread across the term. Same building, and the higher-rate proposal is the cheaper deal. Reading proposals means seeing that inversion.
The Traps Inside a Simple-Looking Proposal
Beyond the headline rate, a few line items in a proposal deserve extra scrutiny because they shift cost quietly. A base year in a modified-gross proposal can be set low so your share of expense increases starts early. The measured square footage may use a generous load factor, inflating the rentable figure your rate is applied to. And the pass-through language may leave operating expenses uncapped, so a good effective rent erodes over the term. None of these appear in the headline rate; all of them change what you pay.
Reading a proposal well means checking each of these before responding. A rate that looks competitive can sit on top of an inflated square-footage figure or an uncapped pass-through that makes it far less so. The proposal rewards the reader who looks past the one number the landlord put in bold.
How to Reduce Any Proposal to One Number
The method is mechanical once you know the steps:
- List base rent for each year of the term, applying the escalation schedule.
- Add the tenant-paid operating costs for each year (in an NNN lease, taxes, insurance, and CAM).
- Subtract the total value of free rent.
- Subtract the TI allowance (or the value of a turnkey delivery).
- Sum every year, then divide by the number of years for annual effective rent, or discount to present value for the most accurate comparison.
Do this for each proposal and the real ranking appears, often reordering the offers versus their headline rates. This is the same logic that governs comparing different lease structures, and it draws on the buildout economics in our tenant improvement allowance guide.
What to Renegotiate Once You See the Real Number
Rebuilding the proposal does more than rank offers; it shows you exactly where to push. If the effective rent is high because of steep escalations, negotiate the escalation rate or a cap. If it is high because concessions are thin, ask for more free rent or a larger TI allowance rather than a lower rate, since concessions are often easier for a landlord to grant than headline reductions, because they preserve the number the landlord reports. And confirm the pass-through structure, since an uncapped NNN can undo a good effective rent later. The proposal is the opening position, not the deal.
How Plus CRE Helps
Plus CRE represents tenants only. Our lease negotiation and tenant representation work starts by rebuilding every proposal into effective rent, the number that reveals which offer is actually cheapest and exactly where to negotiate. Talk to us before you respond to a proposal, because the landlord already did this math.
Frequently Asked Questions
What is effective rent?
Effective rent is the average rent you actually pay over the full lease term after counting concessions like free rent and tenant improvement allowances, plus escalations. It is the only figure that lets you compare two proposals honestly, because the headline rate hides both concessions and future increases.
Why is a higher rate sometimes cheaper?
Because concessions and escalations change the real cost. A higher headline rate paired with months of free rent and a large TI allowance can have a lower effective rent than a low flat rate with no concessions. The rate is only one input; the concessions and escalations decide the total.
How do I compare two lease proposals?
Reduce each to effective rent: total base rent across the term with escalations, plus tenant-paid operating costs, minus free rent and TI allowance, divided by the years. That single number ranks the proposals by real cost, which often differs from their headline-rate order.
Should I negotiate the rate or the concessions?
Often the concessions. Landlords resist cutting the headline rate because it is the number they report, but will grant free rent or a larger TI allowance more readily. Both lower your effective rent, so pushing on concessions can get you a cheaper deal the landlord is more willing to sign.
