What Is Net Effective Rent?
Net Effective Rent (NER) is the average annual rent per square foot that a tenant actually pays, after netting out free rent concessions and tenant improvement (TI) dollars, spread across the months they are paying rent. Face rent — the headline $/SF number on the term sheet — is almost always misleading because it ignores the cost of the concessions used to land the deal.
NER Beats Face Rent Every Time
Two lease offers can look identical on face rent and produce dramatically different NER results. A $32/SF face with 6 months free and $45/SF TI on a 7-year term often nets out below $28/SF effective. The landlord and broker think in NER. The tenant should too.
The NER Formula
NER = (Gross Rent Over Term − Free Rent Value − TI Allowance) ÷ Rentable SF ÷ (Months Paying Rent ÷ 12)
The denominator is critical: free rent months are removed from the denominator, not just the numerator — because the tenant only pays during the rent-paying months.
What This Means for Owners and Investors
For acquisitions analysis, NER is the rent number that should flow into your NOI Calculator, Cap Rate, and GRM models — not the face rent on the rent roll. A property heavy with newly-signed leases full of concessions is worth materially less than the face rent suggests.