How to calculate effective rent on a commercial lease

For a simple, undiscounted tenant comparison, effective base rent is total scheduled base rent after base-rent concessions divided by the number of months in the comparison period. Divide by the same area and annualize if you want an annual per-square-foot figure. State what the metric includes: effective base rent is not total occupancy cost.

There are other definitions of effective rent, including discounted cash-flow approaches and landlord analyses that include leasing costs. Label this calculation clearly so two offers use the same method.

Worked example with free rent

Illustrative Offer A is for 3,000 square feet over 60 months, with flat base rent of $30 per square foot annually and the first three months of base rent waived.

• Annual face base rent: 3,000 × $30 = $90,000.
• Monthly face base rent: $90,000 ÷ 12 = $7,500.
• Paid months: 60 − 3 = 57.
• Total base rent paid: 57 × $7,500 = $427,500.
• Average monthly base rent: $427,500 ÷ 60 = $7,125.
• Annual effective base rent per square foot: $7,125 × 12 ÷ 3,000 = $28.50.

These figures assume no escalations, no partial months, and no conditions that change the concession. The example excludes CAM, taxes, insurance, utilities, improvements, deposits, and the time value of money.

Compare an offer with a lower face rate

Illustrative Offer B has the same area and term, flat rent of $29 per square foot annually, and no free rent. Its total base rent is 3,000 × $29 × 5 = $435,000. Average monthly base rent is $7,250.

Offer A therefore has $7,500 less base rent over this specific comparison period despite its higher face rate. That does not establish that A is the better lease. Differences in operating expenses, delivery condition, improvement costs, flexibility, or timing could outweigh the base-rent difference.

Escalations require a schedule

When rent changes, calculate each period separately. For example, a hypothetical $7,500 monthly starting rent with a 3% increase each anniversary becomes $7,725 in year two and $7,956.75 in year three. Do not apply 3% repeatedly to the original starting amount unless that is what the clause says.

Identify which months are abated and the rate that would otherwise apply in those months. Check whether free rent changes escalation timing. Use the actual schedule when supplied, and reconcile differences between the schedule and a formula before treating either as authoritative.

Add an occupancy-cost comparison beside the rent metric

Use separate rows for estimated pass-through charges, direct utilities, recurring maintenance, required insurance, and unreimbursed improvements. Keep refundable security deposits in a separate cash-required view rather than quietly counting them as rent expense.

If Offer A has estimated additional charges $0.50 per square foot per year above Offer B, the five-year difference at 3,000 square feet is $7,500 assuming flat charges. That would offset A's base-rent advantage in this illustration. Estimates can change; show both the assumption and a higher-cost scenario.

What to check in the documents

Confirm annual versus monthly units, area basis, abatement conditions, escalations, and which costs are included. The NNN vs. gross lease guide explains why labels alone cannot settle the comparison. Use the commencement timeline to place payments correctly and the TI allowance checklist to model construction cash separately.