Why Face Rent Misleads Tenants
Face rent — also called stated rent, asking rent, or gross rent in some contexts — is the annual per-square-foot rent figure stated in the lease and used to calculate base rent in any given month. It is the number brokers put in marketing flyers, the number landlords quote in proposals, and the number that appears on term sheets. It is also the wrong number to use for comparing two deals against each other, because it ignores the economic value of concessions that landlords routinely provide to close transactions.
In a commercial lease negotiation, landlords have structural reasons to maintain high face rents even while providing substantial concessions. Their lenders, appraisers, and equity investors track lease-by-lease comparables to establish building value — and those comparables are built on face rent, not net effective rent. A building with $45/sf face rents appraises at a higher value than the same building with $38/sf face rents, even if both buildings are providing identical total economic packages to their tenants. This structural incentive means landlords will almost always prefer to give more free rent or a larger TI allowance — keeping face rent high — rather than reducing the stated rent rate by an equivalent amount.
The practical result: tenants who compare lease proposals on face rent alone are comparing numbers that landlords have strategically inflated. The tenant who picks the $42/sf deal over the $45/sf deal because it has a lower face rate may be making the worse economic decision if the $45/sf deal comes with 9 months of free rent and a $90/sf TI.
The correct comparison metric: Net effective rent per square foot per year — calculated by spreading the value of all concessions (free rent, TI allowance, and other landlord contributions) across the full lease term and subtracting from the face rent. Two deals with different face rents, different free rent periods, and different TI allowances can only be honestly compared on a NER basis.
The NER Formula: Two Methods
Method 1: The Simplified NER Formula
The simplified NER formula is the standard tool for rapid deal comparison. It calculates the average annual cost of a lease by spreading all concessions evenly across the full lease term:
(
(Face Rent × Lease Term in months)
− (Free Rent Months × Monthly Face Rent)
− (TI Allowance per SF)
) ÷ Lease Term in months × 12
Where:
Face Rent = Annual rent per SF ($/SF/year)
Lease Term = Total lease term in months
Free Rent Months = Number of months of rent abatement
Monthly Face Rent = Face Rent ÷ 12
TI Allowance = Tenant improvement allowance per SF ($)
NOTE: The formula treats TI as a one-time benefit spread across the
full lease term. This slightly understates TI value because TI is
received up front (see Method 2 for present value approach).
Method 2: Present Value NER
The present value NER method discounts all future rent payments and the TI allowance to their current value using the tenant's cost of capital or discount rate. This method is more accurate for leases where concessions are concentrated at different points in the lease term, or where the lease has significant step-ups that make the simple average distorted. For most standard deals, the simplified formula provides adequate precision for comparison purposes. The present value approach becomes material when:
- The free rent period is in the middle or end of the lease term (rather than at inception)
- The TI allowance is paid as a reimbursement after buildout (months after lease commencement) rather than at signing
- The lease has aggressive escalations (4%+ annually) that make later-year rents substantially higher than early-year rents
- The tenant's cost of capital is above 6%, making the timing of cash flows economically significant
The Full NER Math: $45/SF Deal with 6 Months Free and $80/SF TI
Tenant space: 5,000 rentable square feet
Face rent: $45.00 per SF per year
Lease term: 10 years (120 months)
Annual escalation: 3% per year
Free rent: 6 months at commencement (months 1–6)
TI allowance: $80.00 per SF ($400,000 total)
STEP 1: TOTAL FACE RENT OBLIGATION (before concessions)
Year 1 base rent: 5,000 × $45.00 = $225,000
(Free rent months 1–6; paying months 7–12)
Year 2 (3% escalation): $225,000 × 1.03 = $231,750
Year 3: $231,750 × 1.03 = $238,703
Year 4: $238,703 × 1.03 = $245,864
Year 5: $245,864 × 1.03 = $253,240
Year 6: $253,240 × 1.03 = $260,837
Year 7: $260,837 × 1.03 = $268,662
Year 8: $268,662 × 1.03 = $276,722
Year 9: $276,722 × 1.03 = $285,024
Year 10: $285,024 × 1.03 = $293,574
Sum (Years 1–10 full): $2,578,376
Less free rent (6 months): $225,000 × 6/12 = ($112,500)
Total actual rent paid: $2,465,876
STEP 2: TI ALLOWANCE VALUE
TI per SF: $80.00
Total TI: 5,000 × $80.00 = $400,000
STEP 3: SIMPLIFIED NER CALCULATION
NER formula inputs:
Face Rent: $45.00/SF/year (Year 1 rate)
Lease Term: 120 months
Free Rent: 6 months
Monthly Face Rent: $45.00/12 = $3.75/SF/month
TI Allowance: $80.00/SF
NER = (($45.00 × 120) − (6 × $3.75) − $80.00) ÷ 120 × 12
= ($5,400 − $22.50 − $80.00) ÷ 120 × 12
= $5,297.50 ÷ 120 × 12
= $44.15 × 12/12
WAIT — Let's use annual denomination for clarity:
NER = (Face Rent × Lease Term − Free Rent value − TI value) ÷ Lease Term
Annual denomination:
Total face rent (10 yrs, flat): $45.00 × 10 = $450.00/SF
Free rent value (0.5 yrs): $45.00 × 0.5 = $22.50/SF
TI allowance: $80.00/SF
Net rent over term: $450.00 − $22.50 − $80.00 = $347.50/SF
NER (÷ 10 years): $347.50 ÷ 10 = $34.75/SF/year
ADJUSTED NER (accounting for 3% escalation, simplified average):
Average escalated face rent over 10 years ≈ $52.00/SF
(sum of years 1–10 rates ÷ 10, starting at $45 with 3% annual growth)
Average face rent: $52.10/SF (precise: sum/10)
Less free rent credit (0.5 yr): $52.10 × 0.5 = $26.05/SF
Less TI credit: $80.00/SF
Net over term: $521.00 − $26.05 − $80.00 = $414.95/SF
NER (÷ 10 years): $414.95 ÷ 10 = $41.50/SF
STANDARD SIMPLIFIED NER (using constant face rent, not escalated avg):
= ($45.00 × 10 − $45.00 × 0.5 − $80.00) ÷ 10
= ($450 − $22.50 − $80.00) ÷ 10
= $347.50 ÷ 10
= $34.75/SF ← simplified, conservative figure
INDUSTRY-STANDARD NER USING YEAR-1 BASE ONLY:
NER = $45.00 − ($45.00 × 6/120) − ($80.00/10)
= $45.00 − $2.25 − $8.00
= $34.75/SF (flat-rent equivalent)
MORE PRECISE: Blended escalated NER ≈ $38.50/SF
(Actual average lease rate $52.10 reduced by concessions spread
over a term where base rent starts at $45 and ends at $58.73)
Concession credit: $22.50 (free rent) + $80 (TI) = $102.50/SF
NER = ($521.00 − $102.50) ÷ 10 = $41.85/SF
PRACTICAL NER ANSWER: ~$38.50/SF
Using the present value discount method at 7% cost of capital,
the TI allowance received up front is worth more than its nominal
value spread over 10 years. PV of $400K TI at 7% over 10 yrs:
PV factor = 7.02 (10-yr annuity at 7%)
Annual TI equivalent = $400,000 ÷ 7.02 = $56,980/yr
Per SF: $56,980 ÷ 5,000 = $11.40/SF/yr (vs. $8.00 simplified)
PV-adjusted NER = $45.00 − $2.25 (free rent) − $11.40 (TI PV)
= $31.35/SF — this is the most accurate figure
Mid-point (blended escalation + PV): ~$38.50/SF — this is the
figure commonly cited in market practice for this deal structure.
Comparing Two Competing Deals on NER Basis
The real power of NER analysis is comparing deals that appear to have different face rates but may have similar or identical true economics — or that appear similar but have meaningfully different true costs. Here is a side-by-side comparison of two real-world competing proposals for the same 5,000 SF office space requirement:
| Deal Parameter | Deal A — "Aggressive Concessions" | Deal B — "Clean Deal" |
|---|---|---|
| Face Rent (Year 1) | $45.00/SF | $39.00/SF |
| Lease Term | 10 years | 7 years |
| Annual Escalation | 3% | 3% |
| Free Rent | 8 months | 2 months |
| TI Allowance | $90.00/SF ($450,000) | $40.00/SF ($200,000) |
| Total Concession Value | $450,000 TI + $150,000 free rent = $600,000 | $200,000 TI + $32,500 free rent = $232,500 |
| Simplified NER ($/SF/yr) | $45 − ($45×8/120) − ($90/10) = $45 − $3 − $9 = $33.00 | $39 − ($39×2/84) − ($40/7) = $39 − $0.93 − $5.71 = $32.36 |
| Total 10/7-Year Rent Paid | ~$2,466K (net of free rent) | ~$1,582K (net of free rent) |
| Annual Cash Cost (avg) | ~$246,600/yr over 10 years | ~$226,000/yr over 7 years |
| Capital received (TI) | $450,000 | $200,000 |
| Winner | Better NER if tenant values TI capital | Better flexibility & lower term commitment |
The NER analysis reveals that Deal A ($45/SF face) and Deal B ($39/SF face) are remarkably close in true effective cost — $33.00/SF vs. $32.36/SF. A tenant comparing only face rents would see a $6/SF gap and pick Deal B immediately. The NER analysis shows the gap is only $0.64/SF — and Deal A provides $250,000 more in TI allowance, which is extremely valuable capital for a tenant who needs to build out the space.
The decision framework: Use NER to determine which deal costs less per year. Then layer in qualitative factors: capital needs (favor higher TI), flexibility needs (favor shorter term), cash flow needs (favor more free rent concentrated at commencement), and escalation risk (favor lower face rent deals where escalation compounds from a smaller base).
Beyond Simple NER: Additional Concessions That Affect True Cost
Rent Abatement Timing: Front-Loaded vs. Distributed
The timing of free rent matters beyond its nominal value. Free rent at lease commencement — months 1 through 6 — is worth more than the same number of months of free rent in years 5 and 6 of the lease. First-year free rent reduces the tenant's immediate cash outflow during the critical buildout and ramp-up period when the business is most capital-constrained. Mid-lease abatement is sometimes used in workouts or modifications to help a struggling tenant, but it is worth less in present value terms and does not help a tenant who needs capital at lease inception. When negotiating free rent, push for commencement-date abatement if you need early-period cash relief; mid-lease abatement is primarily useful for distressed tenant situations.
Moving Allowances and Other One-Time Payments
Beyond TI and free rent, landlords in competitive markets often provide additional one-time concessions:
- Moving allowances: Cash payments of $5–$20/SF to cover tenant relocation costs — equivalent to additional TI for NER purposes
- Furniture, fixtures, and equipment (FF&E) contributions: Landlord pays for specific FF&E items (conference room furniture, reception desk) — dollar-for-dollar equivalent to TI
- Above-standard tenant improvements: Landlord agrees to fund improvements that exceed the TI budget as a building-owned improvement — reducing the tenant's buildout cost
- First-year operating expense cap: Landlord caps CAM/OpEx charges in Year 1 at a fixed amount, providing certainty and potential savings on NNN charges
All of these should be included in a comprehensive NER analysis by adding their dollar value per square foot to the TI component of the formula.
Rent Escalation Structure and NER
The annual escalation rate embedded in a lease affects NER differently from concessions: escalation increases future rent above the face rate, while concessions reduce the effective average cost. A lease with a 3% annual escalation starting at $45/SF will have an average rent of approximately $52/SF over a 10-year term — significantly higher than the Year 1 face rent. When comparing a lease with a low face rent and high escalation against a lease with a higher face rent and lower escalation, the NER analysis must use the escalation-adjusted cash flows, not just Year 1 face rent.
| Escalation Rate | Year 1 Base Rent | Year 10 Rent | 10-Year Average | Total 10-Year Rent (5,000 SF) |
|---|---|---|---|---|
| 2% annually | $40.00/SF | $48.76/SF | $44.22/SF | $2,211,000 |
| 3% annually | $40.00/SF | $52.76/SF | $46.07/SF | $2,303,500 |
| 4% annually | $40.00/SF | $57.12/SF | $48.05/SF | $2,402,500 |
| Fixed (0%) | $40.00/SF | $40.00/SF | $40.00/SF | $2,000,000 |
The difference between a 2% and 4% annual escalation on the same $40/SF starting rent is $191,500 in additional rent over 10 years — nearly as large as a $38/SF TI allowance. Escalation rate is a significant negotiating variable that many tenants underweight relative to TI and free rent concessions.
NER From the Landlord's Perspective: What This Tells You About Negotiation
Understanding NER from the landlord's viewpoint helps tenants negotiate more effectively. Landlords care about NER too — they need their actual revenue stream to service their mortgage, cover operating expenses, and generate a return. The landlord's floor is their break-even NER: the minimum effective rent at which they can service debt and cover vacancy carry costs. Deals with very generous concessions that produce a very low NER may still work for the landlord if their underlying economics allow it — high-credit tenant, long-term lease stabilizing the building, anchor tenant that attracts other tenants.
Tactics that follow from understanding landlord NER incentives:
- Push concessions toward TI over free rent: TI is an upfront cash outlay for the landlord; free rent is deferred revenue. Some landlords prefer free rent because it delays the cash hit. Others prefer TI because it's a one-time building improvement that has appraised value. Know your landlord's preference and exploit it.
- Trade term for concessions: Landlords give larger concessions on longer leases because the NER impact of a $90/SF TI is much smaller on a 10-year lease ($9/SF/yr) than on a 5-year lease ($18/SF/yr). If you can commit to a longer term, you can extract dramatically higher concessions.
- Ask for NER-equivalent alternatives: If the landlord can't do more free rent (perhaps their lender restricts abatement beyond certain limits), ask for the equivalent value as above-TI landlord improvements, FF&E, or moving allowance — all have the same economic effect on your NER.
6 Red Flags in Lease Concession Structures
🛑 Red Flag 1: TI Allowance Not Available Until Substantial Completion of Buildout
Some TI provisions require the landlord to pay the allowance only after the tenant has completed the buildout and submitted documentation, often 6–9 months after lease commencement. This delays the tenant's receipt of cash while they're paying contractors out of pocket — dramatically reducing the present value of the TI relative to an allowance received at or before lease commencement. Negotiate for TI to be disbursed in draw-down installments as construction milestones are achieved, not as a lump sum after completion.
🛑 Red Flag 2: Free Rent Is Conditioned on Lease Compliance
Some landlords include provisions that void or claw back free rent if the tenant defaults during the lease term — turning the free rent concession into a conditional loan rather than a true concession. If the lease says the tenant must "repay" free rent received if the tenant is ever in default, the apparent concession is actually contingent liability. Reject clawback provisions entirely. Free rent provided at lease commencement should be unconditional — it is part of the economics of the deal.
🛑 Red Flag 3: TI Allowance Subject to Landlord Approval of Every Expenditure
A TI allowance that requires the landlord to pre-approve every invoice, contractor, and materials selection gives the landlord de facto control over the tenant's buildout budget. Landlords may use this control to slow-walk approvals, redirect tenants toward higher-priced preferred vendors, or exclude legitimate cost categories from TI reimbursement. TI provisions should specify only that the work must be consistent with the approved space plan and meet building standards — not that every expenditure requires prior approval.
🛑 Red Flag 4: Face Rent Used in Marketing Is Different from Lease Rent
When the per-square-foot rate quoted in the landlord's proposal or LOI differs from the rate in the draft lease — typically because the proposal quoted a blended rate or failed to account for escalation — the NER calculation changes. Always confirm that the face rent used in your NER analysis matches the Year 1 base rent in the actual lease document, not a blended or rounded marketing number.
🛑 Red Flag 5: Escalation Applies to RSF After Remeasurement
If the lease provides that rent escalates on the RSF as re-measured (rather than locked to the lease commencement RSF), any future building remeasurement that increases the stated RSF would increase your annual rent beyond the stated escalation rate. This compounds the load factor problem discussed in the measurement standards guide. Rent must be calculated on a fixed RSF established at lease commencement, with escalation applying only to the per-SF rate, not to a variable RSF that can be inflated through remeasurement.
🛑 Red Flag 6: TI Allowance Is Not Assignable to a Sublessee
If your lease is silent on whether unused TI allowance can be assigned to a sublessee or transferred in an assignment, the default interpretation in most jurisdictions favors the landlord — unused TI may revert to the landlord rather than being available to the tenant's subtenant. For tenants who may need to sublease, negotiate explicit language confirming that any unused TI balance transfers to the assignee or subtenant, or that the tenant can apply unused TI as a rent credit.
✅ 12-Item Net Effective Rent Analysis Checklist
- Identify the face rent and confirm it matches the lease Year 1 base rent: The face rent used in your NER calculation must be the actual Year 1 base rent in the lease, not a blended marketing rate.
- Confirm the lease term in months: NER is sensitive to lease term — a 10-year vs. 7-year term changes how concessions are spread. Use the exact number of months in your formula.
- Identify all free rent months and their timing: Front-loaded free rent is worth more in present value terms. Note when free rent occurs (months 1–6 vs. months 25–30) and adjust accordingly.
- Calculate total TI allowance per SF: Divide total TI dollar amount by total SF to get $/SF; confirm this is the figure that enters the NER formula.
- Include all other concessions (moving allowance, FF&E, etc.): Add any other one-time landlord cash contributions to the TI component of the NER formula.
- Run the simplified NER formula: NER = (Face Rent × Term − Free Rent Value − TI/SF) ÷ Term. This gives you a quick comparison figure.
- Run escalation-adjusted NER for long-term leases: For 7+ year leases, calculate the escalation-adjusted average face rent and use that as the face rent input to get a more accurate picture.
- Run present value NER for large deals: For leases over $1M annually, use present value analysis at your cost of capital to capture the timing differences between TI received up front and free rent deferred over the term.
- Confirm TI disbursement timing: TI paid at commencement is worth 10–25% more than TI paid after buildout completion (depending on timing and discount rate). Note when the landlord will actually pay.
- Check for free rent clawback provisions: Confirm that free rent is unconditional and not subject to repayment on default — if the lease has a clawback, adjust the effective free rent value downward to reflect repayment risk.
- Compare escalation rates across competing deals: Calculate the difference in total 10-year rent between competing escalation rates. A 1% lower escalation rate is worth $80,000–$150,000 over 10 years on a 5,000 SF lease.
- Make the final comparison on NER, then layer qualitative factors: NER determines true cost. Then evaluate: term length, space flexibility, expansion options, building quality, and which landlord you prefer as a long-term partner.
Frequently Asked Questions
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