One of the common issues with negotiating a commercial real estate lease is balancing the perspectives of both the tenant and the landlord. Understanding net effective rent and how it relates to each party in the transaction can help build a foundation for coming to a reasonable compromise on lease terms.
What Does “Net Effective Rent” Mean for a Tenant?
For businesses, rent is often one of the biggest expenses incurred, and it extends beyond just the amount specified for the base rental rate in the lease. Net effective rent for a tenant will also include additional recurring charges specified in the lease as well, most often in the form of estimated NNN charges but may also include marketing fees or other reimbursements due to the landlord. These additional costs are typically identified as “Additional Rent” and are due along with the monthly rental payment. The net effective rent for a tenant will also include rental reductions such as free rent periods at the beginning of a lease. Taken together, these costs represent the tenant’s net effective rent, or the total amount that will be paid to rent the space.
What Does “Net Effective Rent” Mean for a Landlord?
For property owners, net effective rent is the base rent due under the lease agreement minus costs incurred by the landlord as part of leasing the space such as free rent concessions, broker commissions, and construction costs for tenant improvements. The difference between what is owed by the tenant and these upfront costs is the amount that the landlord has available to pay its mortgage, accrue reserves for capital improvements, and generate a return on the real estate investment.
Meeting in the Middle
Understanding what net effective rent means for both sides of the negotiation provides a foundation for coming to mutual consensus on the structure of the lease. Tenants can evaluate the costs of renting and understand how that compares to the overall market, while landlords can make sure that they are able to meet expense obligations and achieve their desired return.