Net rental income received by the landlord from a lease after deducting the value of concessions and costs incurred to secure the lease such as leasing commissions and tenant improvements.
For instance, if a tenant signed a 5 year lease for $20/sf per year, but received a $10/sf tenant improvement allowance and five months free rent, the effective rent would be $16.33/sf ($20 / 12 months = $1.67/month x 5 months free = $8.33 plus $10/sf tenant improvement allowance = $18.33/sf total cost to landlord. $18.33 / 5 year lease = $3.67 per year deduction from the face rate of $20/sf = $16.33/sf effective rent).
Effective rent is also called net effective rent. Net effective rent (also called net effective rate or NER) is commonly used in landlords' marketing materials rather than stated in the actual lease. NER is the average rent that a tenant pays during their lease term. If the gross rent is $1,000 per month for a 12-month term, the tenant pays $12,000.
NER comes into play when a promotion is offered to the tenant. For example, a tenant may receive one month free for a 12-month term. The gross rent is $1,000 per month. Using the formula:
[Total rent payable] / [number of months in lease] = $11,000/12 = $916.67
The NER is $916.67. That's the average rent the tenant will pay over the term. Instead of advertising $1,000/mo, the landlord can choose to advertise $916.67/mo net effective rent, a more attractive number to potential renters.
When a renter is offered a free month, it lowers their average (i.e., net effective) rent. However, for the renter, they are still paying the full gross rent minus the one free month. As a side note, broker fees are usually based on gross rent instead of net effective rent.
The Investor's Guidebook To Net Lease
Learn More About Net Lease Investments.