Commercial Lease Effective Rent Calculator

How effective rent is calculated

A lease proposal is easier to compare when every promised payment and concession is converted to one annual rate per rentable square foot. This calculator builds a month-by-month lease schedule, applies annual escalations on each lease anniversary, subtracts the opening abatement period, and treats tenant improvement allowance and other upfront cash concessions as a reduction at commencement.

For month m, the lease year index is:

y = floor((m - 1) ÷ 12)

Monthly base rent and operating expenses are:

B = area × starting base rent × (1 + base escalation)^y ÷ 12

O = area × starting expenses × (1 + expense escalation)^y ÷ 12

During free-rent months, the abatement is either B or B + O, depending on the selected treatment. Net occupancy payment is C = B + O - abatement. The monthly discount rate is j = (1 + annual discount rate)^(1 ÷ 12) - 1. Because commercial rent is commonly paid at the beginning of the month, month one is not discounted, month two is discounted one month, and so on.

The discounted all-in present value is:

PV all-in = sum(C ÷ (1 + j)^(m - 1)) - upfront concessions

The discounted base-rent present value uses only paid base rent, after free base rent, and subtracts the same upfront concessions. Each present value is then divided by the annuity-due factor, sum(1 ÷ (1 + j)^(m - 1)), and annualized as 12 × PV ÷ (area × factor). The undiscounted rates use the same cash flows without discounting.

What moves the answer most

The largest drivers are the starting rent, length of the term, size and timing of concessions, and whether the free-rent period also waives operating expenses. Escalations matter more on longer leases because each later lease year compounds from the prior rate. A larger tenant improvement allowance can push effective base rent below the face rent, and in high-concession proposals it can even make the effective base-rent result negative.

The discount rate changes the weight given to later payments. A higher rate makes future escalated payments count less in present value terms, while upfront concessions keep their full value because they are assumed to be available at commencement.

What this calculator leaves out

The model assumes fixed annual percentage escalations and consecutive free rent at the start of the lease. It does not model CPI clauses, caps, floors, fixed dollar steps, percentage rent, gross-up provisions, audit adjustments, renewal options, termination rights, security deposits, restoration obligations, broker commissions, moving costs, taxes on rent, or delayed reimbursement of tenant improvements. Use the monthly schedule as an economic comparison, not as an invoice, accounting entry, appraisal, or legal interpretation.

Worked example

Suppose a tenant is comparing a 5,000 rentable square foot, 60-month lease at $30.00 per square foot in first-year base rent. Base rent and operating expenses both escalate 3% annually, starting operating expenses are $12.00 per square foot, the tenant receives three months of base-rent-only free rent, the tenant improvement allowance is $40.00 per square foot, and the tenant uses an 8% annual discount rate.

The calculator shows discounted effective base rent of about $20.31 per square foot per year and a discounted all-in occupancy rate of about $33.00. On a cash basis, effective base rent is about $22.35 and all-in occupancy is about $35.10. The present value of occupancy cost after upfront concessions is about $686,967, total scheduled base rent is about $796,370, operating expenses are about $318,548, and the opening free-rent value is $37,500.