TI Allowances, Free Rent and Net Effective Rent
Concessions are how landlords cut the real price without cutting the headline rate. Net effective rent is the only figure that reconciles them.
Leasing · 557 words · updated 2026-08-26
Face rent is a published number. Net effective rent is the deal. In soft markets the two can diverge by 25% or more, which is why market statistics built only on asking rates lag reality by several quarters.
The concession package
- Tenant improvement (TI) allowance — dollars per rentable square foot the landlord contributes to building out the space. Quoted either as a total or per year of term.
- Free rent / abatement — months of rent waived, usually at the front of the term, sometimes "gross" (including operating costs) and sometimes "net" (base rent only).
- Moving allowance, cabling allowance, lease assumption — cash contributions toward the tenant's transition costs.
- Turnkey build-out — the landlord delivers a finished space to an agreed plan rather than giving dollars. Economically a TI allowance, but the cost overrun risk sits with the landlord.
Calculating net effective rent
The straight-line method, adequate for most comparisons:
NER = (Total base rent over term − free rent − TI allowance − other concessions) ÷ rentable SF ÷ term in years
Worked example. A 10,000 RSF suite, seven-year term, $32.00 starting rent with 3% annual escalations, eight months free and $70 per square foot of TI.
- Gross base rent over seven years with 3% escalations ≈ $2,455,000
- Less eight months' abatement at the year-one rate ≈ $213,000
- Less TI allowance of $70 × 10,000 = $700,000
- Net = $1,542,000 → ÷ 10,000 SF ÷ 7 years = $22.03 NER
A face rent of $32.00 is a net effective rent of $22.03 — a 31% discount that never appears in an asking-rent statistic.
Discounted net effective rent
Straight-line NER ignores the timing of cash flows, which flatters long free-rent periods and understates the cost of a large up-front TI to the landlord. Institutional underwriting discounts the landlord's cash flows — rent received, TI paid at commencement, leasing commissions paid on signing — at the owner's cost of capital, and compares deals on present value per rentable square foot. For a tenant the mirror calculation is the present value of occupancy cost.
How landlords think about it
A landlord with debt covenants or a valuation event ahead will pay heavily in concessions to protect face rent, because appraised value is driven by contract rent and market rent assumptions, not by what the landlord spent to achieve them. That is a real, rational preference — and it is why a tenant with flexibility on structure can often extract more total value by asking for concessions than by grinding the rate.
It also means TI is not free money. Unamortised TI is a real cost the landlord recovers over the term; a tenant asking for an outsized allowance will pay for it in rate, in term, or in a clawback if it terminates early. Ask what the landlord's standard allowance is for the term being offered, and whether additional TI can be amortised into rent at a stated interest rate — often 6–9%.
Reading the market correctly
Because concessions move faster than asking rates, any market read that uses face rent alone will miss the turn in both directions. Where concession data is available, track it as a percentage of face rent alongside the rate series. Where it is not, treat asking-rent series as a ceiling and use lease comparables — actual signed transactions — as the evidence.