What this calculator does
Advertised rent is rarely what a tenant actually pays. Free months, fitout allowances and recoverable operating costs all shift the true figure, and net effective rent is what remains once they are spread across the lease term.
The effect of an incentive is larger than it looks. One free month on a twelve month lease at $2,000 reduces the effective rent to $1,833.33, an 8.33 per cent discount, while the face rent on the lease still reads $2,000.
The formula
Total rent actually collected over the term has allowances and operating costs deducted, then is divided by the term to give an effective monthly figure, and multiplied by twelve for the annualised net effective rent.
| Term | Meaning |
|---|---|
| Face rent | The headline rent stated in the lease, before any incentives. |
| Net effective rent | What the rent averages out to once incentives and costs are spread across the term. |
| Tenant allowance | A contribution toward fitout, which reduces the effective rent. |
The inputs explained
| Field | What to enter |
|---|---|
| Base monthly rent ($) | The base monthly rent stated in the lease. |
| Lease term (months) | The lease term in months. |
| Free rent months (months) | Number of rent-free months granted as an incentive. |
| Tenant allowance (total) ($) | Total tenant allowance or fitout contribution. |
| Operating costs per month ($) | Operating costs per month borne by the landlord. |
When to use it
Comparing two lease offers
Different incentive structures are only comparable once reduced to a net effective figure.
Valuing a property from its leases
Face rents overstate income where incentives are common, which distorts a valuation.
Negotiating an incentive
Knowing what a free month is worth in effective terms sharpens the conversation.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
What is each free month worth?
The same lease with different rent-free periods.
| Free rent months | Effective monthly rent | Discount versus face rent |
|---|---|---|
| 0 months | $2,000.00 | 0.000% |
| 1 months | $1,833.33 | 8.33% |
| 2 months | $1,666.67 | 16.7% |
| 3 months | $1,500.00 | 25.0% |
Questions
Why do landlords use incentives rather than lower rent?
Because the face rent appears in the lease and feeds into property valuations, which are often based on a multiple of contracted rent. An incentive delivers the same economics to the tenant while keeping the headline figure intact.
Does a longer term dilute an incentive?
Yes. One free month on a twelve month lease is an 8.33 per cent discount; the same month across a sixty month lease is under 2 per cent. Incentives should always be assessed against the term they are spread over.
Should a fitout allowance count?
It depends on whether the fitout benefits the tenant or reverts to the landlord. A contribution toward work the tenant would have paid for regardless is effectively rent relief; work that becomes the landlord's asset is less clearly so.
Is this the same as effective rent in residential leasing?
The arithmetic is identical, though residential incentives are usually simpler, typically a free week or two. The principle of spreading the incentive across the term applies equally.
For the yield that rent supports, see the cap rate calculator. For a quick price-to-rent screen, see the gross rent multiplier calculator.