The actual rental rate a landlord would be able to obtain after deducting the value of concessions from the base rental rate that are extended to a tenant (e.g., leasing commissions, a renovation/ improvement allowance, free rent, moving allowance, etc.). The effective rental rate and is typically expressed as an average lease rate over the term of the lease contract.
For example, if a tenant entered into a 4 year lease for $25/sf per year, and during the lease term received a $10/sf tenant improvement allowance and four months rent waiver, the effective rent would be calculated as follows:
$25 / 12 months = $2.08/month x 4 months free = $8.32 plus $10/sf tenant improvement allowance = $18.32/sf total cost to landlord. Now, if this cost is divided by the number of years: $18.32 / 4 year lease = $4.58 per year. This would be deducted from the stated rate of $25/sf = $20.42/sf effective rent).
Effective rent is also known as net effective rent (or for short as NER).
