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Net effective rent

Net effective rent is the real rent a landlord is left with over the lease term, after all discounts and incentives have been deducted from the agreed rent. The nominal rent in the contract rarely tells the whole story, because the landlord often gives something away to close the deal: a few months of free rent, a contribution towards refurbishment, or a stepped model where the rent starts low. Net effective rent spreads these concessions across the whole lease term and shows what the landlord actually earns per square metre per year.

The calculation takes the agreed rent for the whole term, deducts the value of all rent incentives, and divides by the lease term. An example: a ten-year contract at 2,000 kroner per square metre with one year of free rent and a tenant fit-out contribution of 1,000 kroner per square metre gives a net effective rent well below 2,000, even though the contract looks like a 2,000 deal from the outside. The gap between nominal and effective rent is often 10-20% in a tenant-friendly market.

The distinction matters for two reasons. First, it makes leases comparable: two buildings with the same rent per square metre can have very different profitability if one of them gave away large incentives. Second, it is the net effective rent that drives the valuation, because it is the lasting cash flow a buyer can rely on. In a transaction, a buyer will always dig out the actual incentives behind each contract precisely in order to work out the effective rent, and a high nominal rent with hidden discounts is a classic finding in a due diligence.

Landlords often prefer to give incentives rather than lower the nominal rent, because a high stated rent per square metre keeps up the visible value of the building and sets a higher starting point for the next renegotiation. For an investor assessing market value and yield, it is nevertheless the effective rent that counts. Report: Tenants mentions exactly this in its own list of what it does not cover: the rent level, and therefore also the effective rent, is found only in the contracts.

From Placepoint's glossary: Net effective rent

More information: Eiendom Norge: Market reports, Akershus Eiendom: Market Report

English: Net effective rent.

Common questions we come across

What is net effective rent?

It is the real rent the landlord is left with per year after all discounts and rent incentives have been deducted from the agreed rent and spread across the whole lease term. It shows what a contract is actually worth, not just the nominal amount.

What is the difference between nominal and effective rent?

Nominal rent is the amount stated in the contract. Effective rent deducts free months, tenant fit-out contributions and other incentives. The gap is often 10-20% in a tenant-friendly market.

Why do landlords state a high nominal rent with discounts?

Because a high stated rent per square metre keeps up the visible value of the building and sets a higher starting point for the next renegotiation. Incentives give the same effective rent without lowering the visible rent.

Why does effective rent matter in a transaction?

Because it is the lasting cash flow that drives market value and yield. A buyer always digs out the actual incentives in a due diligence in order to work out the effective rent.