Monday, May 2, 2016

NET EFFECTIVE RENT (NER) – Good Idea to do the Math!

Whether landlords are doing incentives via TENANT IMPROVEMENT ALLOWANCES (TIA) or RENT FREE CONCESSIONS (RFC), the reality is that the stated lease rate is being affected and not necessarily in the landlord’s favour. The TIA involves an actual capital investment on the part of the landlord, whereas the RFI foregoes cash flow for a period of time. In either case there is a determinable cost to the landlord for these type of incentives and a prudent landlord should rightly do the math to understand the net effect.

NET EFFECTIVE RENT (NER) is basically what the lease rate actually looks like, after the incentive is accounted for. Consider the following for either situation on a 1,000’ unit being leased at $10/ft:
  • RF Incentive OF 3 MONTHS – 3 x $833.33/mo = 2500 in year 1 
  • NER = $7500 / yr. or 7.50/ft. ($10,000 - $2500 / 1000’)
  • TI ALLOWANCE  - $5 / ft. x 1000’ = $5000.00
  • NER = $5000 / yr. or $5/ft. (10000 - $5000 / 1000’)
It’s important to note that both of the above examples are calculated against only one year of lease income and assumes a one year lease. If the term is three years, both NER rates go up, as the total rent number is three times higher over the full term. It’s all simple math based on the specific deal. More importantly, it not only affects your cash flow but ultimately the return on investment for the property.

If we assume TIAs or RFC are a cost of doing business in your market, landlords need to focus on determining the NER early in the process when assessing any lease proposal. As with everything in real estate, in some cases the projected NER makes sense, while other times it doesn’t.

We welcome your comments about NER realities and experiences within your market. As always, we’re just a click/call away from discussing our investment opportunities here in Windsor-Essex!

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