Net Effective Rent, or NER for short, is a measure of the expected income from a tenant, seen mostly in commercial real estate. It is the net present value of all the rental payments over the period of the lease. Net effective rent is the amount a tenant pays to a landlord minus any tenant improvement allowance, buildout costs, taxes, maintenance and insurance. In other words, it is what a landlord ultimately gets to keep from a deal and is one of the primary financial metrics landlords use to negotiate their leases.
NER is calculated on a dollar per square foot per year basis and is calculated over the term length of the lease, considering the time value of money. It’s the Net Present Value of the lease’s cashflows amortized back over the term of the lease, expressed as a dollar amount per square foot of the premise, payable per year – this is what allows NER to accurately compare deals of varying term lengths, rents, premise sizes and incentives.
There are several basic items to consider when negotiating a lease and calculating the NER.
- Base Rental Rate
- Tenant Improvement Allowance (TIA)
- Leasing Commissions
- Length of Lease Term
- Discount Rate Applied
To give an example of how NER could differ from the base rental rate, consider the amount given to the tenant in TIA for them to build out the space to their specifications and needs. This amount is deducted from the base rental rate amortized over the length of the lease term when calculating NER. This can result in an above market base rental rate to result in the actual payout to the landlord to be below market rents. Therefore, the landlord must take this and other costs into consideration when negotiating the initial base rental rate to determine if the lease will be profitable.