A lease advertises $24/sq ft but gives six months free on a five-year term. What figure should income analysis use?
Correct Answer
B) The effective rent, spreading the concession over the term
Why this is correct: The effective rent is the correct figure because it reflects the actual economic benefit to the landlord, accounting for the concession. The original explanation notes a 10% discount: a $24/sq ft face rate over 60 months with 6 free months means paying for only 54 months. The effective annual rent is ($24/sq ft * 54 months) / 60 months = $21.60/sq ft, spread evenly over the full term. This is the income a buyer would analyze. Why the other choices are wrong: Using 'The advertised face rate' overstates income by ignoring the free rent concession. Using 'Zero for year one, face rate after' misrepresents the income stream by not averaging the concession over the lease term. Using 'The face rate plus a concession premium' is illogical; concessions reduce, not increase, the effective rent. Exam tip: For any lease with concessions, always calculate the effective rent over the full lease term to reflect true market income.
Why This Is the Correct Answer
Six months free on a sixty-month term means the landlord collects 54 months of rent, so the effective rent spreads the concession across the term to roughly $21.60 per square foot.
Why the Other Options Are Wrong
Option A: The advertised face rate, since it is what the lease document says
The face rate overstates what the landlord actually receives and, capitalized, overstates value proportionally.
Option C: Zero for year one, face rate after
Recording zero in year one and face rate thereafter distorts the timing rather than reflecting the term's economics, and misstates a concession spanning only part of the first year.
Option D: The face rate plus a concession premium
There is no concession premium. The concession reduces the effective rent rather than adding to it.
What Actually Gets Collected
What Actually Gets Collected. Fifty-four months of payment across sixty months of lease.
How to use: Ask about concessions on every lease. Face rates are advertising; effective rents are economics.
Exam Tip
Tenant improvement allowances and moving allowances are concessions too, and reduce effective rent the same way free rent does.
Common Mistakes to Avoid
- -Using advertised face rates from a rent roll
- -Overlooking tenant improvement allowances as concessions
- -Modelling free rent as a year of zero income
Concept Deep Dive
Analysis
Concessions are a way of advertising a headline rate the landlord is not actually receiving, and income analysis has to see through them. A five-year lease at $24 per square foot with six months free delivers 54 months of payment across a 60-month term, so the landlord collects 54/60 of the face rate — an effective rent of about $21.60 per square foot. That is the figure that reflects the true economics and the one that belongs in a discounted cash flow or a direct capitalization. Using the face rate overstates income and, capitalized, overstates value by the same proportion. The reason landlords structure deals this way is that face rates are visible to the market and to lenders, so preserving a high nominal rate while granting concessions maintains the appearance of the building's rent level. Recognising the pattern is part of reading a rent roll: an appraiser should ask about concessions on every lease rather than taking the stated rate at face value.
Background Knowledge
Effective rent spreads lease concessions such as free rent or tenant improvement allowances over the lease term, reflecting the income the landlord actually receives rather than the advertised face rate.
Real-World Application
An appraiser reviewing a rent roll finds six months free on several leases, computes effective rents near $21.60, and uses those in the income analysis.
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An operating expense ratio well below the market norm for that property type suggests:
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