# Evaluating office concessions and net effective rents

Canonical: https://chicagocommercialfunding.com/guides/evaluating-office-concessions-and-net-effective-rents/
Markdown: https://chicagocommercialfunding.com/guides/evaluating-office-concessions-and-net-effective-rents/index.md
Resource ID: evaluating-office-concessions-and-net-effective-rents
Published: 2026-10-21
Updated: 2026-10-21
Attribution: Chicago Commercial Funding Editorial
Topic: office
Asset types: Office
Investment stage: Evaluate
Experience level: Intermediate

Compare office proposals through collected rent less landlord leasing costs, timed to when cash moves. A higher quoted rent can produce less investment income after concessions.

Compare office leases using the cash the owner expects to collect after concessions and leasing expenditures, rather than face rent alone. Identify the area, lease length, expense structure, timing, and definition of every metric before comparing proposals. Then keep the undiscounted average separate from the present value and the amount of money needed before rent starts.

An expensive lease can increase reported occupancy and face rent while reducing near-term owner liquidity. That is particularly relevant when an acquisition model assumes that vacant offices will lease quickly and cheaply. A concession package is an investment in future receipts; the investor needs to understand the amount, timing, recoverability, and risk of that investment.

## Define the comparison before calculating

A landlord can use “net effective rent” to describe several different calculations. Some presentations deduct free rent only. Others also deduct tenant improvements, leasing commissions, or selected transaction costs. Expense reimbursements may be included in one proposal and excluded in another. A quoted number without its definition is not a common unit of comparison.

Use an explicit label such as “undiscounted base rent after abatement and landlord leasing capital, per rentable square foot per year.” State whether the denominator includes abated months and whether downtime before commencement sits outside the lease term. Do not call this number NOI: property expenses, vacancy costs, owner capital, and debt service remain to be considered.

Cousins' first-quarter 2025 supplement presents office leasing measures with separate concessions and tenant-improvement/commission information. The presentation illustrates why definitions matter; its portfolio is not a Chicago asking-rent benchmark. [Review the leasing-activity table](https://www.sec.gov/Archives/edgar/data/25232/000002523225000027/aearningsreleaseex9911q25.htm).

## Work through two hypothetical proposals

Assume a vacant 10,000-square-foot suite and a five-year, sixty-month lease in either alternative. For simplicity, there are no annual escalations, no credit losses, and no discounting in this first comparison. Reimbursements are deliberately excluded and will be modeled separately.

| Item | Proposal A | Proposal B |
|---|---:|---:|
| Annual face base rent per square foot | $36 | $32 |
| Scheduled five-year base rent | $1,800,000 | $1,600,000 |
| Free base-rent months within term | 6 | 2 |
| Base-rent abatement | $180,000 | $53,333.33 |
| Landlord tenant-improvement payment | $500,000 | $250,000 |
| Leasing commission | $90,000 | $80,000 |
| Net five-year receipts after listed costs | $1,030,000 | $1,216,666.67 |
| Net annual amount per square foot | $20.60 | $24.33 |

The denominator is 10,000 square feet multiplied by five years. Proposal A's higher face rent produces approximately $186,667 less undiscounted net receipts under these assumptions. This is arithmetic, not a recommendation to accept B: tenant credit, buildout durability, lease rights, expense burdens, and timing can change the conclusion.

The landlord improvements are cash expenditures, not deductions from the legal rent obligation. The commission calculation here is stipulated, not an assertion that all brokers charge these percentages or use scheduled rent as the commission base. Actual agreements can have tiered fees, renewal fees, installment payments, and different treatment of free rent.

## Show the first-year funding requirement

Proposal A needs $590,000 for its listed improvements and commission before considering downtime, base-building repairs, legal work, or contingency. The $180,000 of abatement is forgone revenue within the lease term; it should not also be inserted as an additional construction invoice. Confusing those categories double counts the concession.

If the owner has $300,000 of available leasing cash, A has a $290,000 immediate funding gap on the stipulated costs. B requires $330,000 and has a $30,000 gap. A property can be economically attractive over five years and still be unable to execute the lease without new equity or an approved financing arrangement.

Map the actual payment months. A reimbursement allowance paid after tenant completion may move cash later than a landlord-managed construction contract. That does not eliminate the obligation or assure the owner can withhold payment. Document the conditions, evidence, approval process, and source of funds.

## Discount cash at the right dates

An undiscounted average treats a dollar today like a dollar five years from now. A present-value model discounts each monthly net payment using a stated rate. It should show negative construction and commission amounts in their actual expected months and positive rent only when expected to be collected.

As a small timing illustration, a hypothetical $100,000 received one year later has a present value of about $90,909 at a 10% annual discount rate. That calculation does not establish a market discount rate. It demonstrates why moving a payment changes value even when the nominal total remains $100,000.

Avoid discounting a five-year average and then subtracting all costs again. The clean approach is one timeline with signed amounts and a separate reconciliation to the undiscounted totals. Include a stated convention for monthly discounting. Keep the results consistent when a lease starts midway through a calendar month.

## Separate base-rent relief from other concessions

Free base rent can coexist with payment of taxes, operating reimbursements, electricity, parking, storage, or after-hours HVAC. A phrase such as “six months free” does not specify which charges stop. Read the clause and put each charge in its own model row.

Work letters can make owner and tenant obligations depend on completion, approvals, or delivery conditions. A filed Principia lease includes a detailed work-letter framework. It is a negotiated historical example, not a default Chicago form. [Read the lease and work letter](https://www.sec.gov/Archives/edgar/data/1510487/000119312518251837/d575899dex1018.htm).

Also identify moving allowances, furniture contributions, rent credits for tenant-managed construction, landlord's base-building work, signage, and temporary space. An allowance already deducted as leasing capital should not be deducted again because the tenant applies it against rent. Trace the economic payment once and explain the legal mechanism separately.

## Distinguish signed economics from cash spent

A leasing report may summarize the economics of agreements signed during a quarter, while the cash-flow statement reflects checks written under agreements signed earlier. Neither is inherently wrong. They answer different questions.

Empire State Realty's 2025 quarterly reporting describes leasing-capital metrics on a signed-lease basis rather than simply equating them with period cash payments. That distinction is useful when interpreting owner reports. [Read the leasing disclosures](https://www.sec.gov/Archives/edgar/data/1541401/000154140125000037/esrt-20250930.htm).

For a small property, maintain a commitments ledger: approved lease, total owner commitment, paid to date, remaining contracted amount, anticipated payment month, and funding source. Reconcile it to the general ledger and bank account. A low current-quarter leasing expenditure can hide a large signed obligation due next quarter.

## Compare the same premises and service burden

A suite with more usable area, independent HVAC, and efficient access may support a different tenant decision than an equal rentable-area suite. Do not use a building's gross area as the rent denominator when the proposal specifies rentable premises. Preserve the measurement convention.

Model owner-retained costs after commencement. A high gross rent that requires the landlord to absorb more utilities or operating-cost growth can produce less income than a lower modified-gross rent. An expense stop may delay recoveries until costs exceed the contractual base. Concession analysis should connect to the lease's recovery calculation rather than assume all operating costs pass through.

Parking adds another potential mismatch. A package including guaranteed spaces and subsidized parking can have a real cost even if the rent schedule never mentions it. Verify the landlord's authority to provide the spaces and the renewal or termination terms of any third-party parking contract.

## Evaluate credit and flexibility before selecting the winner

The arithmetic assumes full performance. A tenant with limited capital may consume a generous buildout and fail before the owner earns the expected return. Review the actual obligor, financial evidence, security, guarantee, business needs, and whether the improvements have value for another user.

Termination options can shorten the earning period. Calculate both full-term and earliest-permitted-exit outcomes using the agreement's actual termination payments and unamortized-cost rules. Do not assume that an owner will collect a reimbursement merely because it appears in a draft term sheet.

Expansion, contraction, assignment, exclusivity, and restoration rights can affect adjacent space or future releasing. A proposal with a slightly higher calculated net rent may impair the building's broader leasing plan. Record those effects as explicit decision factors, with financial estimates only where evidence supports them.

## Apply the comparison in Chicago

Obtain competing proposals and recent executed-lease evidence appropriate to the building, suite size, condition, and user. Downtown towers, neighborhood professional buildings, and suburban campuses serve different requirements. A national REIT's leasing table does not establish local concessions for a particular asset.

Price construction from the actual scope and access conditions. Occupied-building restrictions, delivery logistics, existing systems, hazardous-material review, and permits can affect timing and cost. Confirm responsibility with the architect, contractor, manager, and counsel before treating an allowance as a complete project budget.

Use a decision sheet that shows face rent, definition of effective rent, lease receipts, capital commitments, operating burdens, credit concerns, funding gap, and downside case. Recommend the proposal that best meets the owner's risk and capital objectives, explaining why. The strongest proposal is the one whose complete cash flow and obligations work together, not simply the largest number at the top of the rent schedule.

## Source registry

- [Cousins Q1 2025 leasing supplement](https://www.sec.gov/Archives/edgar/data/25232/000002523225000027/aearningsreleaseex9911q25.htm): accessed 2026-10-21
- [Principia filed lease and work letter](https://www.sec.gov/Archives/edgar/data/1510487/000119312518251837/d575899dex1018.htm): accessed 2026-10-21
- [Empire State Realty Q3 2025 leasing disclosures](https://www.sec.gov/Archives/edgar/data/1541401/000154140125000037/esrt-20250930.htm): accessed 2026-10-21

## Related resources

- [A Chicago investor’s guide to office and medical-office investment](https://chicagocommercialfunding.com/learn/office/)
- [Building systems: HVAC, elevators and office capital exposure](https://chicagocommercialfunding.com/guides/building-systems-hvac-elevators-and-office-capital-exposure/)
- [Medical-office buildouts and specialized tenant requirements](https://chicagocommercialfunding.com/guides/medical-office-buildouts-and-specialized-tenant-requirements/)