Straight-line net effective rent
Spread one-time concessions over the lease term, then subtract their annualized cost from rent and recoveries.
Two useful views of the same lease
One summarizes annual economics; the other preserves the timing of every cash flow.
Landlord lease NPV
Place concessions in the year they are paid, project future rents and expenses, and discount each year's net cash flow.
Example 1 · Annual net effective rent
Start from the Chapter 4 course example, then move any slider to see the bridge update immediately.
Annual net effective rent$17.40 PSFCourse benchmark: $17.40
Annualized concessions$7.60 PSFFree rent + TI + commission
Operating margin58.0%Net effective rent ÷ gross rent
Total up-front concessions$76.00 PSFBefore straight-line amortization
Net effective rent bridgeAll values are annual $/PSF
Positive items raise the running total; operating costs and annualized concessions reduce it.
Net effective rent = rent + recoveries − operating costs − annualized concessions
Following the course example, free rent, tenant improvements, and leasing commissions are spread evenly over the lease term.
Example 2 · Multi-year landlord lease NPV
Compare a constant percentage growth path with a discrete rent bump. Timing matters because earlier cash flow receives less discounting.
Additional cash-flow assumptions
Scenario A NPV$96.22 PSFCourse benchmark at reset
Scenario B NPV$91.22 PSFCourse benchmark at reset
NPV advantage$5.01 PSFScenario A is preferred
Equal-NPV bump$6.13 PSFBump that makes the landlord indifferent
Annual landlord net cash flowTiming of rent and concessions
Scenario A · annual growthScenario B · discrete bump
The Year 1 cash flow includes free rent, tenant improvements, and leasing commissions.
NPV sensitivity to the discount rateCurrent rate is marked
Scenario A NPVScenario B NPV
Drag or animate the discount-rate control to see how later cash flows lose present value more quickly.
Lease cash-flow scheduleAll values are annual $/PSF
| Year | Rent A | Rent B | Recoveries | Operating costs | Cash flow A | Cash flow B | PV A | PV B |
|---|
NPV = Σt=1T Cash Flowt ÷ (1 + discount rate)t
The workbook follows Excel's NPV convention: even the first listed annual cash flow is discounted one period.
Landlord decision: Under the reset assumptions, Scenario A has the higher NPV because its earlier rent growth more than offsets Scenario B's later bump.
What students should notice
The two methods answer related but different questions.
Concessions reduce effective rent
More free rent, a larger TI allowance, or a higher commission lowers the annualized economic rent even when the quoted rent is unchanged.
Timing changes value
A dollar received sooner is worth more. The discount-rate animation makes the penalty on later rent bumps visible.
Compare leases consistently
Straight-line rent is useful for a quick annual comparison; NPV is the stronger tool when rent patterns and concession timing differ.
Instructional-use notice. This tool was created for FIN 355 at California State University, Fullerton. It simplifies lease terms and is intended for teaching only, not for financial, legal, tax, or investment advice.