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Net rent, gross rent, face rent, net effective rent, gross effective rent. They all get thrown around in commercial leasing, and the same space can sound $100+/sqm cheaper or dearer depending on which one you're quoted. If you're facing a lease expiry, a relocation or a renewal, knowing which number you're looking at is the difference between a good deal and a costly one.
Net rent is the base rent before outgoings, while gross rent includes some or all building outgoings. Face rent is the quoted rent before incentives, and effective rent is what you actually pay once incentives are averaged over the lease. Net effective rent is the base rent after incentives, excluding outgoings, and it's the figure most landlords and agents use to value a deal.
As tenant reps, we at Tenant CS compare every option on an effective basis, because the lowest face rent is often not the cheapest deal. Read on for the full breakdown.
Net rent is the base amount of rent you pay, before any building costs. On top of net rent, tenants usually pay their share of outgoings (i.e building costs), such as:
Net leases mainly favour the landlord: if outgoings go up, the tenant pays the increase.
Gross rent is a rent figure that includes outgoings. For tenants, a gross lease can mean more predictable costs and a single payment rather than several separate charges.
These days, it's rare to see a gross lease that genuinely covers all outgoings. Many would be more accurately called semi-gross, and they're usually structured in one of two ways.
The landlord covers outgoings up to a set level, and tenants pay any increases above that base year, based on their share of the building. For example, say you pay a gross rent of $100,000 in Year 1, and in Year 2 the outgoings for your premises rise from $12,000 to $15,000. Under a base year lease, your gross rent in Year 2 becomes $103,000: the $100,000 plus the $3,000 increase.
The maths looks simple, but a poorly negotiated base year can cost tenants thousands. Here's what to look out for with a base year lease.
The tenant agrees to pay certain outgoings directly, for example water rates, while the landlord covers the rest.
If your lease is described as gross, check whether it's fully gross or semi-gross, and exactly which outgoings you could still be asked to pay.
Face rent is the quoted rent before any incentives are taken into account. It's also called asking rent or headline rent. Face rent ignores incentives such as rent-free periods, rent reductions (abatements) and fit-out contributions. It can be quoted net or gross, so always check which.
Effective rent is the rent you actually pay once incentives are taken into account, averaged over the lease term. Because it captures both the rent and the incentive, effective rent is the number to use when comparing options.
Net effective rent is the base rent you actually pay after incentives, averaged over the lease term, excluding outgoings. It's a key measure used by landlords and agents to assess leasing transactions. For tenants, however, it's important to consider gross effective rent and total occupancy costs when comparing options.
Here's a simplified, hypothetical example for an office lease. It ignores annual rent reviews and the time value of money.
You pay $1,218,750 over 5 years, or $243,750 a year. Divided by 500 sqm, that's a net effective rent of $487.50/sqm net effective, well below the $650/sqm net face rent on the proposal.
Now compare a second building quoting a lower face rent of $600/sqm net with a 15% incentive. Its net effective rent works out at $510/sqm net effective. That's more than the first building, even though its face rent looked $50/sqm cheaper. We'll cover more complex scenarios, including staged incentives and fit-out contributions, in a dedicated guide.
Tenant tip: Ask every landlord for the net effective rent, then check the maths yourself. The lowest face rent on the table is often not the cheapest deal.
Gross effective rent accounts for base rent, building outgoings and incentives, averaged over the lease term. It provides a more comprehensive basis for comparing leasing costs, although additional expenses such as cleaning and parking should also be considered. Take the example above and add hypothetical outgoings of $130/sqm a year. The gross face rent would be $780/sqm gross, and the gross effective rent around $617.50/sqm gross effective (assuming the incentive is applied to the net rent only).
When deciding whether to renew your lease or relocate, compare every option on a like-for-like basis.
A common mistake is comparing the face rents of new options against your current passing rent without accounting for the incentives available under a new lease. This can make relocation appear more expensive than it really is.
Landlords would generally rather give you a bigger incentive than lower the face rent. Here's why:
Tenant tip: Compare gross effective rents across every option, including your current premises, then add other occupancy costs such as cleaning, parking, fit-out and make good. That gives you the clearest view of which deal is genuinely cheaper.
We work exclusively for tenants across Australia, with a focus on Sydney and Melbourne. We model the net and gross effective rent of every option side by side, including your current premises. Then we use that analysis to negotiate a stronger rent and incentive package, so you know the true cost before you sign.
Book a call with us today to see how we can help you.
For more lease terms explained, see our full glossary of commercial real estate terms.
Net effective rent is the base rent a tenant actually pays after incentives such as rent-free periods, abatements and fit-out contributions are averaged over the lease term. It excludes outgoings. For example, a $650/sqm net face rent with a 25% incentive over 5 years works out at about $487.50/sqm net effective. It's useful for comparing base rent, but tenants should also compare gross effective rent and total occupancy costs.
Net rent is the base rent before outgoings, so the tenant pays building costs such as council rates, land tax and insurance on top. Gross rent includes some or all of those outgoings in one figure. Many gross leases are actually semi-gross, meaning tenants still pay certain outgoings or any increases above a base year, so always check the lease.
Face rent is the quoted or asking rent for a commercial property before incentives are applied. It's sometimes called headline rent and can be quoted net or gross. Because it ignores rent-free periods, abatements and fit-out contributions, face rent can overstate what you'll actually pay. Tenants should compare offers using net or gross effective rent instead.
