In commercial real estate, things like 'net rent', 'gross rent', 'face rent', 'effective rent' and 'gross effective rent' get thrown around a lot.
However, many tenants need help understanding the difference between these terms. And it's essential because you could be paying a vastly different amount than expected, depending on which is used.
Here's a quick breakdown.
The net rent is the base amount of rent payable. Tenants may be required to pay additional expenses called outgoings (a.k.a building costs), such as:
The landlord primarily benefits from this type of arrangement as, if the cost of outgoings increases, the tenant pays the increase.
The gross rent is a figure that includes the outgoings listed above.
For tenants, this type of arrangement can mean greater consistency because they'll know exactly how much the rent (and outgoings) will be each month without any costly surprises. It may also be more convenient because it involves a single payment rather than multiple monthly charges.
However, these days, it's rare to see a gross lease that genuinely covers all outgoings. Many leases would be more appropriately labelled as 'semi-gross' and are structured in one of two ways:
So, if your lease is a Gross Lease, it's essential to understand whether it is fully-gross or semi-gross and how the difference can affect your bottom line.
Face rent is a rental figure that disregards incentives such as rent-free periods, rent reductions (a.k.a rent abatements) and fit-out contributions. The term is used interchangeably with "asking rent." Whether this figure includes building expenses depends on whether the rent is quoted as "Gross" or "Net."
Effective rent is a rental figure that accounts for any rent-free periods and other incentives provided to you as the tenant. It's the amount you'll pay each month or year when averaged out over your lease term.
Effective rent is the number you want to use when comparing options. That's because it helps you compare properties with varying rents, incentives and outgoings to ensure you're getting a well-structured deal at a fair market price.
Gross Effective Rent is the rent payable under the lease, considering all incentives and including all building outgoings.
When deciding whether to renew your lease or relocate, it’s essential to compare properties on a like-for-like basis.
A common mistake tenants make is comparing face rents for new market options with their passing rent at their current premises - which typically reflects their rent after incentives like abatements have been applied. This can lead to an inaccurate comparison, as face rents don't account for things such as abatement over the term, up-front rent-free periods or landlord-funded fit-outs.
So, to make an informed decision, ensure you’re comparing gross effective rents across all options, which factor in incentives, outgoings, and any additional costs associated with relocating.
If you're unsure how to calculate or compare rents accurately, a tenant rep can help break down the numbers. This will ensure you get a clear and fair comparison, and save you time, money, and potential headaches down the track.
Tenant CS is an entrepreneurial, independent tenant representation firm. Our mission is to help businesses save time and money and get deal terms that benefit them (not the landlord) through our market analysis and lease negotiation strategies.
We work with companies across Australia and New Zealand and have offices at the heart of the Sydney and Melbourne.
Book a call today to find out how we can help you with your next lease negotiation or relocation project.
For a breakdown of more terms, check out our full glossary of terms or contact one of our team members.
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