Building Rental Rates - Free Rent

The other day, I was on a property tour with a client who hadn’t had much experience in leasing commercial building space. It struck me the confusion caused by how building rental rates are quoted. I believe this is not unique to the Indianapolis office space and Indianapolis industrial markets, but also exists in most U.S. commercial real estate markets.

Confusion exists with the way rates are quoted. Landlords often quote commercial space as a list price, or the rental rate before any concessions are blended into the rate. For example, an office building’s Full Service list rental rate may be $21.00 per rentable square foot. However, if in order to get the tenant to relocate its office to the landlord’s building, the landlord provides the tenant with a rental concession equal to 5 months free rent prior to 60 months of rental payments, the true effective rate would equal $19.38 per rentable square foot.

Simply put, the effective rental rate is the average rental rate a tenant pays during the term of the lease. In the example above, the effective rate is calculated by multiplying the rental rate ($21.00 / rsf) by the payable months of the lease term (60 months) and then dividing the total by the number of months the tenant will occupy the space (65 months = 60 months + 5 months of free rent).