In this step-by-step guide, we show you how to use the Free Rent Calculator, which provides an accurate, visual means to quantify the impact of concessions in commercial leases based on the market conditions and landlord’s risk profile. The calculator allows both landlords and tenants to benchmark the impact of free rent, tenant improvements, and moving allowance on a given set of the asking and offering rents. The calculator determines the resulting effective rent, which is equivalent to the tenant paying a constant base rent over the entire lease term.1 The effective rent serves as a comparison benchmark, allowing users to quickly see the impact of changes to the asking rent and concession package. The tool works by allowing users to specify the structure of the rental payments, tenant improvements (TIs), and the moving allowance, and then computes the maximum free rent period in light of the specified lease terms and concessions. Landlords can use the tool to fine-tune the concession package by determining the appropriate level of free rent that seems attractive without increasing exposure to tenant default. Tenants can use the tool to optimize the free rent and concession structure to create the most desirable pattern of monthly cash outflows from the available options.
Liu, P., Su, L., & deRoos, J. A. (2014). Guide to using the free rent calculator [Electronic article]. Center for Real Estate and Finance Reports, 3(2), 5-9.