What is the difference between Asking rent vs Effective rent?
Many tenants get confused over the difference between the effective rent vs asking rent of a commercial property.
In short, the asking rent is the rental price listed by the landlord, while the effective rent is the rent derived after considering rent free discounts given ie. the average rent paid per month.
In a typical leasing process, after you have identified the property to lease, seek your office consultant’s advice on how negotiable the asking rent is. In most cases, the asking rent is negotiable by about $0.10 – $0.50 psf. The other important factor in the lease terms will be the rent-free period. Most of the time, landlords are willing to give 1 month rent-free, and sometimes more, depending on the situation. On a case-by-case basis, depending on the landlord’s preferences, tenants have the option to play around with negotiating a lower rental rate or more rent-free. The effective rent is the final rental rate calculated including the rent free.
So how do you calculate effective rent?
Asking Rent is $5.30psf for a 1000sqft office. Landlord agrees to a $5.00psf rental rate after negotiations. Rent-free period given is 1 month. Total lease term is 3 years (36 months).
Monthly rental = $5.00psf x 1000sqft = $5,000
Effective rent = Total rent ($5000 x 36)/ Total no. of months (36+1) = $4,864.86
Effective rental rate = $4,864.86/ Size of office (1000sqft) = $4.86psf
Asking Rent is $5.30psf for a 1000sqft office. Landlord insists on a $5.30psf rental rate after negotiations. Rent-free period given is 2 months. Total lease term is 3 years (36 months).
Monthly rental = $5.30psf x 1000sqft = $5,300
Effective rent = Total rent ($5,300 x 36)/ Total no. of months (36 + 2) = $5,021.05
Effective rental rate = $5,021.05 /Size of office (1000sqft) = $5.02psf
For a detailed explanation of other office leasing terms, you might want to read this article on Common Leasing Terms to Know When Renting an Office in Singapore.