Search "net effective rent" and you get definitions that amortise incentives over the lease term. Useful maths. Incomplete for buyers. Face rent is what the lease document writes. Effective rent is what the income story is worth once rent-free periods, fit-out contributions, and abatements are spread across the term. Cap the first number and you capitalise marketing. Cap the second and you capitalise cash you can defend.
This is the buyer read on face rent versus effective rent. Commercial passing rent vs net income covers Cap on flyer rent versus Cap on true net after outgoings. Gross lease vs net lease and how to calculate WALE cover recovery and term. Here I stay on one teaching point: incentives change the income unit before you argue Cap rate.
Face rent is the document. Effective rent is the deal.
Face rent is the contractual rent stated in the lease (or the rent schedule). It is what agents quote when they want the asset to look strong. Effective rent reduces that face figure by the value of incentives given to win or keep the tenant, then spreads the result across the firm term.
Common incentive forms in Australian commercial stock:
- Rent-free or rent-abated periods at the start (or mid-term).
- Landlord fit-out contributions or cash incentives.
- Combinations of free rent plus fit-out support.
None of those are "bad" by themselves. Soft markets and competitive precincts use incentives to fill space. The buyer problem starts when the flyer Cap uses face rent as if the incentive never existed.
How to rebuild net effective rent (buyer sequence)
You do not need a valuer's full amortisation model to ask the right commercial questions. Rebuild in this order before anyone talks Cap:
1. Pull the executed lease and every incentive side letter. Marketing summaries miss deeds and variations. If the pack only gives a heads of agreement, treat face rent as provisional.
2. List firm term in months. Options are not firm income. How to calculate WALE keeps firm expiry separate from option fluff.
3. Sum incentive value in dollars. Rent-free months × face rent, plus cash or fit-out contributions the landlord funded (or still owes).
4. Spread that cost across the firm term. Total contractual rent over the firm term, minus incentive value, divided by firm years (or months). That average is your working effective rent for underwriting.
5. Only then map outgoings recovery. Effective rent is still a top-line rebuild. Landlord-retained costs sit in the next step, covered in gross lease vs net lease and passing rent vs net income.
Two defensible treatments show up in valuation practice: build income on effective rent, or build on face rent and deduct outstanding incentive as a capital adjustment. What you cannot do as a buyer is Cap face rent and ignore the incentive. That counts value already given away.
I do not publish a "typical" incentive percentage here. Markets move. Asset class, vacancy, and tenant demand decide the package. Ask for the dollars on this lease.
Why Cap on face rent overstates the buy
Capitalisation is income divided by a Cap rate. If the income input is face rent while a material incentive is still running (or was front-loaded to secure the tenant), the Cap input is inflated. Same building. Same tenant. Different offer number.
The second signal is market honesty. A large incentive often means the space was hard to let at that face rent. That feeds vacancy assumptions, reletting cost, and the Cap rate you should be willing to pay. Soft recovery on outgoings adds to the problem when a suite is effectively gross; that path is already taught in the passing rent companion.
On every commercial deal I run The Deal Grade™: letter A to C on the building, number 1 to 3 on the income. Incentive quality sits inside the income grade with covenant, WALE, escalations, and recovery. A long face-rent headline with a fat rent-free period is a different income grade from clean effective rent on a shorter but honest term.
Incentives at expiry: the reletting stress test
Buying is not only about the current lease. Model what happens if the tenant leaves at firm expiry:
- Downtime with zero rent.
- Marketing and leasing fees.
- A realistic rent-free or fit-out package to secure the next tenant.
- Make-good disputes that delay re-letting.
That downside package belongs in the cash model before you treat today's face rent as a permanent Cap input. Commercial property due diligence keeps lease-first order: income and incentives before facade romance. If the selling agent cannot produce the incentive schedule and rent ledger, treat the yield claim as provisional. Price the risk or walk.
Passing rent, effective rent, and true net (keep the labels straight)
Buyers mix these three labels. Keep them separate:
| Label | What it usually means | Buyer use |
|---|---|---|
| Face rent | Contractual rent on the lease | Starting document figure |
| Passing rent | Current rent spoken for across the roll | Screening; still not Cap-ready |
| Effective rent | Face rent after spreading incentives | Income unit before Cap |
| True net / day-one NOI | Effective (or verified) income after landlord-retained outgoings | Cap input that survives settlement |
Triple net lease Australia already warns that marketing shorthand is not a recovery map. Net effective rent is the incentive half of that honesty. Outgoings are the recovery half. Cap true net only after both.
What to ask for in the pack
Before you Cap anything advertised on face rent:
1. Executed lease, variations, and incentive deeds.
2. Rent ledger for at least 12 to 24 months.
3. Clear statement of rent-free months used and remaining.
4. Fit-out contribution amounts and whether any balance is still payable.
5. Confirmation whether the flyer yield is on face, effective, or "net" after recoveries.
6. Suite-by-suite recovery map if the asset is multi-tenant.
What a commercial buyers agent does is forcing that rebuild before emotional capital is spent on the tour.
Next step: Ready Check / go-commercial
If you are graduating from residential into commercial income assets, start with capital, income need, and risk posture on the Commercial Ready Check. Process and commercial representation sit via go-commercial. Site CTA is Book a strategy call.
Bring the lease and incentive schedule if you have them. If not, that is the first gap we close before anyone talks Cap rate.
Frequently asked questions
What is the difference between face rent and effective rent?
Face rent is the rent written in the lease. Effective rent reduces that figure by the value of incentives (rent-free, fit-out, abatements) spread across the firm term. Buyers Cap effective rent, not the brochure face figure.
Is net effective rent the same as net income after outgoings?
No. Net effective rent is usually about incentives against face rent. Net income (day-one NOI) still subtracts landlord-retained outgoings after recoveries. Do both rebuilds before Cap.
Why do commercial flyers quote face rent?
Because face rent looks higher. It is a marketing unit. Ask whether the quoted yield is on face, effective, or true net after recoveries. If the agent cannot answer, the Cap conversation is not ready.
How should incentives change my Cap rate conversation?
Large incentives can signal soft letting conditions and inflate face-rent Cap maths. Rebuild effective rent, stress-test reletting incentives at expiry, then choose a Cap rate that fits the graded income quality. Do not invent a "market Cap" from a blog.
What documents prove the incentive story?
The executed lease, incentive side letters or deeds, the rent ledger, and a plain schedule of free-rent months and fit-out contributions. Summaries are not enough.
*Shayne Mele · General information only. Not financial advice. Lease incentives, face rent, and effective rent treatments vary by asset, state, and valuation method. Property outcomes depend on your brief, capital, timing, and the asset. Get advice specific to your situation before acting. Individual results vary.*
