effective rent

Effective rent vs NPV: what is the difference?

Effective rent is an average rent number. NPV is later cash brought into today's dollars and added. Use the average to talk. Use NPV when timing matters.

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Questions people ask next

What does effective rent do?

Effective rent converts a messy lease stream into one yearly number a tenant can quote per foot. A tenant should keep this lease answer visible on the same page.

What does NPV do?

NPV keeps the whole lease stream in today's dollars so timing stays visible beside the average. A tenant should keep this lease answer visible on the same page.

Which should you use?

A tenant should use both when timing might flip the rank. One number does not tell the whole story.

Can they disagree?

Effective rent and NPV can disagree. That gap should stay on the page instead of being hidden. A tenant should keep this lease answer visible on the same page.

This question sits on the effective-rent hub.

See the comparison workflow after the idea is clear.

The how it works page shows the four-step path.

Go deeper on How do you calculate effective rent?.

Plain-language definition

Effective rent is an average rent after incentives.

NPV means net present value. It shrinks later cash instead of spreading it flat.

If a credit happens now, NPV gives it more weight than a credit that happens later.

An average can give the later credit the same voice as the early one.

Empty conference room used as editorial background. Not a customer photo.

Why it matters

Teams mix the words and then argue about a number that is not the same object.

A client can think they heard a discounted answer when they heard an average.

That mix creates fake certainty.

Naming the tool prevents that.

How it works

The cash flow is the list of money in and out by year. Write that list first.

Build one cash list.
Make the average from that list if you need a headline.
Make the NPV from the same list with a visible rate.
If the rank differs, say why. It is usually timing.

Later cash boxes sit farther right and look smaller than year-one cash. — Later cash is smaller in today's dollars. This is a teaching picture, not a live model.

Formula in words. Average = flatten. NPV = shrink later years, then add.

Required inputs for this page
Input	Meaning
Same cash list	Do not switch inputs between tools
Average rule	What you spread
NPV rate	How you shrink

Worked example

Here is a teaching sample. It is not customer data and not a result from a live client.

Lease A start rent$40,000

Lease B start rent$37,200

Discount rate8%

Sample NPV A$366,312

Lease A vs Lease B — the contrast lease
Metric	Lease A	Lease B
Start rent	$40,000	$37,200
Year-1 extras	$8,800	$9,416
Year-1 credit	$16,000	$8,800
Sample NPV	$366,312	$355,601

Cash-flow walk — the contrast lease
Year	Rent	Extras	Credit	Cash out	Value today
Year 1	$40,000	$8,800	$16,000	$32,800	$30,370
Year 2	$41,800	$9,064	$0	$50,864	$43,608
Year 3	$43,681	$9,336	$0	$53,017	$42,087
Year 4	$45,647	$9,616	$0	$55,263	$40,620
Year 5	$47,701	$9,904	$0	$57,605	$39,205
Year 6	$49,132	$10,201	$0	$59,333	$37,390
Year 7	$50,606	$10,507	$0	$61,113	$35,659
Year 8	$52,124	$10,822	$0	$62,946	$34,008
Year 9	$53,688	$11,147	$0	$64,835	$32,434
Year 10	$55,299	$11,481	$0	$66,780	$30,932
Sample NPV	—	—	—	—	$366,312

Two bars on one scale for Lease A and Lease B. Teaching sample only. — Both options use the same rate. The lower bar is not automatically the better lease.

How to read the sample

Sample NPV for the contrast lease is about $366,312. A second path lands near $355,601. That gap is a talking point, not a promise.

An early credit boosts both tools, but NPV more. If one path wins only because a credit sat in the wrong year, start over.

Year notes for the contrast lease

Year 1 of the contrast lease has rent of $40,000.
Shared building cost is $8,800.
A credit of $16,000 lowers the cash you pay that year.
Cash out this year is about $32,800. An early credit boosts both tools, but NPV more.
Later cash gets a shrink for time. At 8 percent, year 1 is worth about $30,370 today.

Next, year 2 rent is $41,800.
CAM, which is a shared building cost, is $9,064.
There is no credit in this year.
You pay about $50,864 this year after extras and credits. The average already smeared the gift.
Time shrinks later cash. At 8 percent, year 2 is worth about $43,608 today.

Then year 3 rent is $43,681.
Extras for the building come to $9,336.
Credits skip this year.
The net cash this year is about $53,017. Steps hurt the average less than they hurt undiscounted totals.
Waiting has a price. At 8 percent, year 3 is worth about $42,087 today.

After that, year 4 rent is $45,647.
The shared building cost this time is $9,616.
No extra credit shows up this year.
Cash out this year is about $55,263. NPV still sees later weight if the rate is modest.
Later cash gets a shrink for time. At 8 percent, year 4 is worth about $40,620 today.

In year 5 of the contrast lease, rent is $47,701.
Shared building cost is $9,904.
There is no credit in this year.
You pay about $57,605 this year after extras and credits. This last year is where the two tools can disagree.
Time shrinks later cash. At 8 percent, year 5 is worth about $39,205 today.

Year 6 of the contrast lease has rent of $49,132.
CAM, which is a shared building cost, is $10,201.
Credits skip this year.
The net cash this year is about $59,333. Keep this later year in the sum for the sample.
Waiting has a price. At 8 percent, year 6 is worth about $37,390 today.

Next, year 7 rent is $50,606.
Extras for the building come to $10,507.
No extra credit shows up this year.
Cash out this year is about $61,113. The row still belongs in the sum for the long path.
Later cash gets a shrink for time. At 8 percent, year 7 is worth about $35,659 today.

Then year 8 rent is $52,124.
The shared building cost this time is $10,822.
There is no credit in this year.
You pay about $62,946 this year after extras and credits. Keep this later year in the sum for the long path.
Time shrinks later cash. At 8 percent, year 8 is worth about $34,008 today.

After that, year 9 rent is $53,688.
Shared building cost is $11,147.
Credits skip this year.
The net cash this year is about $64,835. The row still belongs in the sum for the long path.
Waiting has a price. At 8 percent, year 9 is worth about $32,434 today.

In year 10 of the contrast lease, rent is $55,299.
CAM, which is a shared building cost, is $11,481.
No extra credit shows up this year.
Cash out this year is about $66,780. Keep this later year in the sum for the long path.
Later cash gets a shrink for time. At 8 percent, year 10 is worth about $30,932 today.

Add those year values. The sample NPV for the contrast lease is about $366,312. This is a teaching sample, not a client result.

Try the Lease Comparison Tool

Assumptions

Same five-year list for both tools.
8 percent NPV rate for teaching.

Edge cases

If you change the divisor, the average moves and NPV does not.

If you change the rate, NPV moves and the average does not.

Common mistakes

Reporting both numbers without saying which ranked the deal.
Using effective rent in a sentence that claims 'present value.'

Decision implications

Lead with the tool that matches the question.

If the question is timing, lead with NPV.

Compare this to related metrics

Face rent is weaker than both.

Total cash is closer to a raw add than to NPV.

Limits

Neither tool scores a bad floor plan.

When this should not drive the choice

Do not pick a winner with an average if the client asked about time.

Next step

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Trusted sources

These are public references. They are not endorsements and not client results.