Why net effective rent is a terrible metric
[{"id": "e69eeb2", "text": "Applying a discount rate to calculate the net effective rent is the norm in most major markets though, right? \n\nA straight-line NER is an easy back-of-napkin tool for minor deals, but I think everybody would agree that it\u2019s overly simplistic for large deals. ", "replies": [{"id": "e69j2da", "text": "Strait-line NER is way over simplistic for sure. But most don\u2019t have the tools to calculate a complicated rent roll (with escalations, broker fees, tenant improvements, etc) with a discount rate applied. Excel struggles with this kind of complicated equation.", "replies": [], "depth": 2}], "depth": 1}, {"id": "e69rohg", "text": "Good topic but I feel like even this simplified explanation is a little more complex than it should be. \n\nDisclaimer- I work in lending, but in my view my clients do not look at cost of borrowing when it comes to TI and LC's because they have either had upfront tenant rollover reserves held back and they can use it for leasing costs or they are either paying ongoing reserves of $.50 to $1.50/ft. Often its a combination of both and so the money is there waiting for them to use towards leasing. \n\nSo, to keep it simple- in this example- if TI's are $80/ft , then net effective rents are $29.39/ft. If TI's are $150/ft, then net effective rents are $22.39/ft. This is assuming for both scenarios- total rent collected is $37,397,450, term of lease is 10 years. \n\nThe formula for NER/SF is (Total rent collected during lease term- total leasing costs)/term of lease/sf. ", "replies": [], "depth": 1}, {"id": "e6bcs1s", "text": "Why would the broker include financing costs and inflation in his calculation? He doesn't know your finances and shouldn't. If you have the cash up front, which the broker can and should assume, then the point is moot. What, should I just send all of my finances to the broker so he can perform a more detailed calculation, or is that something I should be doing myself as a competent landlord?", "replies": [], "depth": 1}]