How to determine effective rent for restaurant leases
What is effective rent?
Effective rent is a term used to describe the actual rent paid for restaurant leases after factoring in concessions received by a tenant or paid by a landlord.
For example, as a tenant, you may receive free rent and a tenant improvement allowance. In addition, the landlord may be required to perform work to the building prior to delivering possession of the premises.
Why is knowing effective rent for restaurant leases important?
Understanding and calculating the effective rent will help you understand both the actual cost of your restaurant’s lease over the lease term, as well as help you understand how the landlord is analyzing the deal from their side of the table.
Knowing the effective rent also allows the landlord and tenant to structure restaurant leases that work for both parties.
For example, if the tenant needs a higher cash allowance to conserve working capital, the tenant may be able to pay a higher face rent rather than use cash on hand or borrow additional capital.
How do you calculate the effective rent for restaurant leases?
Rent = $2,000 month
Term = 60 months
Free Rent = 4 months ($8,000)
Tenant Improvement Allowance = $20,000
The total rent for sixty months equals $120,000. Subtract both the $8,000 of free rent and the $20,000 for tenant improvement allowance. The total effective rent is now $92,000.
If you divide $92,000 by 60 months, the effective monthly rent is $1,533.33
As a tenant, you are actually paying $1,533.33 per month after receiving concessions from the landlord.
When should you calculate the effective rent?
Calculating the effective rent is a good method to compare two potential restaurant leases you may be considering.
Assuming both restaurant leases offer comparable site features such as visibility and access, the effective rent will allow you to make the best decision based on your sales projections.
In summary, the effective rent is important to help you analyze the real cost for restaurant leases over the term of the lease, as well as understanding the real economics from the landlord’s point of view.
In addition, knowing the true costs allow both parties to structure a deal that works for both sides.
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Cheers!
Mark Chase
Restaurant Real Estate Advisors
I like that you clearly explained how to calculate effective rent. Sometimes it can get complicated to calculate various figures, but you gave a clear example and it was easy to follow. Also, great application about comparing the effective rent against two different restaurant leases.