Face rent vs effective rent: why the gap widens

Face rent is the number on the cover sheet. Effective rent is face rent minus the amortised value of every incentive — rent-free months, fit-out contributions, capped opex — spread across the term.

Year one of a ten-year lease, the two sit close. By year ten, they’ve drifted further apart than most tenants realised they would. Three things drive the divergence.

Escalations compound face, not effective

Most Auckland leases run fixed reviews of 2–3% per annum, with market reviews at year four and year seven. Those escalations stack on the face number. Effective rent, calculated against the original incentive package, doesn’t move.

A face rent of $400/m² with 2.5% annual escalations reaches roughly $510/m² by year ten. The effective rent — calculated against nine months rent-free and a $200/m² fit-out contribution on a ten-year term — sits around $350/m². The gap has widened to $160/m² without anyone touching the lease.

Market reviews reference face

The valuer running the year-seven market review pulls comparables. Those comparables are face rents from recent deals. Effective rent doesn’t show up on the comparable schedule. The tenant inherits the market’s face number, not the market’s effective.

The renewal floor is face

At expiry, the landlord’s opening position is the current face rent. The tenant who only tracked the headline number through the term is negotiating from a base that’s drifted 25–30% above where the economics actually sit.

Track effective rent quarterly. The headline number isn’t the one that bites you.