Free calculator · Real Estate
Lease Economics: Expense Stop & Net Effective Rent
Calculates expense-stop or base-year expense recoveries and the net effective rent for a single office or retail lease. Inputs include rentable area, starting rent and annual escalation, lease term, free rent, tenant improvement allowance, and Year 1 operating expenses with a growth rate.
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Lease Economics: Expense Stop & Net Effective Rent
Lease terms
Expense stop structure
Base-year lease: the stop equals Year 1 expenses ($10.00/SF), so the tenant pays increases above the base year.
Year-by-year rent & expense recoveries
| Year | Base rent | Opex /SF | Tenant reimburses |
|---|---|---|---|
| Year 1 | $300,000 | $10.00 | $0 |
| Year 2 | $309,000 | $10.40 | $4,000 |
| Year 3 | $318,270 | $10.82 | $8,160 |
| Year 4 | $327,818 | $11.25 | $12,486 |
| Year 5 | $337,653 | $11.70 | $16,986 |
| Total | $1,592,741 | $41,632 |
reimbursement (each year) = max(0, expenses/SF − stop $10.00/SF) × 10,000 SF
Expense stop
$10.00/SF
base year = Yr 1 opex
Total recovery (term)
$41,632
over 5 years
Avg recovery / yr
$8,326
landlord reimbursement
Net effective rent (NER)
Free rent value
$75,000
3 mo at Yr 1 rate
TI allowance
$500,000
$50/SF × 10,000 SF
Net Effective Rent
$20.35
per SF per year
NER = (base rent − free rent − TI) ÷ term ÷ SF = ($1,592,741 − $75,000 − $500,000) ÷ 5 ÷ 10,000 = $20.35/SF/yr
Learn the concept
This calculator comes from the free Real Estate Finance course, where the concept is taught with readings, worked examples, and practice questions.
Built by Devon Coombs, CPA, MBA, Teaching Professor of Finance at Santa Clara University.