An office landlord can preserve the rent on the brochure while cutting the value of the lease. The less obvious concession is timing: give away the first year's rent, and even the lease's average annual payment overstates its equivalent annual value at a positive discount rate.

Actual lease comparisons account for this. The US General Services Administration includes free rent, stepped rent and lump-sum payments as separate inputs in its present-value workbooks for evaluating lease proposals.[1] Counting the money and valuing when it arrives are different calculations.

Put the rent on a calendar

Consider a hypothetical office offered on a five-year lease at $100,000 a year, with the first year rent-free. The tenant can occupy the premises throughout the term. Assume fixed rent, no early break, full collection and, for transparent arithmetic, payments at each year-end. Exclude operating expenses, taxes, fit-out contributions and leasing commissions; these would need separate cash-flow entries in a full appraisal.

The landlord receives nothing in the first year and the stated rent in each remaining year. Dividing total receipts by the whole lease term produces an undiscounted average of $80,000 a year.

Now compare a second offer: the same premises, term, tenant quality and other terms, but $80,000 paid at every year-end, with no free period. The total nominal rent is identical. A simple average declares a tie.

The landlord's bank account disagrees. Under the second offer, cash arrives earlier. Under the first, a larger proportion of the receipts waits until later years. RICS's discounted-cash-flow guidance explicitly places rent-free periods and vacancy periods in the cash-flow forecast, so their timing remains visible.[2]

That is why a rent roll alone cannot settle this comparison. It states a contractual rate; the payment calendar reveals how much of that rate the owner can actually collect during the holding period.

Turn delayed payments into an annual equivalent

Use an 8% annual discount rate, chosen solely for this illustration. It is an assumed required return, not a claim about today's office market. Discount each payment by dividing it by 1.08 raised to the number of years until receipt, then add the results. This applies the present-value method described by RICS.[2]

To translate that present value into a comparable annual rent, divide it by the sum of the discount factors for all five year-end payment dates:

Equivalent annual rent = present value of the actual receipts ÷ present value of receiving $1 at every year-end.

For the lease with the free first year, the result is approximately $76,810 a year. This is the level annual payment that would give the landlord exactly the same present value at the assumed rate. The calculation is the author's, using the hypothetical terms above.

The competing flat-payment offer retains its $80,000 annual equivalent. Its earlier receipts make it more valuable even though the undiscounted totals match. Move the concession to the final year instead, holding everything else constant, and the direction reverses: the landlord now collects the larger payments earlier. Which year is free matters.

This comparison values the specified rent stream. It does not value the building: there is no sale price, subsequent letting, refurbishment bill or income beyond lease expiry in the calculation.

Read the definition under the number

An undiscounted effective rent is still useful. CompStak's published methodology adds scheduled rent and escalations, subtracts concessions, and divides by the lease term; it explicitly applies no discount rate. It also identifies markets where its calculation excludes tenant-improvement allowances.[3]

The problem arises when differently constructed measures enter the same comparison. Before treating an “effective rent” increase as better economics, establish whether both observations include the same concessions, use the same timing convention and measure the same period. A consistent average can track a market; a discounted annual equivalent answers a more specific valuation question.

A concession can still be the better deal

The strongest counterweight is the alternative tenant. The flat-payment offer in this example is assumed to be available immediately. In practice, rejecting a concession may leave the office empty. A signed lease with free rent can produce a better outcome than waiting for an offer that never arrives. The owner must compare the concession with the expected cost of vacancy and the likelihood of collecting the eventual rent.

Fit-out also changes the comparison. An apparently generous rent-free period may partly cover time when the premises cannot yet support the tenant's business. The Valuation Office's 2026 rental-adjustment guidance distinguishes normal fitting-out time from an incentive when analysing rental evidence for business rating.[4] That is a purpose-specific adjustment, not permission to erase missing receipts from an owner's cash forecast.

The testable claim is therefore narrow: a higher face rent does not establish a more valuable lease. The claim that a particular concession package is economically worse would be invalidated if a like-for-like cash-flow comparison, including realistic vacancy, costs and collection assumptions, gave it the higher present value. The concession's size alone cannot decide the result.

Watch the documents at three concrete events:

• At lease signing: reconcile the face rent with the concession schedule, payment dates and any landlord-funded works. This fixes what was actually exchanged.
• At rent commencement: check that the first contractual payment becomes a cash receipt. A lease beginning to bill and a tenant beginning to pay are separate evidence.
• At the first break or expiry decision: update the expected collection period and the cost of replacing the tenant. A valuation that assumes uninterrupted receipts needs revisiting when the occupier can leave.

Sources

1. US General Services Administration, “Leasing tools,” Present Value Analysis workbook section — free rent, stepped rent and lump-sum inputs in lease-proposal comparisons; accessed 13 October 2026.
2. Royal Institution of Chartered Surveyors, Discounted cash flow valuations, November 2023 — sections 4.30 and 4.66–4.69, and Appendix A, on explicit cash flows, required returns and present value.
3. CompStak Help Center, “How is Effective Rent calculated?” — undiscounted methodology and market-specific treatment of tenant improvements; accessed 13 October 2026.
4. Valuation Office, Rating Manual, “Part 1: practice note 1 2026 — rental adjustment,” section 7 — fitting-out periods and rent-free incentives in business-rating analysis.
5. Ged Carroll, Empty office, 12 September 2011, Wikimedia Commons — photograph, original Flickr provenance and CC BY 2.0 attribution.