Underwriting
Concessions And The Gap Between Asking And Effective Rent
Advertised rent and collected rent diverge whenever concessions are offered, and underwriting that reads listings without adjusting for them overstates revenue systematically.
Asking rent is what a unit is advertised at. Effective rent is what the landlord actually receives once concessions are spread across the lease term. The two separate quietly.
What a concession is
A concession is value given to a tenant to secure a lease without lowering the stated rent. Free weeks, a reduced first month, waived fees and paid moving costs are all forms of it.
The stated rent remains intact on paper, which is the point. It preserves the headline figure used in marketing, in valuation and in future lease comparisons.
Concessions are usually easier to withdraw than a rent reduction, which is why operators reach for them when leasing slows rather than repricing units outright.
They are also easier to target, since a concession can be offered on the units that are actually sitting empty while the rest of the building is left alone.
How effective rent is calculated
The total value of the concession is subtracted from total rent over the lease term, and the remainder is divided by the number of months. That average is effective rent.
A month of free rent on a twelve-month lease removes a twelfth of the annual revenue from that unit. The stated rent overstates collections by a corresponding amount.
Some operators amortize the concession across the term in their accounting and some record it in the month given. The presentation changes which month looks weak.
Why listing data misleads
Listings quote asking rent. Concessions may be mentioned in small print, negotiated privately or offered only to prospective tenants who ask about them.
Rent comparables assembled from listings therefore describe a market's asking prices rather than its transactions, particularly where leasing has slowed.
The gap tends to widen when new supply is competing for tenants, since new buildings lease up with concessions before they stabilize.
The effect carries into renewal
A tenant who signed with a concession experiences an increase at renewal even when the stated rent is unchanged. The discount simply ends.
That perceived jump raises the chance of turnover, which is why concessions granted at lease-up create a second cost a year later.
Operators who understand this often plan the renewal conversation from the day the concession is granted, rather than discovering the problem when notice arrives.
Reading the rent roll instead
A rent roll showing stated rent and actual monthly billing side by side reveals concessions that listings hide. Tenant ledger detail is better still.
Verifying with the leases themselves, and asking a property manager what is being offered in the immediate area, is the practical check. Lease terms and disclosure practices vary by state.
