What Does Net Effective Rent Mean in Chicago Apartments?

Apartment renters in Chicago are likely to consider offers for a month of free rent in exchange for signing an extended lease.  Some landlords in Chicago even go as far as offering two months of free rent to get tenants signed onto a lease ahead of the winter slowdown of Chicago's rental market. Domu encourages tenants to consider, though, whether a month of free rent is as valuable as it sounds -- particularly if the landlord is making up the difference by charging an inflated rent for the remainder of the lease term.

Landlords sometimes try to entice renters by offering a free month's rent and advertising what they call a "net effective rent."  Be careful, renters, because "net effective rent" is not the same as the actual monthly rent charged -- rather, it is meant to describe the average cost of monthly rent over the course of the lease term, with the free month included in the average.  

How to Calculate Net Effective Rent for Chicago Apartments

Here's how net effective rent is calculated: 

  1. Take the value of advertised free rent 
  2. Divide that number by the number of months of the lease term, minus the number of months of free rent. (For example, if the lease term is for 12 months, and there is 1 month of free rent provided, then you divide the value of the free rent among the remaining 11 months of the lease term for which you will be paying.)
  3. Subtract that amount from the actual monthly asking rent, also known as the gross monthly rent, to get the net effective rent

Let's look at a hypothetical example. If a listing offers a "$1,300 net effective rent" due to a month's free rent, what is the actual monthly rent that the lease will require the tenant to pay during the 12-month lease? $1,418.18.  

Here's how it is calculated:

  1. $1,300 in free rent (aka 1 month free)
  2. $1,300/11 months = $118.18 
  3. Gross monthly rent is $1,300 + $118.18 or $1,418.18 for the remaining 11 months of the lease term.

In this case, the annual fee is $1,418.18 times 11 months, or $15,599.98.   

Now contrast this to an apartment that is listed for $1,300 per month for a 12-month lease agreement with no free rent offered. In that case, the annual fee is straightforward: $1,300 times 12 months, or $15,600. As you can see, an apartment listed for $1,300 with no free rent is nearly the same cost as an apartment listed for $1,418.18 with one free month included.

Will Renters Get the Same Incentive for Renewing the Apartment Lease?

Imagine now that the renter will seek to renew the lease at the end of the lease year. If the landlord doesn't offer another free month's rent to induce the renewal, the tenant will not benefit from the "net effective rent" offered during the initial lease year. He or she will be required to pay $1,418.18 monthly rent in the second lease year, for each month of the lease -- which is certainly more expensive than renewing a lease at a base rent of $1,300 per month. 

At Domu, we encourage landlords to list the actual monthly rent and to list concessions separately, rather than to advertise a blended "effective monthly rent."  We want tenants to have a clear idea of the monthly rent obligation as they consider their options. But even if landlords advertise an "effective monthly rent," the lease agreement should state the actual monthly rent obligation.  

The bottom line is that a savvy renter might find that the annual cost for an apartment with a lower market rent and no rent concession is a better deal than a similar apartment offering a free month and a higher monthly base rent --  particularly if the renter intends to renew their lease for another year. 

Landlords and tenants alike should remember that the newest amendments to Chicago apartment law requires the landlord to give extra advance notice for a raise of the rent — and if the landlord doesn’t offer the same concession for the renewal year, then the landlord is effectively raising the rent. Tenants should consider whether they can afford the actual monthly rent, without the concession of a free month, if they think they might want to renew after the initial term concludes.