Commercial Lease Types: Net, Gross and NNN Compared

Buy a commercial property and you are buying an income stream, not just a building. The lease defines that income almost entirely: who pays for what, how predictable the rent is, and how much of your time the property will take. That is why commercial lease types are the first thing an experienced investor reads, well before the building itself. Two identical buildings on the same street can throw off completely different returns depending on the lease structure, the tenant, and the rent review mechanism sitting behind them.

There are four lease structures you will meet in Australian commercial property, and the difference between them is money: gross, net, triple net, and percentage. Read the wrong one into your yield calculation and the return you underwrote will not be the return you collect.

1 Why Lease Structure Matters

In residential property, your return is largely a function of the property itself, its location, condition, and the local rental market. In commercial property, the lease changes the equation entirely. A well-structured lease with a strong tenant can make an average building an excellent investment. A poorly structured lease can turn a prime building into a liability.

Three things flow from the lease, and each one hits your return directly. The first is income predictability: how certain the rent is and how it grows, because different lease types split cost risk differently between landlord and tenant. The second is management burden. Some leases leave you running outgoings, maintenance and building services; others hand almost every operational job to the tenant, so your appetite for active management should steer which type you buy. The third is the yield itself. A property advertised at a 7% yield on a gross lease and one at a 7% yield on a triple net lease are not the same proposition, because the outgoings exposure behind each is entirely different, and the gross-versus-net-yield distinction means nothing until you know the lease structure.

2 Gross Lease

Under a gross lease the tenant pays a single, fixed rent and the landlord covers all property outgoings. These typically include council rates, water rates, land tax, building insurance, common area maintenance, and structural repairs.

Where gross leases are common

You see gross leases most often in office buildings, particularly multi-tenanted offices where shared services and common areas make it impractical to allocate individual outgoings to each tenant. They also turn up in smaller commercial suites and in some co-working or serviced office arrangements.

Advantages for investors

• Simpler tenant relationships. The tenant pays one figure and you manage the rest, which cuts disputes over how outgoings are allocated and what service levels apply.
• Higher gross rental. An all-inclusive rent produces a higher gross figure, which can make the property easier to finance, since lenders assess rental income.
• Tenant retention. Tenants often prefer the simplicity and cost certainty of a gross lease, which supports lower vacancy rates.

Risks for investors

• Outgoings exposure. If council rates, insurance premiums, or maintenance costs rise faster than your rent reviews, your net income shrinks. You carry the full risk of cost escalation.
• Harder to calculate true net yield. You have to forecast outgoings accurately to know your real return, and those costs can be volatile, insurance and maintenance on older buildings especially.
• Deferred maintenance temptation. Outgoings come straight out of the landlord's pocket, so there is a pull to put off non-urgent work, which tends to become a larger capital bill later.

3 Net Lease

A net lease has the tenant pay a base rent plus some or all of the property's outgoings. The common Australian form is base rent plus outgoings such as council rates, water rates, and building insurance, with the landlord keeping responsibility for structural repairs and sometimes land tax.

Where net leases are common

Net leases are prevalent in retail properties, standalone commercial buildings, and some suburban office assets. Strip retail is the classic case, where individual tenants occupy discrete premises and outgoings attribute cleanly to each tenancy.

Advantages for investors

• Partial outgoings recovery. Passing some costs through to the tenant makes your net income steadier and less exposed to increases in the recovered categories.
• Clearer net yield. With a meaningful share of outgoings recovered, the gap between gross and net yield is smaller and easier to forecast.
• Balanced risk. A net lease sits between a gross lease and a triple net lease on landlord responsibility, which suits investors who want some cost protection without handing all maintenance risk to the tenant.

Risks for investors

• Residual outgoings. You still carry whatever is not passed through, usually structural maintenance, capital works, and sometimes land tax, and those bills can be large and unpredictable.
• Outgoings disputes. Tenants may challenge recoveries they think are unreasonable or badly apportioned, so the lease drafting has to be clear.
• Management overhead. You still run the building, arrange insurance, coordinate maintenance, and administer outgoings recovery, which costs you time or a managing agent's fee.

4 Triple Net Lease (NNN)

A triple net lease, NNN for short, pushes virtually all operating costs and responsibilities onto the tenant. They pay base rent plus every outgoing: council rates, water rates, land tax, building insurance, routine maintenance, structural repairs, and sometimes even capital works. You collect a clean net income with minimal ongoing obligations.

Where triple net leases are common

NNN is the standard in industrial and logistics property, especially single-tenant warehouses, distribution centres, and manufacturing facilities. It is also common in large-format retail, standalone fast-food outlets, and purpose-built premises leased to national tenants.

Why investors favour triple net leases

• Passive income. Your job comes down to collecting rent and checking lease compliance. No outgoings to manage, no maintenance to coordinate, no surprise repair bills.
• Income certainty. What you see is what you get. The rent the tenant pays is your net income, less only your own financing costs, land tax if it is not recovered, and advisory fees.
• Simplified analysis. With the tenant carrying all operating costs, the capitalisation rate and yield fall out cleanly, with no outgoings to estimate and deduct.
• Lower management costs. Nothing to administer means little or no need for a property manager, which lifts your net return further.

Risks for investors

• Tenant covenant is everything. The tenant maintains the building, so a weak or financially distressed one can let it run down and leave you a deteriorated asset at lease expiry.
• Make-good risk. If the tenant vacates and the make-good clause is loosely drafted, or the tenant cannot afford to honour it, you may inherit a building that needs significant capital expenditure before it can be re-leased.
• Lower gross rent. Triple net rents sit below gross rents on a per-square-metre basis, because the tenant is bearing every cost separately, and that can affect loan-to-value ratios and financing terms.
• Concentration risk. Most NNN properties are single-tenant assets. If that tenant defaults or vacates, income drops to zero immediately, with no diversification across multiple tenancies.

A triple net lease with a strong tenant on a long term is the closest thing to a bond that commercial property offers. And like a bond, your return depends entirely on the counterparty's ability to pay.

5 Percentage Lease

A percentage lease pairs a base rent with a variable component tied to the tenant's gross turnover. Once turnover passes an agreed threshold, the breakpoint (or natural breakpoint), the landlord takes an additional payment set as a percentage of turnover above that level.

Where percentage leases are common

Percentage leases are mostly a retail instrument, particularly in shopping centres, malls, and high-street retail strips. Major shopping centre landlords use them as standard practice, and they are turning up more in food and beverage precincts, entertainment venues, and mixed-use retail environments.

Advantages for investors

• Upside participation. If the tenant's business thrives, you share in that success through higher rental income, which aligns your interests with theirs.
• Inflation hedge. Revenue tends to rise with inflation, so the percentage component hedges rising costs, potentially more effectively than fixed or CPI-linked rent reviews.
• Tenant viability signal. Regular turnover reporting shows you how the tenant is trading and gives early warning of financial distress.

Risks for investors

• Income volatility. The variable component moves with the tenant's trading, so in a downturn your income may be limited to the base rent alone.
• Reporting reliance. You depend on the tenant reporting gross turnover accurately. Build in audit rights, but disputes over what counts as revenue and how it is reported are common.
• Structural retail shifts. Online retail can pull in-store turnover down even for an otherwise healthy business, which cuts the percentage rent directly. A tenant can be profitable overall yet ring up less in-store revenue than the lease anticipated.
• Complex valuation. A variable income stream is harder to value, which flows into financing, as lenders may discount the percentage rent when assessing serviceability.

6 How to Read a Lease Summary

The lease summary (sometimes called the lease schedule or tenancy schedule) is the first document to read on any commercial property. It distils each lease down to its key commercial terms so you can compare and analyse quickly. These are the numbers that matter.

WALE (Weighted Average Lease Expiry)

WALE is the average remaining lease term across all tenancies, weighted by either income or area. A property with a WALE of 7.5 years by income means the leases have, on average, 7.5 years remaining, with higher-rent tenancies pulling more weight in the calculation. A longer WALE generally points to greater income security.

Watch how it is presented. WALE by income and WALE by area can diverge sharply if the largest tenant by area sits on a low rent or a short lease. Always check both figures.

Net yield versus gross yield

The gross yield is total rental income divided by the purchase price. The net yield deducts all non-recoverable outgoings from the income before dividing. On a triple net lease the two sit very close. On a gross lease the gap can be wide, sometimes 1.5 to 2.5 percentage points.

Compare properties on a net yield basis, always. A property advertised at an 8% gross yield with significant non-recoverable outgoings may deliver a lower net return than one advertised at a 6.5% net yield on a triple net lease.

Rent review mechanisms

Three review types dominate Australian commercial leases.

• Fixed increases. The rent lifts by a set percentage, commonly 3% to 4%, at each review date. Certain for both parties, but it can leave you over-rented or under-rented against the market over time.
• CPI-linked reviews. The rent moves with the Consumer Price Index. It tracks inflation but can barely shift in low-inflation years, and gives no protection if the market runs well above CPI.
• Market reviews. The rent resets to the prevailing market rate, set by a valuer or by agreement between the parties. The rent can fall if the market has softened, but it stays aligned with current conditions.

Many leases mix them, say fixed 3.5% increases annually with a market review every three years. You cannot forecast future income without understanding the review structure.

7 Red Flags in Commercial Leases

A good headline rent does not make a good lease. When you are reviewing a commercial acquisition, watch for these warning signs.

• Short WALE with no options. A lease with less than two years remaining and no options to renew means you are buying vacancy risk. You may have to re-lease, possibly at a lower rent, possibly after a period of vacancy, and almost certainly after spending on incentives or refurbishment to attract a new tenant.
• No rent reviews or CPI-only reviews. A ten-year lease with no rent reviews locks today's rent in for a decade. Even CPI-only reviews can drift the rent well below market over a long term, which erodes your return in real terms.
• Tenant break clauses. A break clause, or early termination right, lets the tenant end the lease before the expiry date, usually with a notice period. Not fatal in itself, but in a single-tenant property it changes the risk profile completely. The real lease term is the break date, not the expiry date.
• Weak or absent make-good provisions. At expiry the tenant should be required to return the premises to an agreed condition. If the make-good clause is vague, unenforceable, or absent, you can inherit a building stripped of fixtures, damaged by the tenant's use, or needing significant reinstatement before it can be re-leased.
• Personal guarantees, or the lack of them. When a tenant is a company, particularly a proprietary limited company, the lease can be worthless if the company is wound up. A personal guarantee from a director adds a layer of security. Without one behind a small or single-purpose company tenant, your recourse on default is limited to the company's assets, which may be negligible.
• Unusual permitted use clauses. A very narrow permitted use clause limits your ability to re-lease if the tenant vacates. A very broad one can let the tenant run a business that degrades the premises or conflicts with other tenancies. Read the permitted use carefully and weigh how it affects re-leasing prospects.
• Deferred or outstanding rent reviews. If a rent review has been triggered but not completed, or the parties could not agree a market figure, there may be a back-dated rental adjustment owing. It can work in your favour if the review results in an increase, or against you if it was deferred because the market has softened.

The best time to identify a lease problem is before you sign the contract. The worst time is after settlement, when your negotiating position has disappeared entirely.

8 Which Lease Type Suits Which Investor

Different lease structures suit different strategies and risk appetites. There is no best lease type in the abstract, only the one that fits your objectives, your capacity to manage the property, and your tolerance for variability in returns.

The passive investor

If your priority is stable, predictable income with minimal management involvement, a triple net lease with a strong tenant on a long term is the natural fit. Industrial and logistics assets leased to national or listed tenants on NNN terms offer the closest experience to collecting a coupon from a bond. The trade-off is that yields on these assets tend to be compressed, reflecting the lower risk profile.

The hands-on investor

If you are willing to actively manage a property, coordinating maintenance, managing outgoings, and dealing with tenants, a gross lease or a standard net lease can pay a higher yield in exchange for that effort. Multi-tenanted office buildings and suburban retail strips often sit here. The extra management burden is exactly why these assets trade at higher yields, and for a capable investor that is the opportunity.

The growth-oriented investor

If you are chasing upside beyond fixed rental increases, a percentage lease in a well-located retail precinct offers income growth that can outpace inflation. It takes careful tenant selection and a genuine read on the retail market in your catchment area. Higher risk, higher reward, and it demands more active monitoring of how the tenant trades.

The value-add investor

Investors who specialise in repositioning assets target properties with short WALEs, below-market rents, or expiring leases. The play is to buy at a discount, re-lease on better terms, ideally to a stronger tenant on a net or NNN basis, and sell the stabilised asset at a higher price. It demands real expertise and capital reserves, but done well it generates outsized returns.

Whichever strategy you pursue, the lease structure is where the analysis starts. The building is the asset. The lease is the investment.