When it comes to investing in commercial property, one of the most overlooked—but absolutely critical—factors is the lease structure. Whether you're buying your first asset or adding to your portfolio, understanding how a property is leased can have a direct impact on your net return, risk profile, and long-term strategy.
At Cornerstone Commercial, we work with investors every day who are navigating these lease structures. Here's what you need to know before you sign—or buy.
What is a Lease Structure?
In commercial real estate, the lease structure defines who pays for what—outgoings like council rates, insurance, maintenance, and other operational costs. It falls broadly into three categories:
1. Gross Lease
In a Gross Lease, the tenant pays a single fixed rent amount, and the landlord covers all property outgoings.
✔ Pros:
- Predictable cashflow for the tenant
- Simpler to manage for less experienced landlords
✘ Cons:
- Landlord bears the cost increases
- Returns can be eroded over time without proper rent reviews
Example:
A retail shop leased at $60,000 per annum gross. The owner pays $15,000 in outgoings, so their actual net income is $45,000.
2. Net Lease (aka Net Net or Triple Net)
In a Net Lease, the tenant pays rent plus all (or most) outgoings. This is the preferred lease structure for many commercial investors.
✔ Pros:
- Clear, dependable net income
- Easier to compare investment yields
- Often aligned with stronger, institutional tenants
✘ Cons:
- Requires clear documentation of who pays what
- Some tenants may push back on full net terms
Example:
A warehouse leased at $70,000 net with $20,000 in outgoings covered by the tenant. The landlord’s net income is exactly $70,000.
3. Semi-Gross Lease
A hybrid approach, where the tenant pays rent plus some (but not all) of the outgoings. Often used for office or medical spaces where some costs (like aircon servicing or shared cleaning) may be split.
Why Lease Structure Matters to Investors
A $1 million property returning 6% sounds great—but if that return is based on a gross lease, and you’re responsible for $20,000 of outgoings, the effective yield drops to 4%.
Lease structure directly affects:
- Net yield and valuation
- Tenant expectations and negotiations
- Future re-leasing strategy
- The true cost of ownership
What to Look for During Due Diligence
Before buying or renewing a lease, always ask:
- Is the rent net or gross?
- Who pays for insurance, rates, and maintenance?
- Are outgoings clearly itemised in the lease?
- Are there annual increases (e.g. CPI or fixed %) to protect your returns?
Even small misunderstandings around lease structure can mean the difference between a great asset and a cashflow headache.
Need Help Reviewing a Lease?
At Cornerstone Commercial, we review leases every day and can provide practical advice on how your property's structure stacks up. Whether you're buying, selling, or re-leasing—getting the lease terms right is non-negotiable.
