For a developer building anything income-producing, retail, office, or industrial, the lease you put in place before you sell tends to move the end value more than the build spec does. An income property is not valued on what it cost to build. It is valued on the income it produces, capitalised at a yield. Change the lease structure and you change the income, and the income drives the price. That is why lease structure sits on the revenue side of a commercial feasibility, not in the legal appendix.
This guide is written for the developer working out what a completed commercial asset will realise, and how the lease terms underneath that number either lift it or leak it. It covers the main lease structures (gross, net, and semi-gross), how base rent and rent reviews work, what outgoings you can actually recover, the state-by-state rules on passing land tax to a tenant, the difference between a retail lease and a commercial lease and why that classification changes what is legal, how incentives split face rent from effective rent, what a property is worth sold with a lease in place, and the Goods and Services Tax (GST) treatment on the way out. New Zealand is covered at the end. Figures are hedged throughout, because rents, yields, and incentive levels move with the market and with the covenant of the tenant you sign.
Why does lease structure matter to a developer, not just a landlord?
Because a leased commercial asset is priced on its income, and the lease is what sets that income. A completed office, shop, or warehouse sold with a tenant in it is valued by taking its Net Operating Income (NOI) and dividing by a market capitalisation rate (cap rate). Value equals Net Operating Income (NOI) divided by the cap rate. Lift the sustainable Net Operating Income (NOI) or sign a tenant strong enough to pull the cap rate tighter, and the sale price rises for the same building. Leak income through outgoings you cannot recover, or a rent that reviews backwards, and it falls.
That makes lease terms a feasibility input, not an afterthought. A developer who builds a small retail strip and sells it vacant is selling bricks and a planning approval. The same developer who signs a five-year lease to a national tenant before settlement is selling secured income, and the market generally pays more for secured income than for the possibility of it. Pre-committing a tenant also tends to help on the funding side, because a lease in place gives a lender a serviceability story rather than a leasing risk. None of this is guaranteed, and a weak or short lease can add less than the cost of the incentive used to win it, which is exactly why the structure matters.
The practical point is that the lease is a lever you control during the development, and its effect compounds at the cap rate. A dollar of durable annual income added to Net Operating Income (NOI), at a 6 per cent cap rate, is worth roughly sixteen dollars of end value. A dollar lost is worth roughly the same going the other way. Few other decisions on a commercial project have that kind of multiplier.
What are the main commercial lease structures?
There are three common structures in the Australian market, and they differ by who carries the building’s running costs: gross, net, and semi-gross. The choice sets the headline rent, the net income, and how much of the outgoings risk you keep as owner while the asset is leased.
What is a gross lease?
Under a gross lease, the tenant pays one rent figure and the landlord carries the outgoings. The rent is set higher to absorb rates, insurance, and maintenance, so the tenant gets certainty and the landlord wears the risk that outgoings rise faster than the rent. For a developer, a gross lease can make a tenancy easier to fill because the tenant sees a single number, but it tends to leave you exposed to cost inflation across the hold, and a buyer will look through the headline rent to the net income underneath.
What is a net lease?
Under a net lease, the tenant pays base rent plus the outgoings, usually estimated and charged through the year, then reconciled against the actual costs. Net leases are the norm in industrial and standalone commercial property, where a single tenant occupies the whole site and can reasonably carry the building’s costs. For a developer selling an income asset, a net lease generally presents the cleanest income to a buyer, because the base rent is close to the net income and the outgoings largely wash through.
What is a semi-gross lease?
A semi-gross lease sits in between: the landlord pays some outgoings (often the statutory ones like rates in the first year) and the tenant pays the rest, or picks up increases above a base year. Semi-gross structures are common in multi-tenant office buildings, where apportioning every cost to every tenant is messy. The trade-off is that the base year and the increases become a negotiation, and a poorly set base year can quietly erode the net income a buyer is willing to capitalise.
Across a multi-tenant building, the recoverable share is usually apportioned by floor area, so a tenant occupying 20 per cent of the Net Lettable Area (NLA) carries roughly 20 per cent of the recoverable outgoings. Where a building is not fully let, some leases allow a gross-up, which recovers outgoings as though the building were fully occupied so the owner is not left carrying the vacancy’s share. The structure you choose flows straight into the income line of your feasibility, so it is worth settling early rather than treating it as boilerplate.
What counts as base rent, and how do rent reviews work?
Base rent is the primary rent the tenant pays for the premises, before outgoings and before any additional or turnover rent. It is the number that anchors Net Operating Income (NOI), and how it moves over the term is set by the rent review mechanism. The four common mechanisms are fixed percentage, Consumer Price Index (CPI), market review, and a hybrid of these.
A fixed review lifts rent by a set percentage each year, often in the range of 3 to 4 per cent, which gives both sides certainty and gives a buyer a predictable income curve. A Consumer Price Index (CPI) review ties the increase to inflation, which protects the real value of the rent but makes the future income harder to forecast. A market review resets the rent to the going rate at a set point, usually mid-term, which can capture growth but introduces the risk that the market has softened and the rent should fall. A hybrid, such as fixed increases with a market review at year five, is common because it blends certainty with a chance to re-rate.
The review mechanism matters to value because a buyer capitalises the income they expect to collect, and a lease with durable, compounding increases generally supports a keener price than one that might review backwards. One trap to watch is the ratchet clause, which prevents rent falling at a market review. For retail leases, ratchet provisions are void: Queensland voids them expressly under section 36A of the Retail Shop Leases Act 1994, and New South Wales and the other states restrict rent-review clauses that would stop a reduction on a market review. For non-retail commercial leases, ratchets are generally a matter of negotiation and can be enforceable, which is one of several reasons the retail-versus-commercial classification below is worth getting right.
What outgoings can you actually recover from a tenant?
What you can recover depends first on the lease structure and second, for retail premises, on state legislation. Under a net lease the tenant reimburses the building’s running costs; under a gross lease they do not, separately, because it is built into the rent. The outgoings a landlord commonly recovers include council rates, water and sewerage charges, building insurance, cleaning, gardening, security, fire-protection servicing, lift maintenance, and the power used in common areas. A landlord generally cannot make a margin on outgoings and should recover only the actual cost incurred.
Some costs are usually off-limits even under a net lease, and the retail statutes make the exclusions explicit. Capital costs, depreciation of the building, sinking-fund contributions, and the landlord’s own borrowing costs are typically not recoverable. Victoria’s Retail Leases Act 2003 is a clear example, voiding recovery of land tax and, alongside it, capital costs, depreciation, and sinking-fund contributions. Queensland’s Small Business Commissioner guidance sets out a similar list of costs a lessor cannot pass to a retail tenant. The developer point is simple: any recoverable outgoing that turns out not to be recoverable becomes a permanent cost to the owner, and because it reduces Net Operating Income (NOI), it capitalises into a lower sale price at exit.
Can you pass land tax on to the tenant? A state-by-state breakdown
It depends on the state, and it is the single biggest state-by-state variation in commercial leasing, so it is worth mapping before you model the income. For a retail lease, most states prohibit recovering land tax from the tenant, two allow it on a limited basis, and two territories sit outside the question because they levy no commercial land tax at all. For a non-retail commercial lease, land tax is generally recoverable if the lease says so, because those leases are largely a matter of freedom of contract.
The table below is the retail-lease position. Confirm the current wording against the linked source before you rely on it, because these Acts are amended from time to time.
| State or territory | Retail leasing statute | Can land tax be recovered from a retail tenant? |
|---|---|---|
| New South Wales | Retail Leases Act 1994 | Yes, but limited to a single-holding basis |
| Victoria | Retail Leases Act 2003, s50 | No, the clause is void |
| Queensland | Retail Shop Leases Act 1994 | No |
| South Australia | Retail and Commercial Leases Act 1995, s30 | No, where the Act applies |
| Western Australia | Commercial Tenancy (Retail Shops) Agreements Act 1985 | Yes, limited to a single-holding basis |
| Tasmania | Code of Practice for Retail Tenancies 1998 | No provision for it |
| Australian Capital Territory | Leases (Commercial and Retail) Act 2001 | Not applicable, no commercial land tax |
| Northern Territory | Business Tenancies (Fair Dealings) Act 2003 | Not applicable, no land tax at all |
A few of these need a word of explanation, because “single-holding basis” and the two territory positions each change the numbers in a feasibility.
In New South Wales, section 26 of the Retail Leases Act 1994 limits recovery to the land tax that would be payable if the leased property were the only land the landlord owned. The landlord’s wider portfolio, which may push the actual assessment into premium rates, is ignored for recovery. The NSW Small Business Commissioner explains the practical effect: if the land value sits below the land tax threshold, currently $1,075,000 for the 2026 land tax year, no land tax may be recoverable from the tenant at all, even though the landlord may still be paying it on an aggregated basis. Western Australia takes a similar single-holding approach for retail shops.
Victoria not only voids land tax recovery under section 50, it extends the same ban to the state’s new Commercial and Industrial Property Tax (CIPT), which is replacing stamp duty on commercial and industrial land on a phased basis. So in Victoria a developer holding a leased commercial asset carries both the land tax and, in time, the Commercial and Industrial Property Tax (CIPT) as an owner’s cost that cannot be pushed to a retail tenant. In South Australia, the Retail and Commercial Leases Act 1995 prohibits land tax recovery, and it also reaches some commercial leases, applying where the annual rent does not exceed a prescribed threshold that is reviewed by the Valuer-General.
The two territories sit outside the question. The Australian Capital Territory applies land tax to residential investment property only, not commercial, and commercial owners instead pay general rates. The Northern Territory levies no land tax on any property type, so there is nothing to recover or absorb. In both, the outgoings conversation for a commercial owner is about rates and running costs, not land tax.
For your feasibility, the takeaway is that land tax you cannot recover is a leak from Net Operating Income (NOI), and on a retail lease in Victoria, Queensland, South Australia and Tasmania, it is a leak you cannot design around by drafting. Model it as an owner’s cost in those states, and only assume recovery where the lease is non-retail and the terms actually allow it.
Retail lease or commercial lease, and why the classification changes everything
Whether your tenancy is legally a “retail” lease or an ordinary commercial lease decides which of the rules above apply, and the classification is set by statute, not by what the lease calls itself. Retail leases carry statutory protections, including disclosure obligations, limits on recoverable outgoings, the ratchet ban, and the land tax rules above. Non-retail commercial leases are largely freedom of contract, so the parties can agree full outgoings recovery, land tax pass-through, and ratchet reviews. Draft a clause that would be fine in a commercial lease into what is legally a retail lease, and it may be void.
What makes a lease “retail” varies by state, and generally turns on the use of the premises, the floor area, and sometimes the rent. In New South Wales the Retail Leases Act 1994 applies to premises used for a listed retail business with a lettable area under 1,000 square metres, for a term between six months and 25 years, and it can also catch premises in a retail shopping centre, defined as a cluster of five or more retail shops under one owner. South Australia’s Act turns partly on rent, applying where annual rent does not exceed the prescribed threshold. Victoria’s Retail Leases Act 2003 tests whether the premises are used wholly or predominantly for the retail sale or hire of goods or the provision of services, and the courts have confirmed the classification is assessed at the time the lease is entered into or renewed.
The developer angle is that classification determines how much income you can durably recover, and therefore how the asset values. A large-format tenancy over 1,000 square metres in New South Wales, or an office floor let to a corporate tenant, will usually fall outside the retail regime, which means fuller outgoings recovery and land tax pass-through can be built into the lease and, if the tenant covenant holds, capitalised into the sale price. A small shop in a centre will usually sit inside the retail regime, with the protections and the recovery limits that come with it. Neither is better or worse in the abstract; what matters is that you model the income the classification actually permits, rather than the income you would like the lease to produce.
How do incentives affect what a property is worth?
Incentives split the face rent from the effective rent, and a buyer or valuer capitalises something much closer to the effective rent, so a headline rent propped up by a large incentive can value poorly. An incentive is anything the landlord gives to win the tenant: a rent-free period, a rent abatement, or a contribution to the tenant’s fit-out. The face rent is the rent stated in the lease. The effective rent is the face rent after the incentive is spread across the term. When the incentive is large, the gap between the two is large, and the gap is where developers get caught.
Incentives in some markets are currently high. In the Sydney office market, prime incentives were running at around 36 per cent in early 2025, and in Melbourne, incentives on A-grade space have been reported close to 49 per cent. At those levels, a lease signed at a strong face rent may deliver an effective rent barely more than half the headline. A worked example shows the effect. Take a 1,000 square metre tenancy signed at a face rent of $500 per square metre, or $500,000 a year. Give a 35 per cent incentive over a five-year term, and the effective rent is closer to $325,000 a year once the incentive is spread. A buyer pricing sustainable income will lean toward the lower figure, and at a 6 per cent cap rate that difference is worth roughly $2.9 million against roughly $5.4 million on the same building.
For a developer, this is the difference between a lease that hits a valuation and a lease that hits a number on paper. It can be tempting to sign a high face rent with a fat incentive to make the feasibility read well, but if the buyer’s valuer discounts back to effective rent, the end value does not follow the face rent up. The more useful move is generally to structure the lease so the durable income is real: a defensible face rent, an incentive in line with the market, and a review profile that holds up. That is the income that survives a valuation and drives the price.
How much more is a property worth sold with a lease in place?
A property sold with a strong lease in place generally sells on a tighter cap rate than the same property vacant, because the buyer is purchasing secured income rather than the task of finding a tenant. Two levers drive how much tighter: the Weighted Average Lease Expiry (WALE), which is how long the income is contracted for, and the covenant, which is how reliable the tenant is. A long Weighted Average Lease Expiry (WALE) to a national or government tenant supports a keener yield than a short lease to an unknown business, and the yield is what turns income into value.
Current benchmark yields give a sense of the range. Across 2025, Australian prime commercial yields sat around 5.7 to 6.1 per cent for industrial, 5 to 6.5 per cent for office in the major markets, and 5.25 to 5.7 per cent for prime retail, with regional assets generally trading wider. A worked example shows why the lease matters as much as the yield. A building producing Net Operating Income (NOI) of $200,000 a year, capitalised at 6.0 per cent, is worth about $3.33 million. Sign a longer lease to a stronger tenant that supports a 5.5 per cent cap rate, and the same $200,000 is worth about $3.64 million, roughly $300,000 more for no change to the building. Improve the lease structure so Net Operating Income (NOI) lifts to $220,000, at 5.5 per cent, and the value reaches about $4.0 million.
That gap, from roughly $3.33 million to roughly $4.0 million on one small building, is created entirely by the lease. It is why “sell vacant or sell leased” is a genuine feasibility decision rather than a marketing one, and why the cost of a sensible incentive to secure a good tenant often pays for itself several times over at the cap rate. It is also why a developer holding for income, rather than selling, should still model the leased value, because it sets the refinance valuation and the eventual exit. If the plan is to hold and let rather than sell, the capital gains tax treatment and the Division 43 depreciation available on the building both feed the after-tax return and are worth modelling alongside the lease.
What are the GST and tax consequences of selling with a lease?
Commercial rent is a taxable supply, so Goods and Services Tax (GST) applies to it, but the sale of a tenanted commercial property can often be Goods and Services Tax (GST) free as a going concern. These are two different points and both affect the numbers, so it helps to keep them separate.
On the income side, a landlord registered for Goods and Services Tax (GST) charges 10 per cent Goods and Services Tax (GST) on commercial rent, and a registered tenant claims it back as an input tax credit, per the Australian Taxation Office (ATO) guidance on leasing commercial premises. This is different from residential rent, which is input taxed. Recovered outgoings are treated as part of the consideration for the lease, so Goods and Services Tax (GST) generally applies to the outgoings a tenant reimburses as well, which the Australian Taxation Office (ATO) sets out in Goods and Services Tax (GST) Determination GSTD 2000/10. For a registered developer, this largely washes through, but it matters for cashflow timing and for a tenant who is not registered.
When is the sale a Goods and Services Tax (GST) free going concern?
The sale of a leased commercial property can be Goods and Services Tax (GST) free as the supply of a going concern where the tests in Goods and Services Tax (GST) Ruling GSTR 2002/5 are met. The Australian Taxation Office (ATO) summarises the conditions: the sale is for consideration, the buyer is registered or required to be registered for Goods and Services Tax (GST), the parties agree in writing that the sale is of a going concern, and the seller supplies everything necessary for the continued operation of the leasing enterprise, with the property supplied subject to the existing lease and the enterprise carried on until the day of the sale. In practice this usually means selling with the tenant in place and the lease running to settlement.
The going concern treatment is worth structuring for, because it removes Goods and Services Tax (GST) from the purchase price, which reduces the buyer’s funding requirement and any duty calculated on a Goods and Services Tax (GST) inclusive figure. A lease that starts on or after settlement will generally not qualify, because the leasing enterprise was not being carried on before the sale, so the timing of the lease commencement relative to settlement is something to get right early. Whether the profit on the sale is taxed on revenue account or as a capital gain is a separate question that turns on how the project is held and intended, and it interacts with the capital gains tax treatment covered in its own guide.
How does a commercial lease flow into a development feasibility?
You model the lease as revenue: base rent plus any other rental income plus recoverable outgoings, less incentives, gives the net income, which annualises to Net Operating Income (NOI), and dividing that by a cap rate gives the end value that flows into your Gross Realisation Value (GRV). That is the whole chain, and every earlier section in this guide is really about getting one of those inputs right.
A feasibility model should build the leased exit value from the lease terms rather than a round number: base rent, other revenue and recoverable outgoings, less incentives, give the net income and the Net Operating Income (NOI) that capitalises into the end value. Valuing that income as a discounted stream, rather than a single capitalised figure, pairs naturally with a discounted cashflow view of the project. Modelling the tenancy this way keeps the leased exit value consistent with the rest of the development cashflow, rather than dropping in a round-number end value and hoping the lease supports it.
One thing to keep straight is that the lease revenue at exit is separate from any rent you collect while holding the site through the development. Rent earned during the hold is operating income for the period and belongs in the holding assumptions; the leased sale value is the capitalised income the buyer pays for at settlement. Mixing the two double counts income and flatters the feasibility. Keeping the leased end value in the sales line and the interim rent in the holding line keeps the margin honest.
How do commercial leases work in New Zealand?
New Zealand leans on a single market-standard document and light statutory regulation, so the structure is more uniform than Australia’s state-by-state picture. The net lease is the common structure, and most commercial tenancies use the Auckland District Law Society (ADLS) Deed of Lease, now in its seventh edition (2024). There is no retail-specific leasing statute equivalent to the Australian Retail Leases Acts, so commercial leases are governed mainly by the deed itself and the general law, including the Property Law Act 2007.
Outgoings recovery runs through the outgoings schedule in the Auckland District Law Society (ADLS) deed, which lists recoverable items such as rates, insurance, and building services, while capital costs remain the landlord’s. The seventh edition tightened this, requiring landlords to budget outgoings and to notify a tenant of an outgoing within 24 months or lose the ability to recover it, so a developer holding or selling a leased asset should keep the outgoings administration current or watch recoverable income slip away.
On tax, the Goods and Services Tax (GST) rate is 15 per cent, and New Zealand applies compulsory zero-rating to land transactions between registered persons. Where a leased commercial property is sold to a Goods and Services Tax (GST) registered buyer who will use it to make taxable supplies, the supply of land is zero-rated rather than taxed at 15 per cent, and the Inland Revenue Department (IRD) treats a going-concern sale as zero-rated where the tests are met. The buyer must confirm their registration and intended use in writing at or before settlement. The effect is similar in spirit to the Australian going concern rule: a tenanted commercial sale between registered parties usually settles without Goods and Services Tax (GST) changing hands, which keeps the funding requirement down.
What lease structure means for your margin
The lease is a revenue decision that compounds at the cap rate, so it deserves the same attention as the build cost. Every earlier section reduces to the same chain: the structure sets who carries the outgoings, the outgoings rules and the land tax position set how much income you keep, the incentive sets how much of the face rent is real, and the tenant and term set the yield a buyer will pay. Get those right and a modest building can sell for meaningfully more than its bricks; get them wrong and a good building leaks value at exit.
For a developer, the useful habit is to model the leased exit value from the lease terms rather than the other way around. Start from a defensible effective rent, apply the outgoings and land tax recovery the classification actually allows in your state, capitalise the durable Net Operating Income (NOI) at a yield the covenant supports, and carry that into the feasibility as the end value. That keeps the number honest, keeps the margin real, and means the lease you sign before you sell is working for the deal rather than flattering it.
This guide is general information for developers and others in the industry, not legal, tax, or financial advice. Lease law, tax rules, thresholds, and market yields change, and every deal sits in its own context, so confirm the current position with the linked primary sources and your own advisers before you rely on any of it for a live project.