Search "commercial property passing rent vs net income outgoings" and you get glossary pages that define rent, and listing copy that quotes a flyer yield as if it were cash after costs. Useful labels. Incomplete for buyers. Passing rent is the rent spoken for today. Net income is what remains after the outgoings you actually wear. When a major tenancy is effectively gross, those are not the same deal.
This is the buyer read on Cap on flyer rent versus Cap on true net. Gross lease vs net lease, triple net lease Australia, commercial property due diligence, and how to calculate WALE cover the companions. Here I stay on one teaching point: the capitalisation number changes when unrecovered outgoings (including land tax allocation) sit with you on a multi-tenant retail asset.
The flyer yield and what it is counting
Most commercial flyers lead with passing rent or an advertised yield built on that rent. Passing rent usually means the current contractual rent across the rent roll. It is a useful starting figure. It is not a promise that every dollar survives day-one ownership after rates, insurance, management, and land tax. Ask what the flyer is counting before you argue about the Cap rate attached to it.
- Is the yield on total passing rent, or on rent after recovered outgoings.
- Are vacant suites excluded so the number looks cleaner.
- Are incentives, rent-free periods, or side letters already stripped out, or still baked into "passing".
- Is the asset sold as "net" while one or more major suites still leave material costs with the landlord.
If you cannot answer those from the pack, you are capitalising a marketing unit, not a cash unit. What a commercial buyers agent does is asking that before emotional capital is spent on the tour.
Passing rent is not day-one NOI
NOI in buyer language is net operating income: rent you can bank, less the operating costs that stay with you after recoveries. Passing rent is the top line. Day-one NOI is the rebuilt bottom line.
Worked the wrong way, buyers take the flyer rent, apply a Cap rate they like, and treat the result as fair value. Worked the right way, you:
1. Rebuild annual rent from the leases and variations, not the brochure.
2. Map recoverable versus landlord-retained outgoings suite by suite.
3. Subtract the costs you will wear on day one, including any land tax share left with you.
4. Only then capitalise the true net figure against your buy zone.
That rebuild is the difference between Cap on rent and Cap on true net on the same asset. Formal legal review stays with your solicitor. My job is to make sure the commercial question is asked before you bid as if the flyer were cash.
When a major tenancy is effectively gross
Multi-tenant retail often mixes lease types. Smaller suites may sit on clearer net recovery. A major tenancy may be on a structure that is effectively gross: more costs bundled into rent, or recovery limited so far that the landlord still wears a material share of rates, insurance, or other operating lines.
"Effectively gross" is a buyer phrase, not a statute. It means the income spine behaves like a gross lease even when the centre is marketed as net overall. Concentration matters. If one suite carries a large share of passing rent and does not pass costs cleanly, asset-level recovery is weaker than the flyer headline.
State retail regimes can also limit recovery from a retail tenant. High-level only: if a tenancy is retail-regulated, do not treat US-style pass-through as settled until your solicitor confirms what is allowed. Companions on gross vs net and triple net already flag that. Here the point is simpler: one soft major suite can re-price the whole Cap conversation.
Unrecovered outgoings (rates, insurance, and land tax allocation)
On multi-tenant retail, three cost lines show up repeatedly when the flyer yield looks cleaner than the cash.
Rates. Council and water rates may be recoverable on some suites and not on others. Where recovery fails or is capped, the shortfall sits in your day-one NOI, not in a footnote.
Insurance. Confirm who pays the premium, who holds the policy, and whether excesses or shortfalls stay with you. "Tenant pays insurance" on the schedule can still leave gaps that compress cash after settlement.
Land tax allocation. This is the line buyers under-read on multi-tenant retail. Land tax may be partly recoverable, not recoverable, or allocated across suites in a way that leaves a landlord share when a major tenancy is effectively gross. Allocation method, retail limits, and recent actuals matter more than the marketing label. Ask for the clause and the recent dollars. Price what you will wear.
None of those lines need an invented "typical" recovery percentage. If the cost sits with you, it comes out of the income you capitalise. If the selling agent cannot produce budget and actuals with reconciliation, treat the yield claim as provisional. Price the risk or walk.
Cap on rent vs Cap on true net (same asset, different number)
Capitalisation is simple arithmetic with a hard commercial fork.
- Cap on flyer rent: using passing rent or an advertised net that still ignores unrecovered costs.
- Cap on true net: using rebuilt NOI after landlord-retained outgoings, including land tax allocation left with you.
Same building. Same leases. Different offer number.
I do not publish invented Cap rate tables or yield benchmarks here. Rates move with asset quality, location depth, covenant, WALE, and recovery quality. The teaching is qualitative: Cap on rent overstates value when unrecovered outgoings are material; Cap on true net is the number that belongs in The Deal Grade™ income score before you argue facade.
On every commercial deal I run The Deal Grade™: letter A to C on the building, number 1 to 3 on the income. Recovery sits inside the income grade with covenant, lease length, WALE, and escalations. Soft recovery through a major suite is a different buy-zone conversation from clean net recovery across the roll.
What to rebuild before you capitalise
Before you attach a Cap rate to anything, rebuild in this order:
1. Rent roll from the leases. Firm term, options separate, incentives stripped to cash rent. Use how to calculate WALE so term risk sits beside income risk, not inside a single flyer average.
2. Gross versus net map suite by suite. Use gross lease vs net lease for the spectrum. Flag any major suite that is effectively gross.
3. NNN claims stress-tested. If the pack uses triple-net language, read triple net lease Australia and map operating recoverable, landlord-retained, and capital or structural lines.
4. Outgoings pack. Budget, 12 to 24 months of actuals, reconciliation, and a plain land tax allocation answer.
5. Lease-first diligence clock. The full sequence sits in commercial property due diligence: income first, building second.
Only after that rebuild do you capitalise. Cap on true net is the output of work, not a shortcut from the cover page.
Melbourne multi-tenant retail: the pattern without the address
In the Melbourne metro multi-tenant retail band, the pattern I teach looks like this. No suburb street. No tenant brands. No live deal file names.
A centre or strip is marketed on total passing rent and a clean-sounding yield. Smaller suites may recover rates and insurance on a clearer net basis. One major tenancy carries a large share of rent on terms that leave more operating cost, and often a land tax allocation question, with the landlord. Asset-level marketing still says "net". Day-one NOI for a buyer who underwrites the whole roll as net is softer than the flyer.
The buyer move is to rebuild suite by suite, isolate the major tenancy, price the unrecovered lines, and Cap the true net. Diligence still has to be done on the actual pack in front of you.
I have bought and sold commercial as an own project (including Dry Creek on results). Grade recovery before you romance the yield number.
Next step: Ready Check / go-commercial
If you are graduating from residential into commercial income assets, start with capital, income need, and risk posture on the Commercial Ready Check. Process and commercial representation sit via go-commercial. Site CTA is Book a strategy call.
Bring the rent roll and outgoings pack if you have them. If not, that is the first gap we close before anyone talks Cap rate.
Frequently asked questions
What is the difference between passing rent and net income?
Passing rent is the current contractual rent across the leases. Net income (buyer NOI) is what remains after the operating costs you still wear once recoveries are applied. Flyer yield often starts from passing rent. Day-one cash starts from true net.
Why can a "net" marketed centre still leave me with outgoings?
Because marketing labels the asset; the lease schedules decide recovery suite by suite. A major tenancy that is effectively gross, or a land tax allocation that stays partly with the landlord, can leave material unrecovered cost even when the brochure says net.
How should Cap on flyer rent differ from Cap on true net?
Cap on flyer rent uses the marketing income figure. Cap on true net uses rebuilt NOI after landlord-retained outgoings. Same asset, different number. Do not invent a "typical" Cap rate from a blog; rebuild the income, then apply the Cap rate that fits your buy zone and the graded income quality.
Does land tax always sit with the tenant on multi-tenant retail?
No. Recovery and allocation are deal-specific and can be constrained, especially where retail regulation applies. Ask for the clause, the allocation method, and recent actuals. Price the share you will wear.
What should I rebuild before I capitalise a Melbourne multi-tenant retail yield?
Rent from the leases, WALE to firm expiry, gross-versus-net map by suite, outgoings budget and actuals, and a clear land tax allocation answer. Then Cap true net.
*Shayne Mele · General information only. Not financial advice. Lease terms, outgoings recovery, and land tax allocation vary by state, asset, and retail regulation. Property outcomes depend on your brief, capital, timing, and the asset. Get advice specific to your situation before acting. Individual results vary.*
