Search "commercial property recoverable outgoings vs market rent" and you get lease glossaries that stop at who pays rates and insurance. Useful recovery map. Incomplete for buyers. Full outgoings recovery can still leave day-one net operating income under the $/m² you would underwrite on a fresh lease, and under the income screen you thought the flyer cleared.
This is the buyer read on recovering outgoings versus market rent. Commercial property yield Australia owns flyer yield versus underwritable yield. Commercial passing rent vs net income owns Cap on flyer rent when costs are unrecovered. Gross lease vs net lease and triple net lease Australia own the recovery spectrum. Capitalisation rate for buyers owns Cap maths on true net. Here I stay on one teaching point: clean recovery is not the same job as market rent, and holding income is not a market-income thesis.
Holding income vs income screen
Two numbers get confused on the same brochure.
Holding income is what the leases pay you today after the outgoings you actually wear. It is day-one cash quality on the roll you inherit.
Income screen is the day-one net yield band you require against purchase price before the asset clears your buy zone. When I screen commercial income assets for buyers, I often use a 4-7% day-one net income screen as Method teaching and screening language. That is not a promise, not a market average, and not a claim that every asset should clear that band. Asset class, location, covenant, lease quality, recovery, and your capital cost all move the right answer for you.
You can recover outgoings cleanly and still fail the screen. You can also clear the screen on soft rent that sits below the $/m² a fresh lease would support. Recovery answers "who pays the costs". The screen answers "is the net income enough for this price". Market $/m² answers a third question: "is the rent competitive for this space". Mixing those three is how buyers buy holding income as if they bought market income.
OG recovery maths (high level, not an encyclopedia)
I am not writing a full commercial outgoings pillar here. That stays deferred. The maths buyers need for this fork is short.
1. Map recoverable versus landlord-retained costs suite by suite against gross lease vs net lease. Rates, insurance, land tax allocation, and management cost either clear into tenant recovery or stay in your day-one NOI.
2. Reconcile budget to actuals. Budget recovery that never clears is soft net. Ask for 12 to 24 months of actuals with reconciliation, not only the schedule.
3. Stress vacancy. When a suite goes dark, recovery usually stops with the rent. Clean NNN language while occupied does not erase vacancy cost. Triple net lease Australia already flags that honesty test.
4. Stop when recovery is clean. If the map and actuals agree, and landlord-retained lines are priced, you have answered the recovery question. You have not yet answered market rent or the income screen.
Passing-rent teaching owns the unrecovered fork: Cap on flyer rent when a major suite is effectively gross. This piece owns the recovered fork: costs cleared, rent still soft against market and against your screen.
Market $/m² net vs day-one NOI
Restate the asset on two units before you argue price.
Market $/m² net (buyer language) is the net rent you would underwrite for this space on a fresh lease of similar quality, on the area basis the lease and survey defend. I do not publish invented Australian market $/m² tables here. Markets move. Asset class, location depth, fitout, and use decide the band. Ask your valuer and agent for evidence on this asset class, then restate on the correct area unit. Do not Cap a soft rate that only looks soft because the marketing area was inflated.
Day-one NOI is verified income after landlord-retained outgoings and an honest vacancy and incentive treatment. That is the numerator for yield and Cap. Commercial property yield Australia and capitalisation rate for buyers own the ratio maths. Here the teaching is narrower: full OG recovery can still leave day-one NOI sitting on a rent that is below the market $/m² you would underwrite.
Worked the wrong way, buyers treat "net lease, outgoings recovered" as proof the income is market. Worked the right way, you:
1. Confirm recovery is real (map + actuals).
2. Restate current rent as $/m² on the lease area.
3. Compare that $/m² to the net market evidence you will defend, not to the flyer headline.
4. Only then divide day-one NOI by the price you would pay, and test the 4-7% screen as screening language for your brief.
If recovery is clean and $/m² is still soft, you are buying holding income. Price that honestly, or walk.
Short hard expiries / no options
Clean recovery on a short firm term without further options is still an income cliff.
A suite can recover outgoings today and hand you a hard stop with nowhere to renew. Make-good, vacancy, and reletting cost sit beside that end date. Brochure WALE that counts options as firm term hides the fuse. Keep how to calculate WALE beside any net-yield claim: firm term separate from option fluff.
Method teaching for this fork:
- Rebuild remaining firm term suite by suite.
- List further options separately. No option after firm expiry means the income can leave on the hard date.
- Do not treat clean OG recovery as protection against reletting risk. Recovery dies with the lease unless the next tenant signs on terms you underwrite.
Short hard expiry does not automatically kill a deal. It changes the income grade inside The Deal Grade™. A clean day-one NOI on a near-term cliff is a different buy-zone conversation from the same NOI on a long firm spine.
When the thesis is OO / land / reversion
Sometimes the income fails the screen on purpose, and the real thesis is owner-occupier value, land, or reversion to market rent at lease end or vacancy.
That can be a valid commercial buy. It is a different Method job from an income-screen buy.
Owner-occupier / land thesis. You are paying for use or for the land story more than for day-one NOI. Recovery maths still matter for holding cost, but you should not sell yourself a 4-7% income screen you never intended to clear.
Reversion thesis. You are underwriting that rent will reset toward market at expiry, option, or vacancy. That needs evidence on market $/m², downtime, incentive, and make-good, not hope baked into flyer yield. Cap and yield companions own the arithmetic once the income path is honest. Here the honesty test is simpler: if day-one NOI fails your screen, say so. Do not paper over soft rent with "outgoings are recovered".
If the pack cannot separate holding income from the reversion story, treat the marketed yield as provisional. Price the risk or walk. Formal legal and valuation work stay with your solicitor and valuer. Commercial property due diligence keeps lease-first order: income quality before facade.
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, outgoings pack (budget and actuals), and any yield or Cap schedule the agent used. If recovery looks clean on paper, we still restate $/m² and test day-one NOI against your screen before anyone argues market rent as a free pass.
Frequently asked questions
Does full outgoings recovery mean the rent is market rent?
No. Recovery answers who pays operating costs. Market rent answers whether the rent is competitive for the space. You can recover costs cleanly and still sit below the $/m² you would underwrite on a fresh lease.
Can I trust net yield if outgoings are recovered?
Only after you rebuild day-one NOI from leases and actuals, restate $/m² on the lease area, and divide true net by the price you would pay. Recovery is one input. It is not the income screen. See commercial property yield Australia.
What if recovery is clean but the deal fails a 4-7% income screen?
Then you are not buying a cleared income-screen asset on that price. Either reprice, accept a different thesis (OO, land, or reversion) with eyes open, or walk. The 4-7% band is Method screening language, not a promise.
How do short hard expiries change the recovery story?
Clean recovery while occupied does not protect you at hard expiry without options. Vacancy and reletting cost return. Rebuild firm term with how to calculate WALE beside the outgoings map.
Where does Cap rate sit in this check?
Cap sits on true day-one NOI after recovery and after an honest vacancy and incentive treatment. Capitalisation rate for buyers owns the Cap maths. This page stops you treating recovered OG as proof the numerator is market.
Shayne Mele · General information only. Not financial advice. Yields, capitalisation rates, lease terms, outgoings recovery, and market rents vary by asset, state, and valuation method. The 4-7% income screen is Method teaching / screening language only, not a market average or a promise. Property outcomes depend on your brief, capital, timing, and the asset. Get advice specific to your situation before acting. Individual results vary.
