Guide · Commercial
How the Lease Affects Your Commercial Loan: Gross, Net and WALE
On an investment purchase, the lease is the deal. It sets the valuation, it sets what a lender will advance, and it decides how much of the rent you actually keep. Here is what the terms mean and what a credit assessor is looking for in them.
When someone sends me a commercial deal, the first document I want is not their tax return. It is the lease. On a leased investment property the lender's assessment starts with the income, and the income is whatever the lease says it is, less whatever the lease makes you pay. Two properties with identical headline rents can produce very different lending outcomes purely because of how their leases are written.
Gross lease versus net lease
The distinction is simply who pays the outgoings: council and water rates, insurance, land tax, strata levies, repairs and maintenance.
| Gross lease | Net lease | |
|---|---|---|
| Who pays outgoings | The landlord, out of the rent | The tenant, on top of the rent |
| Headline rent | Looks higher | Looks lower |
| What the landlord keeps | Rent minus outgoings | Closer to the full rent |
| Who carries cost rises | The landlord | The tenant |
You will also hear semi-gross, where outgoings are shared or capped at a base year, and triple net, where the tenant carries almost everything including structural items. Retail leases in particular have consumer-style protections that limit what can be passed on, which vary by state.
Lenders lend against net income, not the headline rent
A gross lease with an impressive rent can produce less net income than a net lease with a lower one. Both the valuer and the credit assessor work from the net figure. When you are comparing two properties on yield, make sure you are comparing net against net, or you will reach the wrong answer.
WALE, and why lenders care about it
WALE stands for weighted average lease expiry. On a single-tenant property it is simply the time left on the lease. On a multi-tenant building it is the average time remaining across all leases, weighted by how much income each tenant contributes, so a large anchor tenant with five years left counts far more than a small suite with six months.
It matters because it tells a lender how long the income is contracted for. A property with years of lease remaining to a solid tenant is a very different risk to the same building with the lease expiring next quarter, and that difference shows up in the valuation and in how much a lender will advance.
An option to renew is not lease term
This trips up a lot of buyers. If the lease has three years left plus a five year option, the tenant may renew, but they are not obliged to. Valuers and lenders generally count the certain term, not the option. If you are buying on the strength of a long tenancy, check how much of it is actually committed.
Tenant covenant: who is actually paying you
Covenant strength is the industry term for how reliable the tenant is. A listed company or a government department is at one end. A newly incorporated single-director company with no trading history and no personal guarantee is at the other. Lenders and valuers form a view on this, and it affects both the capitalisation rate applied to the income and the lender's appetite for the deal.
Worth checking in the lease: is there a bank guarantee or security deposit, and how many months does it cover? Are there personal or parent-company guarantees? Who is named as the tenant, and is that entity the one actually trading? These details rarely appear in the marketing material.
Rent reviews, and the one to watch
- Fixed percentage. Predictable, easy for a lender to model, and the most straightforward to underwrite.
- CPI-linked. Tracks inflation, so it protects the real value of your income but is less predictable year to year.
- Market review. The rent is reset to market at set intervals. It can go up. It can also go down, unless there is a ratchet clause preventing that.
The market review is the one to look at closely. If a review falls due during a soft leasing market, your income and therefore the valuation can move against you, and if your facility carries a loan-to-value covenant that can matter to your lender as well as to you.
How this feeds back into the loan
Lenders will often assess an investment purchase largely on the lease income, sometimes with lighter borrower paperwork, when the lease is genuinely strong. Where the lease is short, the tenant is weak, or the property is vacant, expect the assessment to lean much harder on you and your business, and expect a larger deposit. If you are buying with vacant possession to occupy it yourself, that is a different assessment again, covered in buying your business premises.
Read the lease before you negotiate the price
If a lease expires soon or the tenant is weak, that is not automatically a reason to walk. It is a reason to price it accordingly and to plan the finance around a lower advance. The buyers who get burned are the ones who agree a price on the headline yield and only read the lease during the cooling off period.
The short version is that on commercial property the lease is a financial instrument, not paperwork. Have a commercial solicitor read it properly, and send it to me early so we can match the deal to a lender whose appetite fits it. For the broader mechanics, see how commercial loans differ from home loans and what you need for the deposit. This is general information, not credit or legal advice.
Got a lease you want a second opinion on?
Send me the lease and the contract and I will tell you how a lender is likely to read it before you commit.
Frequently asked questions
What is the difference between a gross lease and a net lease?
Under a gross lease the landlord pays the outgoings out of the rent, so the headline rent looks higher but you keep less. Under a net lease the tenant pays outgoings on top of the rent. Lenders and valuers work from the net income either way, so always compare properties on net figures.
What does WALE mean in commercial property?
Weighted average lease expiry: the average time remaining across the leases in a property, weighted by each tenant's share of the income. It tells a lender how long the rent is contracted for. A longer WALE with a strong tenant generally supports a better valuation and a more comfortable lending position.
Do lenders count an option to renew as part of the lease term?
Generally no. An option gives the tenant the right to extend but does not commit them, so valuers and lenders usually work from the certain remaining term. If a lease has a short term left plus a long option, treat the short term as the number that matters for finance.
Can I get a commercial loan on a vacant property?
It is possible, but the assessment changes. Without lease income the lender leans on you, your business or your other assets, and typically expects a larger deposit. If you are buying vacant premises to occupy yourself, that is assessed as an owner-occupier deal rather than an investment one.
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Important information
This information is general in nature and does not take your personal objectives, financial situation, or needs into account. It is not credit assistance or a recommendation to enter into any particular credit contract. Consider whether it is right for you and seek advice before acting. Lending is subject to a lender's eligibility and approval criteria. Terms, conditions, fees, and charges apply.
Greenwood Finance · ABN 23 671 049 693 · Credit Representative No. 551942.
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