Full-Service Lease
Understanding a full service lease in commercial real estate is easy when you have the right information. Commercial real estate professionals understand the ins and outs of this type of lease on commercial property. However, a full service lease is one of the commercial real estate terms that often confuses the general public. Here, you will find full service lease information and how this type of lease compares to other commercial real estate leases.
We’ll start with a simple definition of a full service lease. But first, it’s important to note that the term “full service lease” isn’t clearly defined and standardized. As with any legal agreement, it’s crucial that you actually read the lease terms and calculate a total cost of occupancy, which is rarely provided by the landlord. On its simplest terms, a full service lease typically refers to a leasing agreement in which the owner (lessor) is responsible for covering the building’s operating expenses in the rent. Those expenses that are covered in the rent can include – but are not limited to – real property taxes, insurance, utilities, maintenance, etc. So, to be clear, the full service rate of this commercial property lease covers building operating costs in the rent.
To someone renting commercial space, this sounds like a great deal. You pay a monthly rent based on square footage, and the building’s owner pays the operating expenses for the building. However, when it comes to full service leases, there are more terms involved than just paying a set rate. If you were to negotiate a deal to pay a quoted rental rate that did not change throughout the term of your lease, then you would most likely be negotiating what’s often called a gross lease and not a full service lease.
Here’s the big difference – one which all potential tenants must understand. The terms of a full service lease usually require the tenant to be monetarily responsible for any increases in the owner’s building operating expenses beyond the base year of the lease. What is the base year?
In most cases, the base year references the first calendar year of your lease. For example, during the first year of your full service lease, the owner of the commercial building pays $15 per square foot for operating expenses. Now, as you begin the second year of your lease term, the owner sees his building operating expenses increase to $18 per square foot. In this scenario, you would see your full service lease rate increase to cover that additional cost.
As you can see from the previous example, it is not just important that tenants have in writing exactly what operating expenses are being covered by the owner of the building. It is also extremely important to understand how those operating costs have risen each year in the past. While you can not predict the exact cost of increases in expenses like insurance, property taxes, or utilities; a tenant can review the trends in those increases to have a general idea how much their full service lease will increase year to year.