When you’re looking at different commercial real estate leases for your practice, it’s important to understand what a “full-service” lease entails. This type of lease is usually pretty straightforward and reliable, offering a stable monthly cost without unexpected fees (like sudden maintenance or operational costs passed on to tenants).
You’ll often find full-service leases in standard office buildings and some industrial or warehouse spaces.
Essentially, a full-service lease rolls everything into one comprehensive rental payment. This means your rent includes the base lease rate plus all operating costs (such as property taxes, insurance, and maintenance of common areas) in one total amount.
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Full Service Lease vs. Gross Net Lease
What is a Full Service Lease?
A Full Service Lease is a type of lease where the landlord charges one all-encompassing rental rate that covers both the base rent and all operating expenses associated with the property. These operating expenses can include property taxes, insurance, and maintenance of common areas (such as lobbies, bathrooms, and hallways). In some cases, utilities and janitorial services might also be included in the lease rate.
More simply, full service lease mostly refers to when a landlord is renting the building and includes a service lease for equipment within a building. For example, a full service lease for an office building may include a financing offer, scheduled maintenance, redecoration assistance, and other services.
Some optional services may cover insurance and tax management, but regardless of the case, the monthly price for a chosen lessee will remain the same for the duration of the lease period.
An operating lease is a contract that allows the use of the building’s assets but does not convey claims of the ownership of the asset. An operating lease is also not capitalized, and it’s usually considered as a rental investment, known as “off-balance financing”.
For the owner, the leased building is considered just an asset and depreciated as such. Operating leases have tax grounds, and do not occur as liabilities on the resident’s balance sheet, which can improve his financial ratios.
Full-Service Lease Example
Let’s say you’re renting a 3,000 square foot space at a full-service lease rate of $30 per square foot annually. Here’s how it breaks down:
Your annual cost would be 3,000 SF x $30/SF = $90,000, which comes out to $7,500 each month.
This monthly fee of $7,500 covers both your basic rent and all operating costs.
However, under a full-service lease, you might still be on the hook for any rises in operating costs starting from the second year. These increases are usually linked to the lease having either a “Base Year” or an “Expense Stop.” It’s crucial to know whether your lease includes utilities and janitorial services in this rate or bills them separately. Additionally, you’ll want to understand how any future increases in operating expenses will be shared with you, the tenant.
Full Service Lease vs. Gross Net Lease
The most common leases in Class A building projects are the full service leases because they typically include insurance, taxes, utility management, and janitorial services – all within the agreed rental price.
This type of operational lease is very common in multi tenant buildings with offices, because increases in leasing expenses may be passed onto the tenant on a pro-rata basis after the first year.
Increased operational expenses passed to the tenant are known as “Pass Throughs”. These sets of annual increases may be in your lease so be sure to keep up with any additional changes of the full service lease that refers to these possible Pass-through Expenses.
Whether you’re a tenant, lender, landlord, or appraiser, it’s always important to carefully read the terms of your full service lease and at the same time understand the sections and paragraphs that apply strictly to you. Ignorance may be bliss but in this case, that “bliss” could be expensive.
Gross Net Leasing
Gross net leases (known also as modified leases) are typically applied to some office and industrial projects. A Gross lease includes “base year” taxes, insurance, and common area maintenance.
Nevertheless, any increases after the first year (“Base Year”) can be passed through to the tenant on a prorated basis and kept that way in future years.
A Full Service Lease for Office Spaces
Have you noticed that several properties offering office space have different items included in the monthly rent? This is due to a variety of lease structures and their types, applicable in the building, but the most common types of leases, industry-wide are:
- Full Service,
- Modified Gross, and
- Triple Net.
A Full Service lease is most commonly used among the landlords who rent higher-end buildings, such as class A and multi-story buildings. Typically office spaces in the business buildings offer a full service lease.
The term “full service” means the inclusion of the building‘s operating costs included in your monthly fee to the Landlord, such as:
- Fee for renting the office space
- Electricity costs
- Maintenance (and possible repairs and replacing) of air conditioning, lights, and other common area necessities
- Insurance fees
- Water bills
- Regular real estate taxes
- Janitorial (cleaning) services that usually happened 3 to 5 times a week
For example, I have seen an office building referred to as “full service” but it “only” included janitorial services in the rent, but not electric. A good example of a full service leased building could be if the tenant’s light bulb goes out, and all he has to do is call the landlord or the property manager to fix the issue.
The definition of “full service” is not black and white, but it’s important that the landlord has all the operating expenses clearly defined in the lease, and additionally clearly explained to a tenant.
