An operating lease, known also as a full service lease is a commercial real estate lease in which the landlord makes a promise to maintain and ensure the proper equipment and services are leased.
A full service lease for real estate usually implies that the landlord is considered responsible for paying all of the property’s operating expenditures, including maintenance, taxes, and supporting costs.
In full service lease, the owner typically provides utilities like water, electricity, heat and air conditioning or ventilation, janitorial assistance, etc.
What is full service leasing?
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 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.