Full Service Gross Lease

What Is a Full Service Gross Lease?

A full service gross lease is a commercial real estate lease structure where the tenant pays a single base rent amount, and the landlord covers all operating expenses associated with the property. This arrangement is often compared to an all-inclusive vacation package, where one fee covers all amenities.

Operating expenses typically included in a full service gross lease are:

• Property taxes
• Insurance
• Common area maintenance
• Utilities
• Standard maintenance and repairs
  
  

How Does a Full Service Gross Lease Work?

In a full service gross lease, the tenant's base rent is typically higher compared to other lease types because it includes the landlord's estimated operating expenses. The landlord is responsible for paying all operating expenses from the rental income received, which simplifies the tenant's budgeting process as they only need to account for a single rental payment each month.

Advantages of a Full Service Gross Lease for Tenants

• Simplified budgeting: Tenants benefit from predictable costs with a single, fixed monthly payment.
• Cost stability: Tenants are shielded from unexpected increases in operating expenses during the lease term.
• Focus on core business: This lease structure allows tenants to concentrate on their operations without worrying about property management responsibilities.
  
  

Disadvantages of a Full Service Gross Lease for Landlords

• Expense risk: Landlords are exposed to the risk of rising operating expenses, which may exceed the estimated costs built into the base rent.
• Active management: This lease type requires landlords to actively manage and control operating expenses to maintain profitability.
• Potential lower income: It may result in lower net operating income compared to other lease structures if expenses are not managed effectively.

Full Service Gross Lease vs. Modified Gross Lease

A modified gross lease is a hybrid structure that combines elements of both full service gross and net leases. In a modified gross lease, the tenant pays base rent plus a portion of the operating expenses, which are typically specified in the lease agreement. This type of lease offers a compromise between the landlord and tenant, sharing the responsibility for operating expenses.

Full Service Gross Lease vs. Net Lease

Net leases, such as Single Net (N), Double Net (NN), and Triple Net (NNN), require the tenant to pay base rent plus some or all of the property's operating expenses. In a Triple Net (NNN) lease, the tenant is responsible for paying property taxes, insurance, and maintenance costs in addition to base rent. Net leases generally have lower base rents compared to full service gross leases, as the tenant assumes more responsibility for operating expenses.

Negotiating a Full Service Gross Lease

When negotiating a full service gross lease, tenants should carefully review the lease agreement to understand what expenses are included in the base rent and if there are any exclusions or expense stops. Landlords may negotiate expense stops, which limit their exposure to increases in operating expenses beyond a certain threshold.

Tenants can negotiate for a more favorable base year for calculating expense increases or for caps on annual expense growth. It's crucial for both parties to clearly define the terms of the lease to avoid misunderstandings and potential disputes in the future.