What is a Full Service Lease?
A full service lease is a lease in which a tenant pays only a base rate, and the landlord is responsible for paying all other expenses. Full service leases often contain an expense stop, a point above which a tenant becomes responsible for contributing to the operating expenses of the property. Common expenses can include common area maintenance (CAM) fees, utilities, property taxes, and property insurance. However, full service leases can vary widely in their exact terms, so, whether you’re a tenant or a landlord, it’s essential to understand the specific terms of the lease that you have signed.
Full Service Leases vs. Gross Leases
Full service leases and gross leases are extremely similar, but there are some important differences that both tenants and landlords should be aware of. Full service leases typically contain a base year expense stop, which means that a tenant will not have to pay any operating expenses in the first year, but if expenses increase beyond that point, they will have to.
For example, if a landlord’s operating expenses were $10 per sq. ft./year in the first year, but increased to $12 per sq. ft./year in year 2, then most tenants with a gross lease would be responsible for paying the difference of $12 per sq. ft./year. In contrast, most true gross leases have landlords fully responsible for paying operating expenses, though there still may be a high expense stop, just to protect landlords in the case that expenses rise extremely quickly. Sometimes, a lease is referred to as a full service gross lease, which can mean a variety of different things, so, as always, one should be careful to check the exact terms of a lease before making any important decisions.
Full Service Plus Leases
A full service plus lease is another variation of the full service lease. In this type of lease, a landlord will typically cover all expenses except for one (ex. utilities) which will be covered by the tenant. If the cost of one expense is particularly unstable, this can be a smart way for landlords to reduce their risk exposure while still offering tenants many of the benefits of a full service lease.
Full Service Leases vs. Net Leases
Full service leases and gross leases are both quite different from net leases, which usually require a tenant to pay a significant portion of the landlord’s operating expenses. Triple net leases (NNN leases) are generally the most comprehensive type of net lease, and require a tenant to pay for all operating expenses, in addition to rent. Bond leases, while relatively uncommon, are even more encompassing, as they mandate that a tenant pays for rent (and repair/rebuilding expenses) even if a property has been destroyed or has been condemned. Double net leases (NN leases), usually require that a tenant pays insurance and property taxes, while other expenses are taken care of by the landlord.
While the exact type of leases tenants have on a property is not typically a deciding factor in the commercial real estate loan process, lenders generally prefer to finance commercial properties with double or triple net leases, as this greatly reduces the risk that expenses will climb, and that a borrower could default on their property.