Full Service Lease

Definition of a Full Service Lease

A Full Service Lease, also commonly referred to as a Gross Lease, is a type of commercial real estate agreement where the tenant pays a single, all-inclusive rent payment. In this arrangement, the landlord is responsible for paying all of the property's operating expenses, including taxes, insurance, utilities, and maintenance costs. This structure provides the tenant with maximum budget predictability, as their monthly financial obligation remains the same regardless of fluctuations in the building's operating costs.

Detailed Description and Key Components

In a Full Service Lease, the base rent is typically higher than other lease types (such as Net Leases) because it incorporates the estimated costs of running the building. The landlord manages the property operations and pays the following expenses directly:

• Property Taxes: All local and state real estate taxes.
• Property Insurance: Premiums for the building's casualty and liability insurance.
• Common Area Maintenance (CAM): Costs for cleaning, landscaping, snow removal, and repairs to shared spaces.
• Utilities: Electricity, water, heating, and cooling for both the individual suite and the common areas.
• Janitorial Services: Regular cleaning of the tenant's office space and the building's interior.

The "Base Year" Provision

To protect themselves against significant inflation or spikes in operating costs, most landlords include a Base Year clause in a Full Service Lease. The landlord covers the operating expenses up to the amount incurred during the first year of the lease (the base year). If expenses increase in subsequent years, the tenant is responsible for paying their pro-rata share of the increase above that initial base year amount. This allows the landlord to maintain their profit margins while still offering the tenant the convenience of an inclusive rent structure.

Significance in Commercial Mortgages

From the perspective of a commercial mortgage lender, a property dominated by Full Service Leases requires a more rigorous underwriting process. Lenders focus on the following factors when evaluating a loan for such a property:

• Expense Volatility: Since the landlord bears the risk of rising utility costs or tax hikes, the Net Operating Income (NOI) may be less stable than in properties with Net Leases. Lenders will carefully review historical expense audits to ensure the income is sufficient to cover debt service.
• Management Quality: Because the landlord is responsible for all maintenance and repairs, the physical condition and long-term value of the collateral depend heavily on the landlord's management capabilities.
• Market Competitiveness: Lenders assess whether the all-in rent is at market levels. If operating expenses rise and the landlord cannot pass those costs to tenants, the property's Debt Service Coverage Ratio (DSCR) could be negatively impacted.

In summary, while the Full Service Lease is highly attractive to tenants in the office and medical sectors due to its simplicity, it places the operational and inflationary risks on the landlord. This risk profile is a primary consideration for lenders when determining the terms and interest rates of a commercial mortgage.