This blog was authored and originally published by CARR, a national healthcare commercial real estate firm. It is re-published with permission.
Commercial Real Estate
As you evaluate different types of commercial real estate leases when considering various properties for your practice, it’s important to understand the details of a “full-service” lease agreement. Full-service leases are one of the simpler commercial real estate lease structures, as well as one of the most predictable, making them a solid choice for many tenants whose circumstances require relatively constant monthly payments without too many surprises (e.g., unforeseen operating or building maintenance costs being charged back to tenants).
Full-service leases are commonly found in traditional office buildings, as well as some industrial or warehouse properties.
A full-service lease is typically defined as a lease that has one, all-inclusive rental rate which includes both the base lease rate and the operating expenses (property taxes, insurance and common area maintenance) combined into one figure.
Full-Service Lease Example
For example, if you leased a 3,000 SF space with a $30 per SF full-service lease rate, the breakdown of payments would be:
Full-Service Lease Rate: 3,000 SF x $30 per SF per year = $90,000 per year, or $7,500 per month.
Included in the $7,500 per month amount is both the base lease rate and the operating expenses.
With a full-service lease, the tenant is generally still responsible for any increase in the operating expenses in year two of the lease and beyond. The increases are typically determined by whether the lease contains a “Base Year” or “Expense Stop”. An important aspect of a full-service lease is to understand if the utilities and janitorial are included in the lease rate or if they are billed separately to the tenant, and how any increases in operating expenses will be “passed through” to the tenant.
The Most Important Thing About Leases
When you’re considering what type of lease you will receive at each property you are considering, the most important consideration is to take a “full examination of what the lease includes. In general, the more risk or expenses you are expected to cover as the tenant, typically, the lower base rent you will have to pay. So, you are rewarded monetarily for taking on more risk. The right amount of risk to take on depends on you, your practice, your current situation, and your general risk appetite and ability to deal with unforeseen circumstances.
Trying to decide among different types of commercial leases? Ultimately, each property owner will determine the lease structure they choose for their property, but you as the tenant have the ability to choose which owner you lease from. Let’s compare and contrast a few of the most common types of leases, so you feel more informed to make a decision about what type of commercial real estate lease is right for your practice.
Full-Service vs. Gross Lease
Let’s start with an easy one. It is a common misconception that full-service and gross leases differ, but they are actually exactly the same thing! In fact, you may hear them referred to as full-service gross leases. All of these terms are synonymous for the same type of lease, which is structured with you as the tenant paying one rental rate (inclusive of base rent and operating expenses). The landlord is responsible for building expenses and services (e.g. property taxes, insurance, and maintenance), which they usually fund with rental income.
One word of caution with full-service gross leases: Make sure to read the lease closely to make sure you understand if the common area maintenance expenses increase, you may be expected to pay additional expenses.
Full-Service Lease vs. Triple Net (NNN) Lease
In the world of commercial real estate, you’ll probably come across triple net leases the most. They’re one of the more common commercial real estate lease structures in the industry and require the tenant to pay base rent plus certain pass-thru costs required to operate the property. “NNN” refers to three “nets,” or costs the tenant is required to pay: 1) property taxes, 2) insurance, and 3) operating expenses.
There are a few “risks” you take on as a tenant with a triple net lease. You risk the property taxes and property insurance increasing. You risk an increase in the common area maintenance costs if you have abnormal years of snow removal, landscaping, or if traditional expenses for maintaining a property simply cost more in a particular year, etc… Because the expenses in a NNN Lease are simply passed through to the tenant, you must be prepared for some level of fluctuation each year.
Now, let’s dive into how this differs from a full-service gross lease. While a full-service lease typically limits you as the tenant to paying base rent and operating expenses, a triple net lease can require you to also cover other expenses, such as HVAC maintenance, utilities, and more. A triple net lease usually rewards the tenant for taking on additional expenses with a lower base rent. So, if you’re looking for a more streamlined approach— a full-service lease might be the way to go.
Because you have one lease rate you pay per month without additional expense obligations, it can appear a bit simpler to many tenants. However, if you’re ok with a little variability and change, a triple net lease can get you a lower monthly base rent, a tradeoff you might find worthwhile.
Full-Service Lease vs. Modified Gross Lease
A modified gross lease falls exactly in the middle of a full-service gross lease and triple net lease. With a modified gross lease, you — the tenant — pay base rent, and some operating costs in the total of one price per square foot. Additionally, the ‘modified’ delineation of the leases type means you agree to pay for one or two other items in addition to your one lease payment, such as utilities or trash removal.
The details of exactly which other cost or costs you will need to pay will depend on your specific lease agreement. For instance, your contract might only require you to pay base rent and utilities the first year, and then in subsequent years just ask that you pay a prorated amount of operating costs for the property. Typically, the amount of operating costs you’re responsible for correlates to the percentage of the building you’re occupying.
Ultimately, it’s up to you as the tenant to decide what type of property to include in the lease search, knowing that each property owner will determine the lease structure they require to lease from them. While most items in a lease are negotiable, the lease type and structure is typically set long before offers and terms are discussed. By comparing and contrasting the full-service lease option against your other commercial real estate lease types, you can make an informed decision about how much risk and responsibility is appropriate for your practice to assume. With a full-service lease, you’ll just pay base rent and operating costs in one lease rate, but that base rate may be higher than in other commercial real estate lease types. With a triple net lease, you’ll be responsible for all base rent, operating costs, and property taxes broken down to two separate numbers — but you’ll be rewarded with a lower base rent. Finally, a modified gross lease will put you somewhere in the middle, asking you to pay a generally moderate base rent and be responsible for other type of operating expense or cost.
As always, our team at CARR is here to help you evaluate these options in the context of your practice, so you can be confident in the election that you choose. Our services come at no cost to you as the tenant and we are only here to be your advocate and experienced guide as you navigate the world of commercial real estate.
Thank you to the CARR company for allowing us to republish this article defining Full-Service lease. To read the article on their site click here. CARR provides professional commercial real estate representation for companies within the healthcare field.
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