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What is a Full-Service Lease?
A full-service lease typically refers to a commercial lease agreement where the charges are all-inclusive. In this case, the tenant only pays the base rent. At the same time, the landlord takes care of all the operating expenditures, including taxes, maintenance, and support costs.
Key Terms in a Full-Service Lease
Understanding the lease terms used in a full-service lease will help you choose the right type of lease. Here is a list of the most common terms used:
- Base Rent : A predetermined minimum amount that every tenant must pay every month. The base rent is always a fixed amount and is usually quoted in square feet.
- Operating Expenses : They include all costs associated with running a property. Operating expenses include insurance, property management fees, repairs, and taxes.
- Turnkey : The term refers to a fully renovated apartment or building readily available for rent.
- Usable Square Feet : Refers to an area in a building that the tenant can use. USF doesn't include common areas like staircases, lobbies, public restrooms, and hallways.
- Rentable Square Feet : The term defines the total usable square feet plus the building's common area. The tenant will have to pay for a portion of the building's shared spaces.
- Addendum to Lease : An addendum to lease is a legal document added to the original lease agreement between the tenant and the landlord. The document caters to the additional information missed in the original lease.
- Assignment of lease : A document allows the tenant to sell the lease to a third party. Most commercial leases contain this clause that allows the tenants to assign their lease to a new tenant.
- Term : Refers to the period between the start and end.
- Security Deposit : This is an upfront payment made by a tenant to secure against damage to the property or delayed rent payments.
Here is an article with additional key terms.
Examples of Full-Service Leases
If a tenant leases a 4,000 Square Feet space and is charged $40 per square foot, the payment they will make would be:
- $40 per Square Feet per year X 4,000 SF = $160,000 per annum or $13,333 per month. The $13,000 monthly charges include the base rate and all operating expenses.
Some leases may contain an escalation clause that raises the rent annually by 2%.
- So, a tenant will pay $160,000x 102%/100=$163,200. The rent will rise by $3,200 in the second year.
Advantages of a Full-Service Lease
Below are six advantages for tenants in using a full-service lease.
- It's preferred by tenants who follow a strict budget. The tenants only pay for the base rent and don't have to worry about paying for the operating expenses.
- It helps the tenants to have one predictable rental amount. However, it's worth noting that operating expenses like maintenance and utilities keep fluctuating, thus creating uncertainty about the exact amount to be paid each month.
- The landlord is responsible for maintaining the building. Therefore, the tenants can concentrate on running their business because they don't have to worry about the facility's state.
- The tenant doesn't have to worry about a significant appliance breakdown. The property owner will replace it without charging extra money.
- These leases help the owner attract quality tenants who would like to use the premises for several years.
- In some countries, the expenses incurred can help the landlords get significant tax breaks, especially if they have several properties.
Here is another article explaining the advantages
Disadvantages of Full-Service Leases
Below are four disadvantages of using a full-service lease.
- A full-service lease mostly favors the tenants and not the landlord. The landlord is responsible for maintaining the physical condition of the premises and all its systems.
- It's not a good option for property owners who don't want to hire a property manager.
- Not ideal for tenants who want to customize the property to suit their preferences. The tenants have little say because the property manager determines the property's general appearance.
- Most full-service leases charge higher rent compared to other commercial lease agreements. Most property owners fear incurring losses by paying a lot of operating costs. They instead transfer the operating costs to the tenants by charging higher rental fees.
Gross Lease vs. Full-Service Lease
A gross lease and full-service lease usually refer to the same thing because the landlord usually caters to all operating expenses in both cases. However, in some full-service leases, the tenants might be required to pay for some expenses.
Some countries use the modified gross lease to relieve the landlord from paying for all building operating costs. Therefore, the operating costs are passed to the tenants. In addition to paying the rent, the tenants are supposed to take care of some utilities and janitorial services.
Click here if you want to know more about these types of leases.
Full-Service Lease vs. Net Lease
A net lease is a common commercial real estate agreement that allows tenants to pay rent plus an additional amount to cover the building's operating expenses. Such operating expenses include:
- Property taxes
- Common space maintenance fee
There are different types of net leases, and each type has its level of obligations that a landlord passes to the tenants.
The landlord calculates each tenant's pro-rata share by determining the total operating cost per square foot. After calculating the total operating cost for all rentable spaces, the landlord divides that amount based on each tenant's space.
The tenant only pays for the rent and utilities on the full-service lease. In contrast, the landlord pays all the building expenses, including the insurance, real estate taxes, and maintenance costs. However, a tenant might be required to cater for additional charges after the first year of tenancy.
Here is another article that can help you understand the difference better.
Triple Net Leases vs. Full-Service Leases
A triple net lease, also known as NNN, is among the commercial leases where the tenant is supposed to pay rent and other commercial property operating expenses. In addition, the tenant is liable for paying rent, maintenance fees, taxes, and building insurance.
In the NNN lease, the tenants pay reduced rental prices compared to a full-service lease. Landlords lower the rent because the tenants have agreed to pay for the operating expenses.
The triple net leases are usually long-term and often have concessions for rent hikes. However, some tenants might want to break their leases if the maintenance fees are higher than usual.
Some landlords use the bondable net lease to avoid instances where the tenant wants to break their leases before their period expires.
Since all the operating expenses are shifted to the tenants, most people avoid the NNN leases because the property taxes and insurance could increase. On the other hand, some tenants prefer full-service leases over the NNN lease because the landlord bears all the risks.
Please reference here if you have a question about the leases mentioned above.
Get Help with Leasing Issue
Full-service lease is among the most common type of commercial leases today. However, it can be pretty challenging to determine the type of lease that suits your need. Hire an expert today to help you evaluate the best leasing option.
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