All commercial real estate properties have leases. As a property owner, you need to choose a lease structure. Understanding the differences between lease types is important to accurately evaluate the income and costs of a commercial real estate property. Today we’re exploring whether a full-service lease is a good option for your investment goals.
A full-service lease is a type of commercial real estate lease where the property owner agrees to cover all operating expenses for the property throughout the duration of the agreement.
A full-service gross (FSG) lease typically outlines the arrangements between a landlord and tenant for the rental of property. The terms used in an FSG lease are essential in understanding the nature of the agreement, as well as defining the rights and obligations of each party.
Real property: This refers to the entire physical area the landlord owns, such as a shopping mall or an office building.
Demised property: This term identifies what is being rented to the lessee from this space and typically would be specified more closely with details such as a map delineating its exact boundaries and any services associated with it, like cleaning, snow removal, or security.
Term: This is the length of time of the lease.
Base Rent: This identifies the starting rent without additional expenses.
Operating Costs: The additional expenses such as property taxes, advertising, and utilities.
Security Deposit: The tenant’s upfront payment to secure the lease.
Occupancy and Use: The lease will include specific rules the tenant must follow. Some examples of the rules include after-hours noise, garbage dumping, and food service.
Improvements: Ensure your lease specifies who is responsible for improving the property, including who pays the cost.
Contingencies: These clauses specify how to handle the costs for unusual events, such as fires and other disasters. Typically, other contingencies include the tenant’s bankruptcy, eminent domain, and arbitration.
Both parties involved in an FSG lease need to understand all of these crucial terms thoroughly so that their financial expectations are accurately determined and other possible contingencies clarified upfront.
Tenants who want to stick to a specific budget prefer a full-service lease arrangement. It is important to note that operating costs may vary each month, but without these added costs, commercial lease tenants can still predict their rental amounts more accurately. In addition, the property owner assumes responsibility for maintaining the building to keep it up and running.
Overall, there are many advantages of a full-service lease for tenants. It eliminates worry about fluctuating operating costs which can be challenging to keep up with month after month. Tenants also have peace of mind knowing that their landlord is taking care of any necessary maintenance issues or repairs promptly and professionally.
When opting for a full-service lease, there are some important disadvantages to consider. First and foremost, full-service leases may favor the tenants more than the landlord – tenants are often spared from taking care of the property. The upkeep and maintenance of the premises and its systems may become unpredictable with an older building.
This type of lease can also be difficult for landlords to handle – they are often responsible for managing repairs or ensuring that all systems remain functional. If landlords choose a full-service lease without a property manager, it will be more time-consuming when repairs and maintenance are necessary.
Additionally, full-service leases are not ideal for tenants wanting to customize their space – since property managers are usually in charge of the design versus allowing the tenant leeway in renovations, furniture choices, or changes outlined within their contract. In other words, unless expressly stated in writing beforehand, tenants have little say regarding how they want their property or space to look during the occupancy period due to this lack of control afforded by a full-service lease.
Operating expenses are a vital aspect of commercial real estate, as they cover most of the costs associated with owning or leasing the property. These expenses include utilities, such as water and electricity, property tax payments to the local government, insurance premiums for liability protection, and maintenance costs for keeping the building in tip-top shape. Depending on various factors, including who will be using the building and how they use it, the tenant and landlord may split these costs evenly.
Ensuring all operating expenses are fairly negotiated before signing any lease agreement is essential. To avoid any surprises, both parties should ensure they understand what costs they’re responsible for and how much those costs amount to. It’s also important to know how those costs may change over time due to inflation or other market shifts. Keeping all of these considerations in mind can help ensure everyone can afford their portion of operating costs quickly and easily.
Full-service leases and gross leases are similar, but there are some key differences that both tenants and landlords should be aware of. Full-service leases usually include a base year expense stop, meaning tenants won’t have to pay operating expenses in the first year but will be responsible for costs increased after that.
A net lease is a popular commercial real estate agreement used throughout the industry. It is the complete opposite of a full-service gross lease, in which tenants typically pay a higher base monthly rental amount but are not responsible for any operating expenses associated with the property.
In a single net lease, tenants are usually only responsible for paying taxes associated with the property, while in a double net lease, they must also cover insurance premiums. In a triple-net lease, they must also pay maintenance costs, taxes, and insurance premiums. The modified gross lease is typically similar to what you would find in traditional full-service gross leases – where the tenant pays base rent plus utilities – except it does not include common area maintenance fees. No matter what type of net lease is selected, landlords and tenants benefit from this structure because it cuts down on rental costs for tenants while allowing landlords to maintain some control.
When choosing a lease for your commercial property, it’s helpful to work with a local broker to ensure the terms of the agreement are clear. At Ullian Realty, we understand the local market. We know what tenants are looking for in commercial property options. Call us to learn more about Brevard County, Fl, commercial property.
© 2024 The Ullian Realty Corporation. All Rights Reserved.