Owners of investment properties have several options when determining how to lease their space to tenants. They may want to choose a lease structure based on their property type and its benefits. A full service lease has a predictable and straightforward structure that you can modify to benefit yourself as the landlord or investment property owner through the lease agreement.
A full service lease, also called a gross lease, is a type of lease agreement that outlines the financial responsibilities of the tenant and landlord. In a full service lease, the tenant pays one flat sum for rent, while the landlord is responsible for the property’s operating expenses.
These expenses include real estate taxes, utilities, insurance premiums, and building maintenance. Under a full service lease, landlords charge tenants a base rent, and tenants are not obligated to pay any share of the property’s expenses.
A full service lease makes it easy for the tenant, as they only have one bill they must pay each month. They do not have to worry about fluctuating costs of utilities. It also benefits the landlord, as they do not have to spend time chasing after multiple payments or dealing with ongoing cash-flow problems.
Triple Net (NNN) leases and modified gross leases are other available leasing options, and each has different responsibilities for operating expenses. The tenant is fully responsible for paying the operating costs in an NNN lease, while the responsibility varies in a modified gross lease.
Depending on the lease agreement terms, tenants may pay little or most property-associated costs in a modified gross lease.
Full service leases are most commonly used for apartment rentals in multi-story buildings and Class A properties. Properties obtain this classification if they are less than ten years old , have high-end finishes, offer amenities within the building or a nearby area, are in a preferred location, and ask for above-market rent.
Older buildings can achieve this classification if they are considered vintage, fully renovated, and meet current building standards. Commercial real estate properties that rent office space also use full service leases.
While some property owners may dislike being responsible for operating expenses, you can pass some of the costs to your tenants through your lease agreement. There is no standard lease agreement for a full service lease, so landlords can choose to include several expenses in the base rent they charge tenants.
This practice lowers your operating cost responsibilities. For example, if you know the annual amount of taxes for your property, include a portion in the base price of the rent.
Landlords can also add an expense stop to their lease agreement. This clause protects property owners from increasing expenses over the term of the lease. In this method, the landlord pays all operating costs for the first year. This amount becomes the base rate for future years. If operating expenses rise higher than the base rate in the following years, the tenant is responsible for the price difference.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.