Commercial real estate transactions rely heavily on the lease agreement, which dictates the financial relationship and risk distribution between the landlord and the tenant. The classification of a lease determines who is responsible for the property’s operating expenses beyond the base rental fee. Financial predictability and long-term budgeting are directly influenced by the specific language used in the leasing document. The Full Service Gross (FSG) structure is one of the most common frameworks used in office environments today.
Defining the Full Service Gross Lease
The Full Service Gross (FSG) lease structure is fundamentally simple for the tenant. Under this arrangement, the tenant remits a single, fixed rental payment to the landlord each month. This payment covers the base rent for the physical space along with the majority of the property’s associated operating expenses. The landlord assumes the responsibility of managing and paying for these variable costs directly from the revenue collected.
This structure allows a business to budget for occupancy costs with a high degree of certainty. The tenant avoids the administrative burden of calculating and paying separate bills for various building services and common area charges. The FSG lease is often considered the most straightforward type of commercial lease agreement from the perspective of the occupying business.
Components of Full Service Rent
The term “Full Service” defines the range of costs the landlord absorbs within the single rental rate. These expenses represent the ordinary and recurring costs necessary to maintain the physical structure and ensure the building functions properly. Understanding the specific components included in this bundled rate is necessary for accurate financial comparison with other lease types.
The costs typically covered by the landlord in an FSG lease include:
Real estate taxes assessed against the commercial building, including any levies or special assessments.
Building insurance premiums that cover the property’s structure against damage.
Common Area Maintenance (CAM) costs associated with maintaining shared spaces.
Standard utilities, such as electricity, water, and gas, used throughout the building, including the tenant’s space.
Routine janitorial services within the leased premises.
The Base Year and Expense Stops
While the FSG lease is marketed as all-inclusive, it often involves a mechanism that shifts risk back to the tenant over time. This mechanism is managed through the establishment of a “Base Year” for operating expenses. The Base Year is defined as the first full year of the lease term, and the actual operating costs incurred during this period set a fixed benchmark.
The landlord covers 100% of the operating expenses up to the total amount established in this initial Base Year. Any subsequent increase in the property’s operating costs above that benchmark is then passed through to the tenant. The tenant’s fixed monthly rent remains stable, but they receive an annual bill for their proportional share of the expense increase.
This concept is often formalized through an “Expense Stop,” which functions as the maximum dollar amount per square foot the landlord agrees to absorb. The Expense Stop is the financial equivalent of the Base Year expense level, stated as a fixed figure. If the property’s operating costs rise above this threshold, the tenant must pay the difference.
This arrangement protects the landlord from the effects of inflation over the lease term. For the tenant, it introduces a variable element into their otherwise fixed occupancy cost, requiring careful review of the Base Year figures before signing the agreement.
Comparing FSG to Other Lease Structures
Understanding the FSG framework requires contrasting it with other major commercial leasing structures, which primarily differ in how operating expense risk is allocated. The Triple Net (NNN) lease sits at the opposite end of the spectrum from FSG. Under an NNN agreement, the tenant pays a lower base rent but is directly responsible for their proportional share of property taxes, property insurance, and common area maintenance.
In an NNN lease, the tenant bears the entirety of the risk associated with rising operating expenses, paying the actual, variable costs as they occur. While this structure offers the tenant greater transparency and control, it diminishes financial predictability compared to the FSG model. NNN leases are commonly found in retail and industrial properties where the tenant often occupies a standalone building.
Between the FSG and NNN models lies the Modified Gross lease, a hybrid structure designed to share the expense risk. In this arrangement, the tenant pays a single rental rate that covers the base rent and only some operating expenses. For example, the landlord might cover taxes and insurance, while the tenant is directly responsible for utilities and janitorial services.
The Modified Gross structure allows for greater negotiation flexibility, enabling parties to tailor the expense allocation to their specific needs. The primary differentiation across all three models remains the degree of expense risk transferred from the property owner to the occupier.
Advantages and Disadvantages for Tenants and Landlords
The FSG lease provides distinct benefits and drawbacks for both the occupying business and the property owner. For the tenant, the main advantage is the simplicity of financial management and budgeting. Knowing the monthly occupancy cost upfront allows for easier cash flow forecasting without needing to track fluctuating utility or maintenance bills.
This structure also removes the administrative burden of engaging with multiple vendors for services like trash removal or landscaping. A potential downside for the tenant is the lack of control or visibility over the actual operating expenses, potentially leading to overpayment if the landlord’s costs are lower than anticipated.
For the landlord, the FSG model simplifies property marketing, as the single, all-inclusive rate appears more attractive and easier to understand for prospective tenants. This structure is often preferred in competitive markets where offering a predictable cost structure is a differentiator. The disadvantage for the property owner is the initial absorption of all expense risk.
If operating costs rise above the Base Year or Expense Stop, the landlord must initially cover these expenses until they can be reconciled and billed back to the tenant. This delay in cost recovery, combined with the administrative task of managing all vendor contracts, represents a higher overhead for the property management team.
Typical Applications of the FSG Lease
The Full Service Gross lease structure is prevalent in multi-tenant office buildings, particularly in high-rise settings where shared infrastructure is complex. Smaller businesses often favor this model because it simplifies their financial obligations and provides greater cost certainty. The structure is well-suited for environments where the operating expenses are managed centrally by the building owner for efficiency.
Conversely, the FSG lease is rarely found in industrial warehouses or single-tenant retail locations. These property types typically utilize NNN structures because the tenant often has more direct control over the building’s systems and site maintenance. The FSG model remains the standard for professional office space across most major metropolitan markets.