Commercial real estate leases define the financial relationship between a tenant and a landlord, impacting a business’s long-term budget planning. Understanding responsibility for property operating expenses is fundamental to negotiation. The Full Service Gross (FSG) lease is a common arrangement, particularly in multi-tenant office buildings, designed to simplify a tenant’s monthly financial obligations. Businesses often prefer this lease type because it offers a predictable, single-payment structure for occupancy costs.
Defining Full Service Gross (FSG) Lease
A Full Service Gross lease is characterized by a single, all-inclusive rental rate paid by the tenant to the landlord. This fixed payment covers the base rent for the space and the property’s general operating expenses. The landlord assumes responsibility for managing and paying for nearly all costs associated with the building’s operation.
This structure simplifies the tenant’s monthly budgeting process, as the tenant is insulated from fluctuations in expenses like utility costs or unexpected maintenance issues. The landlord calculates the all-inclusive rate by estimating total operating costs and incorporating them into the base rent.
Costs Typically Included in a FSG Lease
The “Full Service” nature of this lease means the landlord covers a comprehensive set of expenses necessary for the building’s function. These costs are bundled into the rental rate, ensuring the tenant does not receive separate invoices. Included expenses generally fall into three main categories.
The first includes statutory costs of property ownership, such as property taxes and building insurance premiums. The second category covers essential maintenance and upkeep, known as Common Area Maintenance (CAM). CAM charges fund services like landscaping, repairs to the roof and structure, and maintenance of shared spaces such as lobbies and parking lots. The third category encompasses day-to-day operational services, including utilities (electricity, water, and gas) for both common areas and the leased space. Janitorial services for the tenant’s private office space and common areas are also typically included.
Costs Typically Excluded from a FSG Lease
Despite the all-inclusive name, a Full Service Gross lease does not cover every expense a tenant will incur. Exclusions typically relate to costs specific to the tenant’s unique business operations or excessive use.
- Specialized utilities, such as dedicated internet, data lines, or phone services, which are not part of the building’s core infrastructure.
- Business-specific insurance policies, such as contents insurance for equipment and liability insurance for operations within the space.
- Costs related to customizing the leased space, known as tenant improvements or specific build-outs.
- Sales or other taxes levied directly on the tenant’s business activity, rather than on the property itself.
Understanding the Base Year or Expense Stop
The greatest complexity within an FSG lease involves how operating expenses are handled after the first year. To protect against future cost inflation, landlords typically include a Base Year or an Expense Stop clause. The Base Year provision establishes the actual operating expenses incurred during the lease’s first year as a fixed benchmark.
In subsequent years, the tenant only pays their proportional share of any increase in operating expenses that exceeds this initial Base Year amount. For example, if Base Year expenses were \$10 per square foot and rise to \$10.50, the tenant is responsible for the \$.50 per square foot increase. The Expense Stop functions similarly but uses a predetermined fixed dollar amount as the ceiling for the landlord’s expense coverage, rather than the actual costs of the first year.
This mechanism shifts the risk of operational cost increases back to the tenant after the first year. The tenant’s share of the increase is calculated based on their pro-rata share of the building’s total rentable square footage. Tenants receive an annual reconciliation statement detailing the building’s actual expenses and their required reimbursement for costs above the established baseline.
How FSG Compares to Other Lease Types
The Full Service Gross lease contrasts sharply with Net and Triple Net (NNN) lease structures, primarily in the allocation of operating expense risk. In a Triple Net lease, the tenant pays a lower base rent but is responsible for their pro-rata share of all three “nets”: property taxes, building insurance, and Common Area Maintenance (CAM). This structure shifts nearly all risk and administrative burden for variable costs onto the tenant.
An FSG lease, by contrast, shifts the initial risk of expense fluctuation to the landlord, who pays operating costs out of the single, higher rental payment. This difference means the tenant has a highly predictable monthly outlay, even if the building’s insurance or utility costs unexpectedly spike. The NNN lease structure, while offering a lower face rate, exposes the tenant to the full annual variability of major operating expenses.
Advantages and Disadvantages for the Tenant
The primary advantage of an FSG lease is the simplicity it offers for financial planning and business operations. The single, all-inclusive monthly payment allows for highly predictable budgeting, as the tenant does not have to forecast fluctuating utility bills or unexpected maintenance costs in the short term. This structure also minimizes administrative burden, since the landlord manages all vendor relationships, bill payments, and expense reconciliation.
Disadvantages
The FSG structure presents certain drawbacks tenants should consider. The initial base rent for a Full Service Gross lease is typically higher than the base rent for a net lease, as the landlord incorporates estimated operating costs into the rate. Because the landlord controls the choice of utility providers and service contractors, the tenant has less control over the efficiency or quality of building services. Furthermore, the inclusion of a Base Year or Expense Stop means the tenant is still exposed to annual operating expense increases, potentially leading to unexpected costs if the initial benchmark is not carefully negotiated.