What Is a Full-Service Gross Lease?

A gross lease is the simplest structure to read. You pay a single rent, and the landlord pays the building’s running costs out of it. "Full service" is the term used mostly in multi-tenant office buildings for the most inclusive version, and it suggests that services such as cleaning and utilities are part of the package.

Compare that with a triple net lease, where the tenant pays base rent and then adds its share of taxes, insurance and maintenance. A gross quote and a net quote are therefore measuring different things. A gross rate looks higher because it already contains costs the net rate excludes.

The attraction for a tenant is simplicity. You have a single number to budget, and you do not need to track building expenses category by category. Your exposure to a bad year for taxes or repairs may also be lower, depending on how the lease is written. The landlord takes on that risk, and it prices that into the rent.

The list is set by each lease, not by the label. These are the items you would generally expect a full-service rent to cover, and each one should be confirmed.

• Real estate taxes and the landlord’s building insurance.
• Maintenance and repair of common areas and building systems.
• Heating, ventilation and air conditioning during stated building hours.
• Electricity for ordinary office use, in many leases.
• Janitorial service in your suite, on a stated schedule.
• Security, property management and engineering staff, as the building provides them.

Sands Investment Group makes the same caution in its own explanation: a lease labeled full service can still require tenants to pay a share of operating costs, so each lease should be read closely.

This is where most surprises come from, and they are usually found in the services and operating expense sections.

• After-hours HVAC. Heating and cooling are provided during building hours. Outside those hours you may pay an hourly charge. Leases may set this per hour or per floor per hour, and some let the landlord change the charge.
• Excess electricity. A 2007 article from the law firm Arnold & Porter observes that most office leases let the landlord charge for excess electrical use, and that what counts as excess depends on the lease. The same article says full-service leases in California typically include electricity as an operating expense, so the rule can differ by market. Heavy equipment, server rooms and supplemental cooling are obvious candidates.
• Expense increases. Many full-service leases have a base year or expense stop, so you pay your share of operating costs and taxes above that level. In practice, this makes the lease a form of modified gross, whatever it is called.
• Above-standard services. Extra cleaning, a day porter, added security or a freight elevator outside set hours may be billed separately.
• Your own costs. Telecommunications, business insurance, furniture and personal property taxes, where they apply, are normally yours regardless of the lease type.

If your team regularly works evenings or weekends, or your equipment runs around the clock, read the building hours and electricity clauses before you compare rents.

The numbers here are hypothetical, for illustration, and are not market rates.

A company takes 5,000 rentable square feet at $32.00 full service, which is $160,000 a year. The lease charges $60 an hour for after-hours HVAC. The team works past building hours or on Saturdays about 40 hours a month.

• After-hours charge: 40 hours times $60 is $2,400 a month.
• Annual charge: $2,400 times 12 is $28,800.
• Effect on cost: $28,800 divided by 5,000 square feet is $5.76 per square foot.
• Effective rate: $32.00 plus $5.76 is $37.76 per square foot.

A building at a higher rent with longer standard hours could cost this company less. Your actual pattern of use, not the rent, decides that, so measure your hours before you negotiate. For a company that closes at the end of the business day, the same clause may cost almost nothing.

The Arnold & Porter article, written for small office tenants, recommends negotiating the building hours, including Saturday morning service, during which HVAC is provided at no added cost, and limiting electricity charges to use materially beyond ordinary office needs. The rest of the list follows from the same idea: turn an open-ended charge into a known one.

• ✓What are the building hours, including Saturdays and holidays, and do they fit how we work?
• ✓What is the after-hours HVAC rate, is it written in the lease and can it change?
• ✓Is the after-hours charge per hour, per zone or per floor, and is there a minimum call?
• ✓If two tenants on a floor use after-hours service together, do they split the charge?
• ✓What counts as excess electricity, and how is it measured?
• ✓Is there a base year or expense stop, and which year or amount?
• ✓What cleaning schedule and services are included in the rent?
• ✓What is the charge for above-standard services, such as a freight elevator or extra security?
• ✓Are expense increases capped, and do we have the right to review the landlord’s records?

Tenant Advisory Group represents tenants, and when we compare full-service offers we ask about hours and use early. A rent that looks competitive can change once a client’s real working pattern is applied to it. Have your attorney review the services section along with the operating expense section, since the two work together.

1. List exactly what the full-service rent includes, by name.
2. Estimate what your company will add for after-hours use, excess electricity and above-standard services.
3. Find the base year or expense stop, and ask for several years of the building’s expense history.
4. Add those estimates to the rent to get a total annual cost.
5. Do the same for each net or modified gross option, adding the nets and suite costs.
6. Project each option across the term, using the rent escalations in each proposal.

The result is a comparison of total cost and of how much risk each option leaves with you, which is what the label was only hinting at.