Introduction

Understanding the different types of commercial real estate leases is crucial for both landlords and tenants. The lease structure dictates key factors such as rent payments, property expenses, and maintenance responsibilities. Choosing the right lease type for a commercial space can have major financial and operational implications for a business.

The three most common commercial lease types are triple net (NNN), full-service gross (FSG), and modified gross (MG). Each has unique characteristics that make them suitable for different tenant needs and landlord goals. In this article, we'll provide an overview of these lease structures and discuss key considerations for tenants leasing office space, such as how property taxes and other expenses are handled. By the end, readers will have a solid foundation for navigating commercial leases.

What Does FSG Mean in Commercial Real Estate?

Understanding Full Service Gross (FSG) Leases

In commercial real estate, a full service gross (FSG) lease is a type of rental agreement where the landlord covers most or all of the property's operating expenses. This means that in addition to the base rent, the landlord pays for utilities, janitorial services, property taxes, insurance, and maintenance costs. FSG leases are common in multi-tenant office buildings and some retail properties, as they simplify the leasing process and provide cost predictability for tenants.

Advantages and Disadvantages of FSG Leases

The main advantage of an FSG lease for tenants is simplified budgeting. Since most expenses are included in the rent, tenants have a predictable monthly cost and don't need to worry about fluctuations in operating expenses. Additionally, tenants benefit from the landlord managing services like maintenance and janitorial work.

Pros of FSG leases:

• Predictable monthly expenses
• Simplified budgeting
• Landlord manages services

Cons of FSG leases:

• Higher base rent
• Less control over service providers
• Potential for overcharges if actual expenses are lower than estimated

Practical Scenarios for FSG Leases

FSG leases are particularly beneficial for startups and small businesses that value predictability in their office space costs. For example, a tech startup leasing a 5,000 square foot office on an FSG lease at $30 per square foot would pay a fixed monthly rent of $12,500. This allows the company to accurately budget for its office expenses without the risk of unexpected maintenance fees or spikes in utility costs.

What Are NNN Leases and Their Benefits?

Triple Net (NNN) Lease Explained

Triple net lease structures represent one of the most common commercial real estate arrangements, particularly in retail and industrial properties. In a triple net lease, tenants are responsible for three primary operating expenses beyond their base rent: property taxes, building insurance, and common area maintenance (CAM). This arrangement differs significantly from other lease types, as NNN leases effectively pass through fees that would typically be handled by the property owner.

Advantages and Risks of Long-Term NNN Leases

Triple net leases offer distinct advantages for both parties, though they come with important considerations. For landlords, these leases provide steady, predictable income streams with minimal operational responsibilities. Tenants benefit from lower base rental rates and greater control over property management decisions.

However, the primary risk in long-term NNN leases lies in the potential for unexpected cost increases. For example, if property taxes increase significantly due to area development or reassessment, tenants bear the full financial burden.