Definition
A Full Service Gross (FSG) Lease is a commercial lease structure in which the tenant pays a single, all-inclusive rent amount, and the landlord is responsible for paying most or all operating expenses of the property.
In simple terms: the tenant pays one lump-sum rent, and the landlord covers property expenses.
Typical Expenses Covered by the Landlord
- Property taxes
- Insurance
- Common Area Maintenance (CAM)
- Utilities (sometimes including in-suite electricity)
- Janitorial services
- Property management fees
Base Year Expense Adjustments
Although FSG leases appear fully inclusive, many include a base year stop. This allows the landlord to recover increases in operating expenses above the base year.
Example
- Base year operating expenses: $12.00 per SF
- Year 2 operating expenses: $13.50 per SF
- Tenant space: 10,000 SF
Increase = $1.50 per SF
Tenant reimbursement = 10,000 × $1.50 = $15,000
This adjustment mechanism protects the landlord against inflation.
Common Property Types Using FSG Leases
- Office buildings
- Medical office buildings
- Government-leased properties
FSG vs. NNN Lease
- FSG Lease: Landlord pays most operating expenses (with possible base year stop).
- Triple Net (NNN) Lease: Tenant pays taxes, insurance, and operating expenses directly.
Advantages for Tenants
- Predictable monthly payments.
- Less administrative burden.
- Reduced exposure to unexpected cost spikes (within base year).
Advantages for Landlords
- Simplified marketing (“one rent numberâ€).
- Competitive positioning in office markets.
- Opportunity to control expense management directly.
Investor Considerations
- Expense inflation risk if base year stops are weak.
- Need for accurate expense forecasting.
- Impact on NOI if costs rise faster than recoveries.
- Importance of gross-up provisions for partially leased buildings.
Gross-Up Clauses
A gross-up provision adjusts base year expenses to reflect stabilized occupancy, preventing artificially low base year numbers.
Common Pitfalls
- Incorrect base year expense calculations.
- Failure to include expense escalations in underwriting.
- Misalignment between lease language and pro forma assumptions.
- Underestimating management and utility costs.
Underwriting Example
An office building with FSG leases generates $2,000,000 in gross rent. Operating expenses total $900,000. If expenses rise to $1,050,000 and base year recoveries are insufficient, NOI could decline significantly.
Investor Checklist
- Review base year documentation for each tenant.
- Confirm gross-up provisions exist.
- Model expense growth conservatively.
- Compare lease recoveries to historical expenses.
- Evaluate tenant credit strength for reimbursement reliability.