Modified Gross Lease is a type of lease where the commercial tenant takes the responsibility of a few operating costs such as utilities, interior maintenance by either paying the estimated costs or actuals of the expenses Commercial real estate leases can be of two types: gross lease or net lease. They primarily detail the responsibilities of the agreeing parties in aspects related to maintenance and upkeep expenses and other costs associated with the property in question.
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A gross lease is also known as a full-service lease and makes the landlord responsible for all associated expenses with the building or the property. These expenses usually include the insurance of the property, taxes on it, and common area maintenance (CAM), apart from external maintenance and repairs.
A net lease is at the opposite end of the spectrum from a gross lease. In it, the tenant pays some or all of the expenses associated with the building or property. In a triple net lease (NNN lease), which is one of the three forms of a net lease, the tenant pays all the aforementioned expenses.
Net leases are usually agreed upon when a single-tenant occupies a premise like a retail store or restaurant chains.
Modified Gross Lease
A modified gross lease, also referred to as a modified net lease, finds a middle ground between a gross lease and a net lease.
In it, some of the building or property expenses are borne by the tenant while the remaining is borne by the landlord with no single party responsible for all the operating costs. As an instance we can consider this: In a modified gross lease, the tenant may pay CAM costs while the landlord may take up taxes and insurance.
This type of a real estate rental agreement is signed when multiple tenants are occupying a property or building. There are different ways in which single bills are divided among tenants. For example, let’s say the total water utility bill of a building with 10 tenants is $5,000 a year. If there are no separate meters to measure usage, the tenants may pay either pay an equal amount of $500 each or proportional to the area that they occupy in the building.
Pros and Cons of a Modified Gross Lease
Pros to the Tenant
For a tenant, a modified gross lease can be attractive as it leaves the landlord responsible for the upkeep of the building and stay involved instead of leaving the activity to tenants. Further, tenants get more control over whichever cost they are responsible for paying, given the terms of the lease.
Pros to the Landlord
For a landlord, a modified gross lease helps retain some control over their building or property. For instance, if they’re responsible for the external maintenance of the property, they can do so in a manner and to a degree, they find it suitable instead of being worried about how the tenants may be taking care of it.
Cons to the Tenant
A modified gross lease may not be in tenants’ favor if the situation outlined in pros to the landlord is reversed. For instance, the landlord, who may be responsible for taking care of the maintenance and repairs of the exterior of the property, may not do so a standard desired by the tenants. This may be detrimental to those occupants for whom a pleasing exterior is crucial to increase their appeal to clients.
Cons to the Landlord
If the landlord underestimates the operating cost, especially CAM costs, it is likely to result in a poorly maintained interior of the building and can significantly add to the costs of maintenance and upkeep for the landlord once a tenant leaves.
It is important to note that the classification of the type of lease as a net lease, gross lease, or modified gross lease is a broad one and a deeper study of the rental agreement is essential to ensure that one completely understands the terms laid down in it and their implications.1–4