Modified Gross Lease

Modified Gross Lease is a type of lease where the commercial tenant takes responsibility for a few operating costs such as utilities and interior maintenance by either the estimated expenses 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 matters relating to maintenance and upkeep expenses and other costs associated with the property under contract.

As we all know, Ground Lease or Land Lease is a type of contract where the parties are interested in transacting on land. Based upon the understanding between the Land Owner and Lessee, the terms and conditions of the lease vary. Multiple types of contracts are thus in practice to define and indicate the different terms and conditions.

Subordinated or Unsubordinated Leases define the ownership of improvement and mortgage conditions. However, in this article, we will be discussing the types of leases that decide the role of the parties for regular operational expenses.

Gross Lease

A gross lease is also known as a full-service lease. Here, the landlord takes up the entire responsibility of paying all associated expenses of the building or the property. These expenses usually include insurance, property and local taxes, and common area maintenance (CAM). It is in addition to all external repairs and maintenance.

Net Lease

A net lease is at the opposite end of the spectrum from a gross lease. Here, the tenant/lessee bears all or some of the expenses of the building or property. In a triple net lease (NNN lease),  the tenant pays all the above costs.

Net leases are usually preferred where a single-tenant occupies a premise, like a retail store or a restaurant chain.

Modified Gross Lease

Modified Gross Lease

A modified gross lease, also referred to as a modified net lease, stands somewhere between a gross lease and a net lease.

Here, the tenant pays some of the buildings or property expenses. While the landlord takes up to pay the remaining costs, both parties divide the responsibility between them for payment. And no single party remains responsible for all the operating costs. For Example, In a typical modified gross lease, the tenant may pay CAM costs while the landlord pays taxes and insurance.

Where multiple tenants occupy a property or building, this type of real estate lease agreement is preferred. Single bills amongst the tenants could be divided in different ways. For example, let’s say the total water utility bill of a building with ten tenants is $5,000 a year. If there are no separate meters to measure usage, the tenants may pay either an equal amount of $500 each or proportional to the area they occupy.

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. Thus tenants can concentrate on their business rather than deploying resources for maintenance.  Further, tenants get more control over whichever cost they are responsible for paying, given the lease terms.

Pros to the Landlord

A modified gross lease helps a landlord retain some control over their building or property. Here the landlord has no worries about how his property is being taken care of, is proper and regular maintenance is happening in a manner desirable. Also, insurance and property tax payments are happening timely.

Cons to the Tenant

A modified gross lease may not be in the tenants’ favor if the landlord is lazy or has little interest or indifference to the upkeep of the property. For instance, the landlord, who is responsible for taking care of the repairs and maintenance of the exterior of the property, may not do so as per the desired standard. It may be detrimental to occupants for whom a pleasing surface is crucial to increase their appeal and sales to clients.

Cons to the Landlord

If the landlord underestimates the operating cost, especially CAM costs, it may result in a poorly maintained interior of the building. It can significantly add to maintenance and upkeep costs for the landlord once a tenant leaves.

This classification of the type of lease as a net lease, gross lease, or modified gross lease is a broad one. And a more in-depth study of the rental agreement is essential to ensure that one completely understands the terms laid down in it and their implications.

Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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