The Ins and Outs of Modified Gross Leases in Commercial Real Estate

modified gross leases in commercial real estate

Note from Fowler Property Advisors:
We get a lot of questions about the types of commercial real estate leases out there. What are the types of commercial leases? Which one is best? What should be included? As a result, we’ve decided to do a series of blog posts to help answer these questions. We started with an overview of the common lease structures, followed by a post on Triple Net leases. This look at Modified Gross leases is the third in our series.

In commercial real estate, one popular lease type is the modified gross lease. Modified gross leases strike a balance between the flexibility of a gross lease and the clarity of a triple net lease. This type of lease is typically used for commercial spaces such as office buildings, where there is more than one tenant. Understanding the ins and outs of this type of lease generally leads to a much smoother and mutually beneficial leasing experience. 

What is a Modified Gross Lease and how does it work?

As mentioned, a modified gross lease is a hybrid between a gross lease and a triple net lease. In a gross lease, the landlord typically covers all operating expenses, including utilities, maintenance, insurance, and taxes. Conversely, in a triple net lease, the tenant is responsible for these expenses, in addition to rent. While the structure of a modified gross lease can vary widely, in this post, we will keep it simple and focus on the structure most commonly found in the Charlotte, NC market.

In the spectrum of lease structures, a modified gross lease is generally seen as the middle ground of risk-sharing between the tenant and landlord. In triple net leases, tenants take on the risk of rising taxes, insurance, and common area maintenance while the landlord takes on those risks in a gross lease. In this structure, the landlord and tenant share the responsibility for property-related expenses. The specific allocation of expenses between landlord and tenant can vary from property to property. Typically the tenant is obligated to pay rent and utilities, while the landlord covers operating expenses for the property. 

Benefits of Modified Gross Leases for Tenants

First and foremost, a modified gross lease structure provides simplicity and predictability for the tenant – simplicity in that the tenant typically pays a negotiated rent amount and predictability in that they are not exposed to the variability in expenses that exist in triple net leases. Additionally, commercial tenants tend to be familiar with this lease structure as it is commonly used in residential rental properties.  

A couple of considerations for tenants: 1) It is important for tenants to understand whether or not utilities are sub-metered. If they are, tenants can establish accounts with the utility providers in their name. If they are not, tenants should ask for details on how the landlord will split utilities among the tenants of the property. 2) Tenants should budget for janitorial services as they are not included in a modified gross lease.

When you’re ready to find the ideal spot for your business, it’s crucial to work with a commercial real estate advisor who will have your back and work for the best deal for you, whether you’re leasing or buying. We have this experience and client-centered focus. Call us at 704.219.0908, email, or schedule an appointment using the button below.

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