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What is a 'Modified Gross Lease'

A modified gross lease is a type of real estate rental agreement where the tenant pays base rent at the lease's inception but in subsequent years pays the base plus a proportional share of some of the other costs associated with the property, such as property taxes, utilities, insurance and maintenance. For example, under a modified gross lease, a property's tenants might be required to pay their proportional share of an office tower's total heating expense.

BREAKING DOWN 'Modified Gross Lease'

Under a gross lease, by contrast, the owner/landlord covers all of the property’s operating expenses including real estate taxes, property insurance, structural and exterior maintenance and repairs, common area maintenance and repairs, unit maintenance and repairs, utilities and janitorial costs. Under a modified gross lease, the tenant takes over expenses that are directly related to his or her unit, including unit maintenance and repairs, utilities and janitorial costs, while the owner/landlord continues to pay for the other operating expenses. A third type of lease is a net lease. More common in single-tenant buildings, it passes even more property expenses through to the tenant. A modified gross lease falls somewhere between a gross lease and a net lease. Which expenses the tenant is responsible for can vary significantly from property to property, so a prospective tenant must ensure that a modified gross lease clearly defines which expenses are the tenant’s responsibility.

Modified gross leases are common when multiple tenants occupy an office building. In a building with a single meter where the monthly electric bill is $1,000, the cost would be split evenly between the tenants; if there are currently 10 renters, they each would pay $100. Or, each tenant might pay a proportional share of the electric bill based on the percentage of the building’s total square footage that the tenant’s unit occupies. Alternatively, if each unit has its own meter, each tenant will pay the exact electrical expenses it incurs, whether $50 or $200.

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