Modified Gross Lease

AAA

DEFINITION of 'Modified Gross Lease'

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Add-On Factor

    The number of usable square feet divided by the number of rentable ...
  2. Modified Cash Basis

    An accounting method that combines elements of the two major ...
  3. Gross Lease

    A type of commercial lease where the landlord pays for the building's ...
  4. Lease

    A legal document outlining the terms under which one party agrees ...
  5. Operating Lease

    A contract that allows for the use of an asset, but does not ...
  6. Triple Net Lease

    A lease agreement that designates the lessee (the tenant) as ...
Related Articles
  1. Professionals

    A Day In The Life Of A Real Estate Agent

  2. Mutual Funds & ETFs

    Add Some Real Estate To Your Portfolio

  3. Bonds & Fixed Income

    A Guide To Real Estate Derivatives

  4. Home & Auto

    How You Make Money In Real Estate

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center