Modified Gross Lease

What is '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'

Commercial real estate leases can be categorized by two rent calculation methods: ‘gross" and ‘net’. The modified gross lease - at times referred to as a modified net lease - is a combination of a gross lease and a net lease.

Under a gross lease, the owner/landlord covers all 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.

A net lease, which is more common in single-tenant buildings, passes the responsibility of property expenses through to the tenant. Net leases would most likely be used in conjunction with large single tenant properties such as national restaurant chains.

Modified gross leases are a hybrid of these two leases as the operating expenses are both the landlord and tenant's responsibility. With 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.

The extent of each party’s responsibility is negotiated in the terms of the 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 is the tenant’s responsibility.

When Modified Gross Leases are Common

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.