What is a Modified Gross Lease?
A modified raw lease is a type of immovable rental agreement in which the tenant pays a base rent at the start of the lease, but they also assume a proportional share of some of the other costs associated with the property, such as property taxesutilities, insurance and maintenance.
Modified gross leases are typically used for commercial space such as office buildings, where there is more than one tenant. This type of lease typically falls somewhere between a gross lease, where the landlord pays for operating expenses, and a net lease, which passes real estate expenses on to the tenant.
All agreements should be carefully reviewed by both parties. Even though the lease uses common terminology, it should be treated as if it were a unique document for your own situation.
Key points to remember
- Modified gross leases are rental agreements in which the tenant pays base rent at the start of the lease as well as a proportionate share of other costs such as utilities.
- Other property-related costs, such as upkeep and upkeep, are usually the responsibility of the owner.
- Modified gross leases are common in the commercial real estate industry, especially office space, where there is more than one tenant.
How a Modified Raw Lease Works
Commercial real estate leases can be classified according to two methods of calculating rents: gross and net. The Modified Gross Lease, sometimes referred to as the Modified Net Lease, is a combination of a Gross Lease and a Net Lease.
Modified gross leases are a hybrid of these two leases, because exploitation charges are the responsibility of the owner and the tenant. With a modified gross lease, the tenant pays for expenses directly related to their unit, including unit maintenance and repairs, utilities, and janitorial fees, while the landlord/landlord continues to pay other operating expenses.
The extent of each party’s liability is negotiated in the terms of the lease. Expenses for which the tenant is responsible can vary widely from property to property, so a potential tenant should ensure that an amended gross lease clearly defines which expenses are the responsibility of the tenant. For example, under a modified gross lease, tenants of a property may be required to pay their proportionate share of the total heating expenses of an office tower.
When Modified Raw 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 electricity bill is $1,000, the cost would be divided equally among the tenants. If there are 10 tenants, they each pay $100. Or, each can pay a proportional share of the electricity bill based on the percentage of the total building area occupied by the tenant’s unit. Alternatively, if each unit has its own meter, each tenant pays the exact electrical expense they incur, either $50 or $200.
The landlord can usually pay other building-related costs under a modified gross lease such as taxes and insurance.
Advantages and Disadvantages of Modified Raw Leases
Like any other business transaction, modified gross leases for tenants and landlords have both advantages and disadvantages.
Since maintenance and other related costs are the landlord’s responsibility, the tenant benefits. The tenant has more control over budgeting costs directly related to their business, including rent, business taxes, salaries, etc. But if the landlord is lax in general maintenance, it can be a problem for tenants, especially those who rely on the appearance of their office or retail space to attract and retain customers.
By using a modified gross lease, landlords can be assured that their property is maintained to the extent they deem appropriate, especially since some tenants may not be as reliable when it comes to making repairs or improvements such as the maintenance of the outdoor space. A disadvantage, however, is the understatement of operating costs. Thus, a landlord can get in trouble if the rent they charge is too low for a space that requires a lot of maintenance.
Gross and net leases
Under a gross leasethe owner/lessor covers all operating expenses of the property, including property taxes, Home Insurancestructural and exterior maintenance and repairs, common area maintenance and repairs, unit maintenance and repairs, utilities and janitorial fees.
Landlords who issue gross leases typically calculate a rental amount that covers the cost of rent and other expenses such as utilities and/or maintenance. The amount to be paid is normally issued as a lump sum, which the tenant pays to the landlord each month for the exclusive use of the property. This can be beneficial for a tenant as it allows them to budget well, especially when they have limited resources.
A net lease, on the other hand, is more common in single-tenant buildings and shifts the burden of property charges to the tenant. Net leases are typically used in conjunction with tenants like national restaurant chains.
Many commercial real estate investors who buy properties, but don’t want the aggravation that comes with owning, tend to use net leases. Because they pass the costs associated with the building – insurance, maintenance, property taxes – onto the tenant through a net lease, most landlords will charge a lower amount of rent.
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