Definition Definition

Modified Gross Lease: Understanding Modified Gross Lease and Practical Example

What is Modified Gross Lease?

Modified Gross Lease is a property investment arrangement where the tenant pays monthly payment at the start of the lease and assumes a considerable portion of the structure's other expenditures, such as real estate taxes, electricity, security, etc., and maintenance.

Understanding Modified Gross Lease

Modified gross leases are commonly utilized in industrial establishments with multiple tenants, such as office buildings. This kind of lease sits somewhat like a gross lease, in which the landowner pays all running expenditures, and a net lease, in which the tenant pays all maintenance expenses. Market factors and discussions between the renter and the owner account for this difference. As a result, reading the lease agreement seems the only way to determine who is accountable for whatever expenses.

There are two rent assessment methodologies for commercial property leases: gross and net. A modified gross lease (sometimes known as “Modified Net Lease”) combines the benefits of both a gross and a net lease. Expenditures are shared by both the owner and contractor in modified gross leases, a combination of the two types of leases. 

With a modified gross lease, the tenant assumes responsibility for expenses linked explicitly to their apartments, such as unit routine maintenance, electricity, and housekeeping charges. Still, the owner/landlord remains responsible for the remaining operational costs.

Practical Example

Let's have a look at a simple example. Assume we have a 100-square-foot structure with the following costs:

Taxes on real estate = $100

Insurance = $25

When these expenditures were grouped in an expense category, and a $1/SF cost stop was attached, the lessee would repay its pro-rata portion of the value over the outlay stop. Total expenditures are $125 in this scenario, and the apartment is 100 square feet, so total costs per sq foot are $1.25. That indicates the tenant should pay the difference between the $1/SF stop and $0.25/SF, or $25,000, in this example.

We would receive the per square foot expenditure figures mentioned above if we implemented the $1/SF cost stop to each specific expense (rather than the entire group):

Property taxes: $100 divided by 100 equals $1 per square foot; insurance - $25 divided by 100 equals $0.25 per square foot.

The renter would receive $0 in repayments because neither spending surpasses the $1/SF expenditure stop threshold.


In Sentences

  • The term modified gross lease is commonly used to indicate property or asset investments' generated income with other expenses.


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