What is a Modified Gross Lease?

Negotiating terms and conditions is common when leasing or renting commercial property. This can become challenging for the parties involved, especially if they have different knowledge levels of leasing properties. Businesses commonly use a modified gross lease when renting commercial properties. A modified gross lease is a combination of two types of leases: the gross lease and the modified lease. A gross lease is a simple lease that only requires the tenant to pay rent on a monthly basis. The Lessor owns and maintains, lessee bears other expenses for operating the space such as taxes, utilities, etc. Read on to learn more about what a Modified Gross Lease is and why it’s beneficial for both parties involved.

What is a Gross Lease?

A gross lease is a standardized lease agreement that only includes one payment: the rent. This lease excludes operating expenses (taxes, insurance, repairs, utilities, maintenance, etc.) for the leased space. This lease is considered a “gross lease” because the tenant bears all other costs. The name comes from the fact that the tenant is responsible for paying their share of the building’s gross rent. Gross leases suit businesses that can afford upfront leasing costs. This lease suits businesses with high credit, low turnover, and stable cash flow. Gross leases also work well for businesses that have a steady cash flow and are actively working toward profitability.

What is a Net Lease?

A modified lease combines gross and net lease features. Landlords use this lease to control the tenant’s rent payment amount, such as adding a modified net lease to raise rent on low-rental properties after the agreement is signed. Investors often use modified net leases for properties requiring repairs before renting. This type of lease provides the investor with ample time to complete repairs while still collecting the appropriate rent.

What is the Difference Between a Gross and a Modified Gross Lease?

A gross lease and a modified gross lease are very similar in nature, but there is one important difference between the two: the amount of rent paid. In a gross lease, the tenant pays the entire gross rent amount, which means they pay the entire amount of rent, including the landlord’s share and any other expenses related to operating the property. In a modified gross lease, the tenant and landlord each pay a percentage of the gross rent amount. A gross lease is most beneficial for landlords who own their properties. This type of lease agreement gives the landlord complete control over all expenses related to managing the property. On the other hand, a modified gross lease gives the tenant some control over these expenses by requiring them to pay a percentage of the gross rent.

Benefits of a Modified Gross Lease

Both the landlord and the tenant can benefit from a modified gross lease agreement. Here’s why: – Landlords have more control over their expenses: If the landlord holds a traditional gross lease, they are responsible for paying all expenses related to managing the property, including taxes, repairs, and utilities. The landlord retains control over certain costs by assigning specific expenses to tenants in a modified gross lease. Tenants can accurately predict their cash flow with this type of lease because they know their payment percentage. Similarly, landlords can forecast their income by calculating the rent paid and their own expenses.

Disadvantages of a Modified Gross Lease

Before entering into a modified gross lease agreement, it’s important to consider potential drawbacks. These include the need for both parties to agree on the percentage each will pay, which can be challenging if they have different budgets or expectations. Additionally, since the lease agreement must be in writing to avoid misunderstandings, both parties are accountable for their share. Consider that the tenant may pay more in the long run if the landlord has a modified net lease and controls the gross rent. Although a higher percentage may seem reasonable at first, the tenant could later regret using their funds to cover the landlord’s share.

Final Words: Is a Modification Gross Lease Right for You?

As a commercial tenant, you may come across leasing agents offering modified gross leases. While this can seem like an attractive option, it’s crucial to understand its nuances before committing. Modified gross leases offer benefits for both landlords and tenants. It allows landlords to anticipate their income, while enabling tenants to forecast their cash flow. Depending on the gross rental rate, a modified gross lease may be lower than a traditional gross lease, making it a more attractive opportunity for tenants and easier for landlords to find tenants. Consulting with an experienced commercial real estate agent is recommended to help you choose the best lease for your business. This way, you can fully comprehend the terms and conditions of each lease type and select the one that best aligns with your business’s needs.