Jun 10, 2020

Pros and Cons of a Modified Gross Lease

By Don Catalano

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Pros and Cons of a Modified Gross Lease
Modified Gross Lease is a type of lease where both the landlord and the tenant are responsible for paying a property’s operating expenses. Under this type of lease, a commercial real estate tenant takes the responsibility of paying for the base rent and a few operating costs such as utilities, interior maintenance. Modified gross leases are often used for commercial spaces where there is more than one tenant.


How a Modified Gross Lease Works

Modified Gross Lease falls between a gross lease and a net lease. Gross lease is where the landlord pays for operating expenses, while a net lease means the tenant takes on the property expenses.

 

The modified gross lease means that the operative expenses are borne by the tenant and the landlord. With the modified gross lease, the landowner pays for the operating expenses while the tenant looks to pay for the expenses within their units.

 

Pros of a Modified gross lease

1. More Budgeting Control

Since the maintenance is borne by the landlord, the corporate tenant has more budgeting control over the expenses that directly affect their business operations, such as salaries, rent, business taxes, etc.

 

In addition, it allows you to save costs and save money. For instance, you can pay your own utility usage and make it more efficient.

 

2. Less Responsibility For Office Building

Corporate tenants like modified gross lease because it means they are not responsible for the maintenance of the building. This allows corporate tenants to focus on the major aspect of their business operations. Since the landlord will be responsible for paying the CAM, they become more involved in the state of the building. This is good and allows you to focus on the pressing needs of your business. 

 

Cons of a Modified gross lease

1. Less Control

If the landlord is nonchalant with the building maintenance, it can affect the building's appearance. If your business relies on the appearance of the building, it may affect your business operation. There have been several cases where landlords lax over the maintenance of the building leading to scruffy common areas, which may discourage customers and embarrass corporate tenants.

 

2. Fluctuation

Unlike in a normal gross lease, costs can be expected to fluctuate in a modified gross. This can affect your financial plans, especially for startups and small businesses. Also, the landlord might overestimate their operating costs. This may affect the rental rate, and you may end up overpaying for some of the costs. Therefore, it is important to work with a tenant rep to know which lease option is the best for you.

 

In conclusion, while there are obvious pros and cons to using a modified gross lease, it can be an excellent lease type especially if you cannot decide between two commercial real estate extremes of gross and net leases. Generally, a modified gross lease is a good idea for both tenants and landlords. It allows tenants to pay for costs they can control and gives landlords control over certain responsibilities, such as the CAM charges.

 

Here are a few more articles we think you'll like:

COVID-19 & Retail Space

What to Know About Mixed-Use Space

8 Commercial Lease Terms That Give You Options

 

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Don Catalano

Don Catalano

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