Real estate investors must seek to understand commercial real estate leases. And the effect they have on their investments. The reality is, not all leases are the same. That is because they have a direct effect on the size and strength of rental cash flow.
In this post, we look at the Signnn definition of a modified gross lease. And everything you should know about this lease type.
Modified Gross Lease Explained
For a modified gross lease, the tenant and the landlord share the responsibility for the property’s operating costs. And no single party takes up full responsibility for the expenses. For instance, the tenant may take up the responsibility of settling the maintenance and upkeep costs plus a given portion of the insurance premiums and deductibles. On the other hand, the property may cover the taxes and any accruing insurance costs.
Modified gross leases are most common in stand-alone buildings or office buildings.
A modified gross lease is a variation between two leases, that is, the triple net lease and the gross lease.
In a gross lease, the property owner settles all the property expenses. The lease type specifies higher rents since the rent payments must cater to the expenses paid by the landlord.
Modified gross lease versus triple net lease
For the triple net leases, tenants pay property taxes, maintenance upkeep, tax, and deductibles. Generally, this lease type charges less rent compared to a gross lease.
A modified gross lease combines the aspects of a net lease and a gross lease. Like the gross lease, the tenant pays a monthly rent to the property owner and is relieved of some services. On the other hand, a modified gross lease, however, resembles a net lease in that the tenant must pay for several expenses.
A modified gross lease comes with perks and drawbacks for both the landlord and tenant.
Pros to the landlord
With a modified gross lease, the landlord retains some control over the property. For example, landlords might pay maintenance costs since they want to control common areas their way. That relieves them of the stress of having to worry whether the jobs get done right.
Cons to the landlord
If the landlord underestimates the costs covered in the modified gross lease, it means that they might have to dig deeper inside their pockets. Or not their property the attention and maintenance it deserves.
If the property deteriorates, that might drive away new tenants. Or even bankruptcy.
Pros to the tenant
Tenants might find modified gross lease more attractive since it allows the landlord to cover a portion of the property expenses. That lets them save money compared to tenants who pay all the expenses.
Cons to the tenant
If property owners did a shoddy job with maintenance, tenants might suffer. That is because they will get forced to work in deplorable conditions. And this might chase away customers.
The tenant will also have to share the responsibility of the property as outlined by the deal. That may expose them to financial vulnerabilities if the sudden costs fall under their responsibility.
Relocation to another location is also expensive for the tenant, especially if it was unexpected.