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Once you have found the right property to suit your business needs, the next step is to sign an office lease or a lease for your retail commercial space, so you can move in and open your doors. However, you will find a few different types of leases exist, one being a modified gross lease. How does a modified gross lease work? A simple definition of a modified gross lease is an agreement which requires the tenant to pay base rent plus a portion of other expenses related to the property.
One common feature of modified gross leases are expense stops, which is a tool your landlord will use to determine the amount of expenses you pay above your rent. In a modified gross lease with an expense stop, your landlord will set the maximum amount he or she will pay towards certain operating expenses.
Once the amount of a particular expense meets or exceeds the limit, you will be responsible for any additional expense. Sometimes landlords use base year expense stops in a modified gross lease. In these situations, your landlord will pay the entirety of all first year operating expenses, but you will be responsible for all expenses in subsequent years.
On its own the definition of a modified gross lease might not help you understand how it differs from other leases. In this guide, we offer you a description of how the terms and structure of a modified gross lease compare to other types of lease agreements.
Comparing the difference between a modified gross lease vs. a full service, or gross lease is similar to comparing an all-inclusive vacation to a cruise vacation. When you head to Mexico to relax on the beach and enjoy some margaritas at an all-inclusive resort, all costs are included in one flat price, such as your room, food, activities, taxes, fees, and gratuities.
Similarly, a gross lease is a rental agreement which includes one flat rental fee for everything associated with your office or retail space. In contrast, when you set sail in the Caribbean or other cruise destination, you pay for your cruise, which includes your cabin, food, and some activities. You have to pay additional port charges and fees as well as gratuities for different workers on the ship, and for any upgraded dining or beverages you want.
Like a cruise, you will pay a base amount plus a few extras when you have a modified gross lease. Examples of additional costs which tenants must pay in a modified gross lease are utilities and interior cleaning services; landlords often pay for maintenance costs under a modified gross lease.
An industrial gross lease is essentially a different name for a modified gross lease. Different areas of the country use a different language on a lease agreement form to describe the same thing. In some places, if both terms are used, the only difference lies in the zoning, not in the way the terms of the lease look.
An industrial space often is one big area, while an office space might be shared with multiple tenants in one building. For example, a modified gross lease for a warehouse or some type of operating plant might be referred to as an industrial gross lease, which as previously mentioned, is simply your base rent plus some share of the operating costs. Regardless of the type of building, the additional utilities, cleaning, or other fees in addition to the rent are typically referred to as common areas maintenance (CAM) fees, which divide shared utilities and services among all tenants in a building.
Among commercial real estate leases, the major division lies in the difference between gross and net leases. Like a modified gross lease, a tenant must pay a base rental amount plus additional costs when they have a net lease.
The difference between these two is the type of costs. In a modified gross lease, the additional costs are related to operating expenses for the commercial space. In a net lease, the additional costs are a property expenses. Three kinds of net leases exist: single, double, and triple net leases, which we will cover in depth below.
In all net leases, the tenant pays additional expenses which can include property taxes, insurance premiums, and maintenance costs. The specific additions depend on the type of net lease. In a single net lease, the tenant pays property taxes in addition to their rent and in a double net lease the tenant pays property taxes, and property insurance premiums on top of their rent.
A modified gross lease and a triple net lease are almost at the complete opposite ends of the spectrum in the way they treat the financial obligations of the tenant and the landlord under the lease. A triple net lease includes a base rent amount for the tenant, plus the tenant is also responsible for property taxes, insurance premiums, and all maintenance costs. Under a triple net lease, the tenant(s) can also be responsible for damages not covered by property insurance.
Ultimately, the landlord has little risk or responsibility when their tenants sign a triple net lease. When you are searching for commercial space you should ask to see a sample lease or a lease template which your potential landlord uses for tenants. You want to know exactly what type of lease you are signing. A modified gross lease and a triple net least can appear similar because they both have base rent with additional costs. In many cases, a triple net lease comes with a lower rent because of the higher expenses, and landlords tend to offer more concessions. This means you need to beware of searching for commercial real estate based on price alone if you aren't prepared to take on all the risk and responsibility which comes with a triple net lease.