Modified Gross Lease (MG Lease): Definition and Rent Calculations

What Is a Modified Gross Lease?

A modified gross lease is a type of real estate rental agreement where the tenant pays base rent at the lease’s inception, but also shares some of the other costs associated with the property, such as property taxes, utilities, insurance, and maintenance.

Modified gross leases are typically used for commercial spaces, like office buildings, with multiple tenants. This type of lease falls between a gross lease, where the landlord pays for operating expenses, and a net lease, which passes on property expenses to the tenant.

All agreements should be reviewed carefully by both parties, as even if the lease uses common terminology, it should be treated as a unique document for the specific situation.

Key Takeaways

• Modified gross leases are rental agreements where the tenant pays base rent at the lease’s inception, as well as a share of other costs like utilities.
• Other costs, such as maintenance and upkeep, are generally the responsibility of the landlord.
• Modified gross leases are common in the commercial real estate industry, especially office spaces with multiple tenants.

How a Modified Gross Lease Works

Commercial real estate leases can be categorized by two rent calculation methods: gross and net. The modified gross lease, also known as a modified net lease, combines elements of both.

With a modified gross lease, the tenant is responsible for expenses directly related to their unit, such as unit maintenance, repairs, utilities, and janitorial costs. However, the landlord continues to pay for other operating expenses.

The specific responsibilities of each party are negotiated in the lease terms. It is important that a prospective tenant ensures that a modified gross lease clearly defines which expenses they are responsible for. For example, under a modified gross lease, tenants may be required to pay a proportional share of an office tower’s total heating expense.

When Modified Gross Leases Are Common

Modified gross leases are common in office buildings with multiple tenants. In a building with a single electric meter and a $1,000 monthly bill, the cost would be split evenly among the tenants. For example, if there are 10 renters, each tenant pays $100. Alternatively, each tenant may pay a share of the bill based on the percentage of total square footage their unit occupies. If each unit has its own meter, tenants pay the exact amount of their own electrical expense, whether it is $50 or $200.

The landlord generally pays other costs related to the building, such as taxes and insurance, under a modified gross lease.

Pros and Cons of Modified Gross Leases

Modified gross leases have both advantages and disadvantages for tenants and landlords.

Tenants

Tenants benefit from having the landlord cover maintenance and related costs. They have more control over budgeting for expenses directly related to their business, such as rent and taxes. However, if the landlord neglects general maintenance, this can be problematic for tenants who rely on the appearance of their space to attract and retain clients.

Landlords

Using a modified gross lease allows landlords to ensure that their property is maintained properly, especially when tenants may not be reliable for repairs or improvements. However, one disadvantage is the possibility of undervaluing operating costs, which may lead to inadequate rent for a space requiring significant upkeep.

Gross and Net Leases

Gross Lease

Under a gross lease, the landlord covers all operating expenses, including taxes, insurance, maintenance and repairs, utilities, and janitorial costs.

Landlords who issue gross leases typically calculate a rental amount that covers rent and other expenses, issued as a flat fee that the tenant pays monthly. This allows tenants to budget properly, especially with limited resources.

Net Lease

A net lease is more common in single-tenant buildings and passes property expenses to the tenant. Net leases are often used with tenants like national restaurant chains.

Many commercial real estate investors who do not want the hassles of ownership use net leases. By passing on costs like insurance, maintenance, and property taxes to the tenant through a net lease, landlords can charge lower rent.

What Is the Difference Between a Gross Lease, Modified Gross Lease, and Net Lease?

A gross lease means the landlord pays for operating expenses, while a net lease means the tenant takes on property expenses. A modified gross lease is a combination where both the tenant and landlord bear the operative expenses.

Is Modified Gross or Net Lease Better?

Investors often prefer net lease properties because property expenses are the responsibility of the tenants. Properties with gross or modified gross leases can be more challenging to sell as investments.

When Is a Modified Gross Lease Used?

Modified gross leases are commonly used when multiple tenants occupy an office building. Tenants split utility bills, while the landlord generally pays other costs like taxes and insurance.

The Bottom Line

Modified gross leases are rental agreements where the tenant pays base rent at the lease’s inception, as well as a share of other costs like utilities. Maintenance and other property-related costs are generally the responsibility of the landlord. Modified gross leases are common in the commercial real estate industry, particularly in office spaces with multiple tenants.