What Is a Modified Gross Lease?

In a full gross lease, one rent payment is meant to cover the building’s running costs. In a triple net lease, the tenant pays those costs separately on top of base rent. A modified gross lease is anything in between, and that breadth is the point to understand. Sands Investment Group puts it directly: the terms of modified gross leases are unique to each deal.

The label therefore tells you the lease is a hybrid, and little else. It does not tell you which costs are yours. Before you can compare a modified gross quote with anything, you have to find out what has been modified.

Never compare a modified gross rent with another rent until you have a written list of what each one includes.

A common pattern is for the landlord to carry building-level costs in the rent, such as taxes, building insurance and common area upkeep, while the tenant pays costs tied to its own suite. Published descriptions vary. Prophia describes tenants paying for utilities, janitorial service and interior maintenance, with the landlord covering structural repairs and property taxes. Sands Investment Group gives another version in which the tenant pays upkeep and part of the insurance, and the landlord pays taxes and the rest of the insurance.

Here is how to think about each cost, knowing that any one of them can fall on either side of the line.

• Real estate taxes: often included at a starting level, with increases passed through.
• Building insurance: treated the same way as taxes in many leases, or split.
• Common area maintenance: often included at a starting level, with increases passed through.
• Suite electricity: commonly separate, whether submetered, split by floor area or billed another way.
• In-suite janitorial: may be included or left to the tenant.
• Repairs inside the suite and to equipment serving only your space: a frequent source of disputes, so read this section closely.
• Roof, structure and major capital work: usually expected to stay with the landlord, but confirm that in the lease.

Many modified gross office leases rely on one of two devices that decide when increases reach you. They deserve their own guide, so here is only the outline.

• Base year. A named calendar year sets the baseline, and you pay your share of expenses above that year’s level. Some leases use the year of signing or the year before, and Holland & Hart describes it as typically the first year of the lease. Read which year yours is.
• Expense stop. A stated amount per square foot is treated as built into the rent, and you pay your share of expenses above it.

Either way, your rent is fixed only in part. You are still exposed to rising costs above the line, which is why a modified gross lease should not be read as a guarantee of flat occupancy cost. Our guide on base years and expense stops shows how to compare the two, including the gross-up clause that makes the base year fair.

The figures below are hypothetical, for illustration, and are not market rents.

A company needs 4,000 rentable square feet and is offered space at $25.00 modified gross. The rent includes taxes, insurance and common area costs at base year levels. The tenant pays for suite electricity, at an assumed $1.50 per square foot, and in-suite cleaning, at an assumed $1.00.

• Rent: 4,000 times $25.00 is $100,000 a year.
• Electricity: 4,000 times $1.50 is $6,000.
• Cleaning: 4,000 times $1.00 is $4,000.
• Year-one total: $110,000, which is $27.50 per square foot, or about $9,166.67 a month.

A second building offers the same size at $26.50 and includes electricity and cleaning. Its year-one total is $106,000. It looks more expensive on the quoted rate and costs $4,000 less in year one. Neither figure settles the choice. You would still want to compare base years, expense history and what each lease treats as your responsibility in later years.

For many office tenants, the appeal is a more predictable cost than a triple net lease offers, with less exposure to the full swing in building expenses. You are generally not paying the starting level of those costs separately, and you need to budget only for increases above the line plus your own suite costs.

The trade-off is complexity. Because the structure is negotiated, there is more room for a surprise. A cost you assumed was included may be billed, a repair you assumed was the landlord’s may be yours, and a base year set in a partly empty building may produce sharp increases as the building fills. Holland & Hart explains how a gross-up clause addresses that last problem.

Tenant Advisory Group represents tenants, and modified gross proposals are where we find line-by-line comparison most useful, because the same label can hide different deals. Listing who pays for each cost usually tells a client more than the rate does.

• ✓Which costs does the rent include, listed by name?
• ✓Is there a base year or an expense stop, and what is it?
• ✓Do tax and operating expense increases use the same baseline?
• ✓Is the base year grossed up for occupancy, and on the same terms as later years?
• ✓How is suite electricity measured and billed?
• ✓Who pays for in-suite cleaning?
• ✓Who repairs and replaces the heating and cooling equipment that serves our space?
• ✓Are capital costs excluded from pass-throughs or spread over time?
• ✓Are increases capped, and do we have the right to review the landlord’s records?

Then put the answers into a single line-by-line table and total each option over the lease term. Have your attorney review the operating expense and repair sections, since the lease’s definitions control what is billed, whatever the proposal called the deal.