One important concept to understand is that modified gross leases can look very different from one another. And many modified gross leases are very specific when it comes to who is responsible for what. For example, a modified gross lease could require the tenant to pay a pro rata share of a building's common area maintenance, regular painting, cleaning, and janitorial services, or other specific maintenance items.
Because of this, modified gross leases often go through several rounds of negotiation between landlords and tenants before they are finalized and signed. It's important for both parties to understand exactly what expenses they'll be responsible for under the terms of a modified net lease. Unlike a gross or net lease, there's no specific "industry standard" cost-distribution structure.
Modified gross leases can be used in several types of commercial real estate arrangements, but their flexibility makes them a particularly common option for buildings with multiple tenants. Modified gross leases are very common in multi-tenant office buildings, just to name one example. Many landlords prefer net leases for obvious reasons for commercial spaces, but they can be very difficult to implement in multiple-tenant properties.
For example, the landlord would have to figure out how much property taxes each tenant owes each year, how much of a particular maintenance expense would be the responsibility of each tenant, and other complications. Modified gross leases make it easier to divide certain expenses like these.
Furthermore, if a building has one meter for electrical or water service, a modified gross lease agreement could provide a methodology for splitting the cost among the tenants. If a tenant leased a 2,000-square-foot suite in a 40,000-square-foot office building, a modified gross lease could hold them responsible for 5% of the building's utilities, property taxes, property insurance, and common area maintenance costs.
Another common feature of a modified gross lease is known as an expense stop, meaning that the landlord will cover expenses up to a specific amount, beyond which it becomes the tenant's responsibility. For example, maintenance costs of up to $1 per square foot annually could be paid by the landlord, with the tenant responsible for any excess. Expense stops can apply to just one type of expense, like maintenance, or to the property's operating expenses as a whole.
