What is Modified Gross on a Commercial Lease? As a commercial real estate broker with Commercial Properties, Inc., we get many tenants asking this question.
Whether you’re looking for office, retail, or industrial space for a startup business or to expand your existing business, it’s important to understand the costs associated with commercial real estate before you sign on the dotted line. When it comes to cost, your commercial real estate agent can tell you the average lease costs in the area you’re looking at. Certain high-traffic or otherwise more desirable areas will cost more than less desirable areas. In addition to asking what the cost is per square foot, it’s important to find out what is included in the total price. Are there any common area maintenance (CAM) costs, such as for maintaining courtyards, entryways, and the like? Within the space itself, does the cost include just the basic “shell” (white walls and concrete floors) or more? Are you responsible for property taxes, property insurance, utilities, or trash collection?
Costs associated with most commercial real estate leases can be broken into three areas:
Electric and Janitorial
How these costs are charged to the tenant can be also be broken into three catagories:
- Triple Net Lease, referred to as “NNN” (in a triple net lease), represents the three major “net” costs: property taxes, property insurance and common area maintenance (CAM).
- Modified Gross Lease, referred to as "MG" is where all (or part) of the above nets are included as part of the base rent.
- Full Service Lease, referred to as "FS" is where the base rent, the nets, electrical and janitorial are included in one price per square foot lease rate.
Here are more details of the Three Main Lease Types:
Triple net lease: A triple net lease requires a tenant to pay a low lease rate while also paying other costs associated with operating and maintaining the space. In fact, with a triple net lease, the landlord will also pass on utility costs that are not separately metered, as well as all costs related to common area maintenance (CAM)
These so-called CAM charges include all expenses involved in maintaining common areas such as water/sewer, trash, restrooms, landscaping, parking lots, fire sprinklers, the roof or anything that all tenants share.
Modified Gross/ Modified Full Service Lease: Unlike a triple net lease, this agreement includes one, two or all three of the Nets as part of the base rent. It’s important not to assume what’s included and to ask your commercial broker what part of the nets have been included or modified. Typically a modified gross lease will include all the nets in the base rent but not electric or janitorial.
Full Service Lease: This agreement is where the base rent covers all costs of taxes, insurance, maintenance along with the utilities and janitorial. The tenant pays a pre-determined lease rate each month and there are no pass-through expenses for operating expenses. A pure full service lease is the best of all worlds for a tenant, particularly for a medical office tenant. The tenant only has to write one check per month, and the amount only goes up incrementally over time with the normal progression of rent.
Monthly rent typically rises about 2 to 3% per year (although that’s negotiable). The tenant doesn’t have to worry about getting hit later for extra costs such as utilities, and the landlord handles all of the maintenance so the tenant can focus on growing their business.
The nice thing about a modified gross lease is in the event the costs for the insurance, taxes, or CAM charges were to go up, this expense would not affect your locked in lease rate. Likewise, the downside of a modified gross lease is that if expenses go down, those savings are passed on to the owner. Also, because electric and janitorial are not typically included in a modified gross lease, you can control how much you use.
Please contact Phill Tomlinson regarding "What is Modified Gross on a Commercial Lease?",the current market, your property or any questions you may have about commercial real estate. To see Phill Tomlinson's commercial real estate listings, visit his Loopnet profile page at www.commercialrealestateaz.com.