Modified Gross Lease

A modified gross lease is a hybrid commercial lease that combines features of both gross and net leases. Tenants pay a fixed base rent plus a negotiated share of certain operating expenses. This arrangement is common in multi-tenant office buildings where some costs are allocated to tenants while others remain the landlord’s responsibility.

Key takeaways

• Tenants pay base rent plus a portion of operating costs (utilities, some maintenance, sometimes taxes).
• Specific expense allocations are negotiated and must be clearly defined in the lease.
• Offers more predictability than a full net lease but less certainty than a full gross lease.
• Common in multi-tenant commercial properties.

How it works

In a modified gross lease the parties divide operating expenses according to terms in the lease. Typical approaches include:
* Per-unit metering: each tenant pays utilities for its own meter.
* Pro rata allocation: shared costs (e.g., common-area utilities) are split based on each tenant’s percentage of total rentable square footage.
* Fixed sharing: landlord covers base operating expenses up to a threshold; tenants pay overages or a predetermined share.

Example: if a building’s monthly electric bill is $1,000 and there are 10 equal tenants, each pays $100; if tenants occupy different proportions of the building, each pays a proportional share.

Main components

• Rent — a negotiated, fixed base amount payable for the lease term.
• Operating expenses — costs for running and maintaining the property (utilities, property insurance, common-area maintenance, sometimes property taxes). The lease must specify which expenses are included and how they’re allocated.
• Maintenance costs — responsibilities for minor repairs, routine upkeep, and major structural repairs are allocated in the lease (landlord typically handles major repairs).

When they’re used

Modified gross leases are frequently used in multi-tenant office properties, medical offices, and similar commercial settings where landlords want to share operational costs without passing the full burden to tenants.

Advantages

• Predictable base rent simplifies budgeting.
• Balanced cost-sharing reduces tenant exposure to all variable property costs.
• Flexibility to negotiate allocations that suit both landlord and tenant.
• Broader tenant appeal than pure net or pure gross leases, which can improve occupancy.

Disadvantages

• Tenants may face variable, unpredictable additional costs (utility spikes, tax increases).
• Expense allocation and reconciliation can be complex and may lead to disputes.
• Ambiguities in maintenance responsibilities can cause disagreements.
• From an investor’s perspective, mixed expense responsibilities may make valuation or sale more complex compared with fully net-leased properties.

Comparing lease types

• Gross lease — landlord pays all operating expenses; tenant pays a single flat rent.
• Net lease — tenant pays rent plus most or all operating expenses (taxes, insurance, maintenance).
• Modified gross lease — hybrid where base rent is fixed and certain operating expenses are shared per the lease.

Practical tips for tenants and landlords

• Define included expenses clearly (what’s in “operating expenses” and what’s excluded).
• Specify allocation method (per square foot, per unit, fixed cap, etc.).
• Include reconciliation procedures and billing frequency (annual reconciliation is common).
• Request audit or inspection rights to verify expense allocations.
• Set caps or thresholds for major expense categories if predictable budgeting is important.
• Clarify maintenance responsibilities for common areas and within leased premises.

Conclusion

A modified gross lease offers a middle ground between full gross and net leases, providing a mix of rent predictability and shared operational responsibility. Because the terms for expense sharing vary widely, clear, detailed lease language is essential so both parties understand their financial obligations and avoid disputes.