What is Modified Gross on a Commercial Lease?

Reblogger
Commercial Real Estate Agent

Below is a pretty good basic explanation.......

Original content by Phill Tomlinson
 
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:
  • Base Rent
  • Nets (NNN)
  • 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.

What is Modified Gross on a Commercial Lease?

 

 

Benefits of a Modified Gross Lease
 
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.
 
 

       

 Phill Tomlinson, Vice President

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The information contained herein has been obtained from various sources.  We have no reason to doubt its accuracy; however, J & J Commercial Properties, Inc. has not verified such information and makes no guarantee, warranty or representation about such information.  The prospective buyer or lessee should independently verify all dimensions, specifications, floor plans, and all information prior to the lease or purchase of the property.  All offerings are subject to prior sale, lease, or withdrawal from the market without prior notice. 

Posted by

Richard Kruse, Managing Director

Gryphon Parker, LLC

Sperry Van Ness Ohio / Gryphon Parker

Parker Kruse Asset Management

Gryphon Auction Group

90 Northwoods Blvd., Columbus, OH 43235

Phone 614.774.4118

 

rfk@svn.com I www.svngp.com I www.svn.com I www.svnauctions.com

 

About Richard Kruse

 

Mr. Kruse began his real estate career full time in Virginia in 1997.  Over the past 17 years, he has conducted real estate and equipment sales across the country.  In August of 2003, Mr. Kruse, in partnership with his wife Melissa, opened Gryphon Asset Advisors, the predecessor to Gryphon USA., Ltd.  In June of 2014, Kruse and Shawn Parker formed Sperry Van Ness Gryphon Parker Commercial Realty and Parker Kruse Asset Management.  Prior to July, Kruse and Parker were each others largest competitor.

 

In addition to sitting on the Ohio Auctioneers Commission, Mr. Kruse leads Sperry Van Ness Auction Services efforts in the State of Ohio, teaches at the Ohio Auction School and is regularly consulted as an expert in auctions and distressed assets by Columbus Business First and the Columbus Dispatch.  He is an active member CenterPoint Church and lives with his wife, Melissa, and daughter, Savannah, in North Columbus. 

 

About Gryphon Parker, LLC

 

 

Gryphon Parker, LLC is a multi-faceted group of companies operating under the names Parker Kruse Asset Management, Sperry Van Ness Gryphon Parker, Gryphon Auction Group & Parker Realty. The entities providing distressed asset management, real estate brokerage, management, leasing and auction services throughout the State of Ohio. The SVN Gryphon Parker Special Assets Group, working closely with Parker Kruse Asset Management, advises financial institutions, borrowers and the Courts on troubled asset administration throughout the United States.

Comments (1)

Winston Heverly
Winston Realty, Inc. - Atlantis, FL
GRI, ABR, SFR, CDPE, CIAS, PA

Super post, I'm glad I came across it from the archives. Thanks for sharing.

Feb 27, 2016 10:04 PM