Lease Structure
Modified Gross Lease
The hybrid lease — landlord and tenant split expenses
A Modified Gross Lease falls between full-service (landlord pays everything) and NNN (tenant pays everything). The tenant pays a base rent plus specific operating expenses, with landlord covering others. The exact split varies — some common structures: tenant pays utilities and janitorial; landlord pays taxes, insurance, structure, common areas. Modified gross is common in multi-tenant office buildings and some multi-tenant retail.
Term
3-10 years initial + options
Rent Bumps
3% annually or CPI adjustments
Cap Rate
6.5% - 8.5% typical for Class B/C office
Tenants
Professional services, medical, office users
Who Pays What?
| Expense | Tenant | Landlord |
|---|---|---|
| Property Taxes | — | |
| Insurance (Structure) | — | |
| Utilities (Tenant Space) | — | |
| Janitorial | — | |
| Common Area Maintenance | — | |
| Structural Repairs | — | |
| Interior Repairs | — | |
| HVAC (Tenant Space) | — |
Pros
- +Simplifies tenant expense budgeting
- +Common and well-understood in office markets
- +Base year escalations cap tenant exposure
- +Good fit for multi-tenant buildings
Cons
- −Landlord absorbs expense increases above base year
- −More operational involvement required
- −Complex CAM reconciliations
- −Valuation harder than NNN (variable NOI)
Common Use Cases
How It Compares
Modified gross gives landlord less operational exposure than full-service but more than NNN. The exact structure varies — always read specific lease provisions. Base year provisions (tenant pays increases over base year expenses) are common.
Investor Perspective
Modified gross leases require more active management than NNN but can generate strong returns in well-run multi-tenant properties. Best for investors who want value-add upside through operational improvements and rent growth.
Other Lease Types
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