Real estate investors seeking long term income rely on leases to earn rent from tenants. The contents of a lease impact the strength and size of rental cash flow.
This is true for a modified gross lease. An inappropriate lease or a poorly written lease can cost a property investor a large amount of revenue. That is why it’s necessary to know the different types of leases and problems they address. Lease type modified gross according to Sands Investment Group – an MGL is a lease in which the tenant pays rent along with some of the unit’s expenses. A modified gross lease is a compromise between two opposite types of leases.
Gross Lease
In this lease type, the landlord pays all property expenses. Gross lease specifies higher rents as the rent payments must cover the expenses the landlord pays. In commercial real estate, gross leases appear in apartment buildings and multi-family properties.
Modified Gross Lease Vs NNN
For NNN lease tenants pay their share of property taxes, common area maintenance, and insurance. This type of lease charges less rent than a gross lease.
An MGL combines aspects of a net lease and a gross lease. Like a gross lease, the tenant pays monthly rent to the landlord and receives some free services. It resembles a net lease in which the tenant must pay for some expenses. The landlord picks up the costs that the tenant doesn’t pay.
Both landlord and tenant must bear some property-related expenses. For example in a modified gross lease, tenants cover common area maintenance whereas the landlord handles property taxes and insurance.
Pros And Cons Of Modified Gross Lease
A modified gross lease has pros and cons to both tenants and landlords.
Pros To The Landlord
Landlords may favor modified gross leases to retain some control over the property. For instance, landlords may pay CAM costs as they want to maintain common areas in a specific way. By paying CAM charges, landlords ensure that they can control the work performance. If they left the CAM to tenants, they would have to worry whether the tenants will do the job properly.
Cons To The Landlord
Properties suffer if landlords underestimate the costs they cover in a modified gross lease. For example – a shopping mall in which a short-sighted landlord underestimated the cost of the CAM charges. The misery landlord lets the common areas deteriorate. This causes tenants to not renew their leases and drives away new tenants. The vacancy rate soars, leading to net operating losses and bankruptcy. The landlord should employ a triple net lease and let the tenants maintain the common areas.
Pros To The Tenant
Tenants may find a modified gross lease attractive as the landlord covers some building expenses. For instance, landlords pay CAM to stay involved in the properties. Tenants have no interest in CAM as long as it is satisfactory. Tenants can control some costs and save money. For example, tenants who pay for their own utility usage can economize through efficiency and conservation.
Cons To The Tenant
Tenants may suffer if a landlord does a poor job. For example, recall the case where a shopping mall landlord responsible for CAM, shortchanged the work. The most common areas will look scruffy, embarrassing tenants, and discouraging customers. This causes tenants to lose business and forces them to undertake an expensive relocation.
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