Modified Gross Lease: Who Pays What, How It Works, and How It Compares to NNN

When it comes to commercial real estate, no term confuses landlords and tenants faster than modified gross lease. On paper, it sounds like a compromise — part net, part gross — but in practice, it’s simply about providing clarity around who pays what.

A modified gross lease is a commercial rental agreement where the tenant pays a fixed base rent plus a proportional share of specific operating expenses, like janitorial, maintenance, or utilities. The landlord still shoulders certain costs, such as property taxes or insurance, depending on what’s negotiated.

Think of it as a middle ground between a triple net lease, where tenants pay nearly everything, and a full-service lease, where the landlord absorbs it all.

So, why should you care?

Because understanding how modified gross leases work can protect your margins, reduce tenant churn, and help you structure fair, flexible agreements in competitive markets.

In this guide, you’ll learn:

• What a modified gross lease really is
• How expenses are split — and calculated
• How it compares to NNN and other lease types
• Legal landmines and best-practice clauses
• What to include in your next lease negotiation

What Is a Modified Gross Lease?

A modified gross lease (MGL) is a type of commercial lease where both the landlord and tenant share responsibility for the property’s operating expenses. The tenant pays base rent, which is fixed, plus a negotiated portion of additional costs — typically things like janitorial, maintenance, or utilities.

It’s called “modified” because it takes the basic structure of a gross lease (where the landlord pays all expenses) and adjusts it to include tenant participation — but not to the level of a triple net (NNN) lease, where tenants carry almost all costs.

Other terms you might see:

• MG lease
• Modified lease
• Hybrid lease (occasionally)

What makes modified gross leases valuable is their flexibility.

The lease terms can be tailored based on:

• The property type (office, retail, mixed-use)
• The number of tenants
• Market competitiveness
• Each party’s budgeting preferences

For example, in a multi-tenant office building, one tenant might pay for their suite’s electricity and janitorial services, while the landlord handles property insurance and common area maintenance (CAM). Another lease in the same building might shift the utility burden back to the landlord, depending on the setup.

There’s no one-size-fits-all. That’s why clear definitions and documentation are essential — especially when you're splitting costs.

Who Pays What? Cost Mechanics & Math

Understanding who pays what in a modified gross lease isn’t just a paperwork exercise — it directly impacts your cash flow, tenant satisfaction, and operational predictability.

At the core is the base rent — the fixed monthly payment. Beyond that, the lease outlines additional shared expenses, calculated using specific methods.

Common shared expenses:

• Utilities: electricity, water, gas
• Janitorial services
• Maintenance: HVAC, elevator, landscaping
• Common Area Maintenance (CAM)
• Property insurance
• Real estate taxes (sometimes)

These expenses are often calculated pro rata based on the tenant’s square footage.

Formula:

Tenant’s Share = (Tenant Sq Ft ÷ Total Rentable Sq Ft) × Shared Costs

Base Year and Expense Stop

A base year sets a benchmark for expenses. Tenants pay increases above that year's levels. An expense stop caps the landlord's responsibility.

Example: If 2024 CAM costs were $10/sq ft and 2025 costs jump to $12/sq ft, the tenant pays the $2/sq ft difference.

Gross-Up Clause

Adjusts operating costs to reflect full occupancy — critical for fair cost sharing in under-occupied buildings.

Exclusions and Caps

Tenants often negotiate to exclude capital expenditures or cap annual increases.

Missing this clause could cost you thousands in unplanned back charges.

Audit Rights

Tenants may request the ability to review CAM and shared cost records annually. Smart landlords include structured audit language to maintain trust.

Modified Gross Lease vs Other Lease Types

Legal & Compliance Essentials

Key Pitfalls to Avoid:

• Don’t assume cost-sharing is understood
• Clearly exclude capital expenses from CAM
• Include audit clauses
• Ensure lease matches local laws and codes

Compliance Highlights

• HUD-92458: Required for rent schedules
• GASB 87: Leases over 12 months must be capitalized
• Petroff v. Crown Castle USA Inc.: Courts interpret based on terms, not labels

🔐 Clarity is your best legal defense.

Best Practices for Modified Gross Leases

1. Cap CAM Charges

Add an annual cap (3–5%) to protect tenant budgets.

2. Exclude Capital Expenditures

Define exclusions clearly to avoid disputes.

3. Define a Base Year

Set a clear benchmark for shared cost increases.

4. Include Audit Rights

Provide tenants limited rights to review annual expenses.

Real-World Example

How a Modified Gross Lease Helped Reduce Turnover

Challenge: Multi-tenant office building with rising CAM costs and tenant friction.

Solution: Shifted to modified gross lease structure with:

• Base year expense benchmark
• 5% cap on CAM increases
• Audit rights for tenants
• Capital expense exclusions

Outcome:

• Turnover dropped 22%
• NOI increased
• Lease disputes declined
• Anchor tenant renewed for 3 years

Takeaway: Transparency and structure build tenant trust.

FAQs About Modified Gross Leases

Conclusion & Resources

Key Takeaways

• Define everything.
• Protect predictability.
• Use the right lease for the right property.

Resources

• Commercial Modified Gross Lease Template
• Managing CAM Costs
• Build-to-Rent Guide
• Property Management Glossary

Ready to write stronger leases, reduce friction, and keep tenants longer?
Explore our Property Management Resource Library.

Legal Disclaimer: The information on this website is sourced from publicly available materials and is provided for general informational purposes only. It is not intended as legal, financial, or accounting advice. LandlordDoc.com makes no guarantees about the accuracy or completeness of the information and assumes no liability for any errors, omissions, or outcomes related to its use.