CRE glossary
Modified gross lease
A modified gross lease is a hybrid commercial-lease structure where the landlord includes some operating expenses in the base rent and passes others through to the tenant. It's the middle ground between full-service (landlord pays everything) and triple-net (tenant pays everything), and what gets included vs passed through is fully negotiable.
Modified gross is the most common structure for multi-tenant office buildings outside the NYC and West LA markets. A typical structure: base rent includes building-shell taxes, insurance, and structural maintenance; the tenant pays separately for utilities, janitorial inside the suite, and any operating-expense increases over a defined base year (an 'expense stop', see below).
Modified gross creates a base year. The base year is usually year 1 of the lease, and the operating expenses for that year set the floor. In subsequent years, the tenant pays increases over the base year on a pro-rata basis, but not the full operating cost. This dramatically reduces the tenant's exposure to landlord operating-cost inflation in years 1–3.
Watch for 'gross-up' clauses. If the building is under-occupied during the base year, operating expenses come in artificially low (less janitorial, lower utilities, etc.). When occupancy normalizes in year 2, costs spike, and the tenant pays the difference as 'increases over base.' Gross-up clauses normalize the base year as if the building were 95% occupied, protecting the tenant from this distortion.
Example
- Year 1 base rent (modified gross)
- $52/SF
- Operating expenses (base year)
- $11/SF
- Year 2 actual OpEx
- $11.55/SF
- Year 2 tenant adds
- $0.55/SF
- Year 2 effective
- $53.55/SF
Broker perspective
When comparing modified gross to NNN, normalize to effective rent. A $50/SF modified gross with a base year and gross-up can be cheaper over a 10-year term than a $42/SF NNN with no caps. The math depends on what's in base rent, what's pass-through, and what the operating-cost trend in the building has been historically.
Frequently asked
People also ask
Modified gross vs NNN, which is cheaper?
Depends on building, market, and how aggressive the landlord is on operating-cost growth. Modified gross is usually cheaper in stable markets; NNN can be cheaper in markets with aggressive escalation caps. Run the math both ways.
What's an expense stop?
The base-year operating-expense level. The tenant pays only the increases over this stop, not the full operating cost. Resets if the lease renews, often to the renewal year's actuals.
Is modified gross the same as full-service?
No. Full-service includes everything in base rent (no pass-throughs at all). Modified gross has pass-throughs over the base year. Confirm in the LOI.
Should I negotiate a gross-up clause?
Yes, always. Without it, an under-occupied base year creates a permanent overpayment trap. 95% gross-up is market standard.
Related terms
Triple net lease (NNN)
A lease where the tenant pays base rent plus their pro-rata share of property taxes, insurance, and CAM.
Full-service (gross) lease
Landlord pays all operating expenses; tenant pays one rent number and that's it.
Operating expenses (OpEx)
All costs to run the building, taxes, insurance, utilities, janitorial, management, that get passed through to tenants in NNN and modified gross structures.
Expense stop
The base year operating-expense level in modified gross leases, tenant pays only increases over this floor.
See modified gross lease extracted from a real lease.
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