What is the Difference Between a Modified Gross Lease and a Triple Net Lease?
If you’re a small business owner, you’ll probably have to deal with leasing office space, warehouses, and other kinds of real estate in your business. And sooner or later, you face the question: what is the difference between a modified gross lease and a triple net lease? That’s because these are the two typical commercial leases.
But because the cost-sharing between tenant and landlord differs in these types of leases, you should be aware of these nuances before you sign an agreement. So read this article to make sure your deal turns out to be a good one.
Modified Gross Lease vs. NNN
Firstly, it’s worth identifying the critical points between the leases discussed here. NNN assumes that tenants are responsible for the rent and all the operating costs related to the property. The terms of a modified gross lease are to pay some of the operational expenses. Next, we’ll break down what each term means.
Triple Net Lease
Why does a triple net lease get that name? Very simply. It’s all about 3 operating expenses: insurance, property taxes, and maintenance. A triple net lease is also often related to a net-net-net lease.
Modified Gross Lease
This kind of lease is similar to a typical residential gross lease, which involves the landlord paying all operating expenses. The tenants pay part of the operating expenses in a modified gross lease. As the tenant, you also should pay for utilities and cleaning services, as they are everyday expenses paid under this lease.
You can pay these costs directly, or you can pay your landlord’s actual or estimated costs. What then does the property owner pay for? First, they pay for taxes, insurance, and building maintenance costs to the extent of the modified gross lease.
How About an Example
Owners who rent out the area of shopping centers and chain store buildings insist on triple-net leases in most cases. Here’s an example: a commercial real estate developer pays to erect a building (a beauty salon, coffee shop, or toy store) on his property. In doing so, he uses the drawings and design specifications of the owner of this property.
You, as the tenant, have to sign a long-term lease, which involves paying taxes, insurance, and most of the operating costs. Property owners often use a modified gross lease for existing detached structures or office complexes.
Pros and Cons
Nothing in this world is perfect, and every coin has two sides. This rule also applies to a modified gross lease and NNN, which have mixed results for landlords and tenants alike.
Benefits for All Parties
Regarding triple net leases, they are very advantageous for small business owners. Why is that? You don’t need to invest capital in real estate and construction costs. Instead, the business uses its investment in the core business. The tenant oversees the property’s maintenance, improvement, and appearance. A triple net lease allows the property owners to focus on their core business rather than being involved in the costs and issues related to maintaining the property.
NNN has a significant benefit for some small business owners. First, it relieves the landlord of responsibility for maintaining the building. Thus, it provides complete tenant control over the expenses paid. The landlord, in turn, can retain control of his property. This way, landlords keep the property in good condition and avoid misunderstandings with unscrupulous tenants.
Drawbacks for All Parties
As for cons, triple net leases carry the risk of higher property taxes and insurance for the tenant. Of course, this threat is only potential but very real. As a tenant, you also have to pay the costs of maintaining the building. In addition, you may be responsible for most injuries that occur on the property. For example, you’ll be liable if a client’s child breaks their leg by tripping on an uneven sidewalk.
With a modified gross rate, the property owner has the right to increase their operating expenses when determining the rental rate. It follows that the tenant will overpay for some costs. The tenant may also risk an unscrupulous landlord won’t keep the property in good condition. And this can’t help but affect the tenant’s business.
Last More Tips
And in the final paragraph of this article, we should mention some tenant defaults on rent payments since these are everyday situations all landlords face. The parties to the contract rarely manage to settle such a dispute amicably. What should the landlord do to protect his interests in such a situation?
Landlords can use a security deposit to protect themselves. It ensures that the tenant pays rent on time, reimburses all the damages, and pays penalties if the contract is breached. For this purpose, several conditions must be spelled out in the agreement:
✔️ The amount of the payment and the term for making it;
✔️ The circumstances under which it is set off;
✔️ The conditions for its return.
The contract often specifies that the advance can simultaneously be used as a rent payment. For example, the parties agree that the owner can use the tenant’s advance for the last month of the lease to compensate for his losses or forfeit.
Upon contract termination, the tenant must return the property to the owner in its original condition, considering normal wear and tear. In addition, the premises must be free of the tenant’s property (often, the parties specify this in the contract; the courts take a similar position). The neglect of this rule by tenants often helps owners protect their interests.
Thus, if a dispute arises, the landlord will set off the amount of the advance to pay the debt and then require the tenant to pay the last month’s advance again. The owner must draw up the contract with the tenant competently, carefully keep all rental documents and avoid unfair behavior or abuse of the right on his part.
Conclusion
Any commercial real estate lease can have two sides. It all depends on the specific situation. For example, for small businesses, NNN is very advantageous. For landlords, a modified gross lease has significant benefits since it allows them to keep control of their property. But again, it all depends on the specific situation and business specifics.
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