A modified net lease is a variation deal or compromise that falls somewhere between a gross lease and a triple net lease. Every modified net lease contract is unique to the property, but there is a division of financial responsibilities between the tenant and the property owner so that the deal is beneficial on both the sides.
Understanding a Modified Net Lease
A modified net lease divides repairs and maintenance between the owner and the tenant and gives the responsibility of insurance and taxes to the tenant in addition to the monthly rent. Depending on the type of building and locations, utilities can be negotiated as a split cost in the deal.
To understand the variations of a modified net lease, you should know about how gross leases and triple net leases are structured. A modified gross lease is negotiated as the blend of the two types of lease.
Different Types of Leases
A triple net lease property offers a long-term tenant contract. It contains details and terms that are negotiated to be favorable for both the property owner and the tenant. In this the tenant takes on the majority of financial responsibilities related to the property.
A gross lease on the other side is structured so that the property owners maintain the property and maintain lease accounting compliance, taking all the financial obligations of their investment including Taxes, property repairs or improvements and insurance. The tenant pays 1 monthly rent sum, which the property owner uses to help cover all of their costs.
Modified net lease is the middle ground between the gross lease and the triple net lease. It’s used to make deals more favorable for tenants and protect the interest of the Investor by dividing some of the property expenses. The business type and property of the location are the factors that are needed for a modified net lease and they are used mostly on retail, Industrial and multi-tenant properties.
The modified net lease has the biggest advantage of compromise. Triple net real estate is very good to both investors who want low risk investment with consistent returns and tenants who want a key location or established building for their business. There may be factors that cause tenants to shy away from a deal and here is where a modified net lease can secure a reputable tenant or business in an investment property over a long period .
Negotiation is the key in structuring new modified leases, because each deal has unique parameters and cost divisions. Retail location will be used by the tenant to sell apparel and footwear and will likely need special display lighting to feature product and to showcase details, which increases the operating cost of the building. In most of the deals, utilities are the responsibility of the tenant but in a modified net lease negotiations can lead to shared utility costs to keep the tenant secured. If the tenant has a famous brand and potential for longevity and success then sharing costs can be beneficial to both the property owner and the tenant.
It’s important that you fully understand the details of the contract if you are considering a property with the modified net lease . This will help you determine those terms if they fit your investment criteria and portfolio plans.