A modified gross lease is a commercial lease that falls between a gross lease and a triple net lease. The tenant pays a base rent that includes some operating expenses, and also pays certain other costs directly or through reimbursements.
Because the split is negotiated, no two modified gross leases are exactly alike. It is common for office and light industrial space and for multi-tenant buildings.
How it works
The lease spells out which costs the landlord covers and which the tenant pays. A common setup looks like this:
- Landlord pays: property taxes, building insurance and structural repairs, up to a set level
- Tenant pays: its own utilities, janitorial service inside the suite and possibly a share of increases in operating costs
Two common tools for sharing cost increases:
- Base year. The landlord pays operating costs up to the actual amount in the first lease year. In later years, the tenant pays its pro rata share of any increase above that base.
- Expense stop. The landlord pays up to a fixed dollar amount per square foot, and the tenant pays its share of costs above it.
Worked example
A hypothetical tenant leases 4,000 square feet in a 40,000 square foot building, a 10% share. The lease uses a 2026 base year, when operating expenses were $400,000. In 2027 those expenses rise to $440,000.
- Increase over base: $440,000 minus $400,000 = $40,000
- Tenant’s share: $40,000 x 10% = $4,000 for the year
The tenant pays base rent plus $4,000 in pass-through costs, usually billed as monthly estimates and reconciled after year end. The tenant also pays its own electricity.
Why it matters for landlords
A modified gross lease protects you from rising costs while offering tenants more predictability than a net lease. The key is precise language: define operating expenses, list exclusions, set the base year or stop, and explain how and when reconciliations happen. Vague terms are a common source of commercial disputes. TenantLoop supports commercial leases with CAM and recurring charges, and our commercial lease guide explains each lease type. Have an attorney review commercial lease terms before signing.
Related terms
Where it gets confusing.
What is the difference between a base year and an expense stop?
With a base year, the landlord covers operating costs up to the amount in the first lease year. With an expense stop, the landlord covers costs up to a fixed amount per square foot. In both cases the tenant pays its share above that level.
How is the tenant's share of cost increases worked out?
By the tenant's pro rata share of the building. A tenant with 10% of the space pays 10% of the increase over the base, usually as monthly estimates reconciled after year end.
What should a modified gross lease spell out?
Which costs count as operating expenses, what is excluded, the base year or stop, and how and when reconciliations happen. Vague terms here cause many commercial disputes.