Modified gross lease
| Modified gross lease |
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Modified gross lease is an agreement on real estate market where not only base rent is included, but also additional costs related to property maintenance, e.g.:
- taxes,
- insurance,
- heating.
If the tenant leases only part of property (e.g. one office), he/she pays part of those costs related to percent of property he/she uses.
Why modified gross lease?
Regular gross lease includes only base rent price. The landlord pays all the additional costs (however they are calculated into base price). Net lease calculates base rent price without all the additional costs, and those costs are covered by tenant. Modified gross lease is a mix of those two: only some costs can be included or tenant covers only some percentage of those costs.
Modified gross lease is popular in buildings where multiple tenants lease offices or apartments and it is difficult to precisely calculate costs of e.g. heating per tenant.
Taxes
This is one of the local government taxes that feeds the commune's budget. The tax authority competent in matters of this tax is the commune head (mayor, president of the city). The following real estate or construction objects are subject to tax:
- land,
- buildings or parts thereof,
- buildings or their parts related to running a business.
General characteristics of property tax.
Real estate tax is one of the largest sources of own revenue for the commune budget. Due to its wide characteristics, it can be assigned to various types of taxes:
- Income tax - it charges income not taking into account the costs of obtaining it. The actual possession of real estate generating alleged income is taxed.
- Consumption tax - the taxpayer uses property resources of recreational, recreational, etc. value. Income is taxed during his consumption expenditure. property tax - encumbered with the possession of property. The source of payment of tax is property in a static approach, i.e. not subject to changes in nominal or real terms. It is taxed, for example, to use your own property for personal purposes or to have a construction site as a form of capital investment.
The taxpayers of real estate tax are natural persons, legal persons, organizational units, including companies without legal personality, being:
- owners of real estate or construction objects,
- self-owned holders of real estate or construction objects,
- perpetual usufruct of land,
- owners of real estate or parts thereof or building objects or their parts, owned by the State Treasury or a local government unit. If the subject of taxation is in its own possession, the tax obligation in the scope of property tax is on the holder of an autonomous one [1].
Insurance
Property insurance - covers all property components, i.e. within the meaning of civil law, one of the types of property including land properties, building properties and parts of buildings. The central point of this insurance is the risk of fire, flooding, flooding and theft. A comparative essence of every property insurance
What is included in the housing insurance?
Housing insurance can include:
- equipment insurance against random events, equipment insurance against burglary or robbery,
- insurance of the apartment / house walls (ie the construction of the building itself),
- liability insurance in private life for damage caused to third parties in connection with the exercise of private life activities in one of two variants to choose from (Standard or Premium),
- assistance insurance (assistance after damage at the place of insurance) [2].
Heating
The heat supplier (heating network operator) charges the building manager for the heat supplied, which consists of two groups of costs:
- fixed costs, independent of the amount of heat actually collected, resulting from the contracted power and fixed charges for the heat supplier.
- variable costs, resulting from the amount of heat actually taken for heating the building and the costs of transporting it to the building.
Heat costs indicated on the invoice of the heat supplier, independent of consumption, the building manager divides the premises among users, using their usable floor space as a criterion.
These costs are added to the variable costs, determined by the building manager using the percentage indicator, which is the cost of heating the space used jointly by all users of premises in a given building, such as corridors, staircases, technical rooms.
The sum of fixed costs, resulting from the invoices of the supplier and a part of variable costs, intended to heat the common parts, is the costs independent of consumption in premises in a given building [3].
Examples of Modified gross lease
- Modified Gross Lease with CAM: This type of lease includes a base rent plus common area maintenance (CAM) charges. The tenant is responsible for their share of CAM charges which are typically based on the tenant's percentage of the building's square footage. For example, if the tenant occupies 20% of the building, they would be responsible for 20% of CAM charges.
- Modified Gross Lease with Taxes and Insurance: In this type of lease, the tenant pays base rent plus their share of taxes and insurance. The tenant is typically responsible for their portion of the building's property tax and insurance payments, which is usually based on the tenant's percentage of the building's square footage. For example, if the tenant occupies 20% of the building, they would be responsible for 20% of the property tax and insurance payments.
- Modified Gross Lease with Utilities: In this type of lease, the tenant pays base rent plus their portion of the building's utilities. The tenant is typically responsible for their portion of the building's utilities, which is usually based on the tenant's percentage of the building's square footage. For example, if the tenant occupies 20% of the building, they would be responsible for 20% of the utilities.
Advantages of Modified gross lease
A Modified gross lease is a real estate agreement that includes not only the base rent, but also additional costs related to the property maintenance. This type of lease offers several advantages to both the landlord and the tenant, including:
- Reduced Risk for the Tenant – By including additional costs in the lease, the tenant is able to better plan and budget for expenses related to their occupancy, reducing the risk of unexpected costs.
- Improved Cash Flow for the Landlord – By including the additional costs in the lease, the landlord is able to receive a consistent and reliable stream of income from the tenant.
- Flexible Negotiation – A modified gross lease allows for more flexibility in negotiations between the landlord and tenant, allowing both parties to come to an agreement that meets their needs.
- Able to Include Additional Services – In addition to the costs related to maintaining the property, a modified gross lease can also include services such as janitorial, landscaping, and other services as part of the agreement.
Limitations of Modified gross lease
A modified gross lease is an agreement on the real estate market where not only base rent is included, but also additional costs related to property maintenance. This type of lease can be beneficial for both the tenant and the landlord, however, there are certain limitations to consider:
- Modified gross leases often require the tenant to pay for their own utilities, such as electricity, water, and gas. This can add up to a significant amount, depending on the size of the property and the tenant’s usage.
- Tenants are also generally responsible for any maintenance of the property, such as repairs, lawn care, and snow removal. This can be costly, especially if significant repairs are needed.
- Modified gross leases are often short-term, with the tenant typically being responsible for any damages to the property at the end of the lease. This can be a financial burden, as the tenant may be required to pay for repairs that are outside their control.
- Finally, modified gross leases are typically more expensive than traditional leases, as the tenant is responsible for more of the costs associated with the property.
A modified gross lease is an agreement where the tenant pays base rent plus additional costs related to the upkeep of the property. Other approaches related to modified gross leases include:
- Triple net lease: tenant pays base rent plus additional costs such as property taxes, insurance, and maintenance costs.
- Percentage lease: tenant pays a base rent plus a percentage of sales above a certain amount.
- Bond lease: tenant pays a fixed rent plus a bond that is held in escrow and returned to the tenant at the end of the lease.
- Direct pass-through lease: tenant pays a base rent plus an additional amount for operating expenses that are passed through from the landlord.
In summary, a modified gross lease is an agreement between a tenant and a landlord where the tenant pays base rent plus additional costs related to the upkeep of the property. There are several other approaches related to modified gross leases, such as triple net leases, percentage leases, bond leases, and direct pass-through leases.
References
- Chau, K. W., & Wong, S. K. (2016). Information asymmetry and the rent and vacancy rate dynamics in the office market. The Journal of Real Estate Finance and Economics, 53(2), 162-183.
- Itard L., Santin O., Visscher H. (2009) The effect of occupancy and building characteristics on energy use for space and water heating in Dutch residential stock „Energy and Buildings” 41.
- Lang K., Tianlun J. (2000) Property Taxes and Property Values: Evidence from Proposittion 2½ „Department of Economics Boston University, Massachusetts Financial Services” 02215.
- Zou H. (2010) Hedging Affecting Firm Value via Financing and Investment: Evidence from Property Insurance Use „City University of Hong Kong” v. 39 n. 3.
Footnotes
Author: Agata Janusz
