A modified net lease is a deal variation or compromise that usually falls somewhere between the terms of a gross lease and a triple net lease. Each modified net lease contract is unique to the property, but there is generally a split of financial responsibilities between the property owner and the tenant to make the deal beneficial on both sides.
In general, a modified net lease may divide repairs and maintenance between the property owner and the tenant and give the responsibility of taxes and insurance to the tenant in addition to their monthly rent fee. Depending on the type of building and location, utilities may also be negotiated as a split cost in the deal as well.
Triple Net Lease, Gross Lease, and Modified Net Lease: What’s the Difference?
To best understand the variation of a modified net lease, it’s important to know about how gross leases and triple net leases are typically structured since a modified gross lease is negotiated as a blend of the two lease types.
A triple net (or NNN) lease property typically offers a long-term tenant contract that is already in place, and contains details and terms that are negotiated to be favorable for both the property owner and the tenant. However, in a triple net lease, the tenant does take on the majority of financial responsibilities associated to the property, including:
- Monthly Rental Fees for the Building or Space
- Property Taxes
- Insurance Premiums
- Maintenance, Upkeep, and Repairs
A gross lease contract, on the other hand, is structured so that the property owner maintains the property and takes on all the financial obligations of their investment, including taxes, insurance, and property repairs or improvements. In a gross lease, the tenant pays one monthly rent sum, which the property owner uses to help cover some to all of their costs.
A modified net lease is a negotiated middle ground between the gross lease and the triple net lease that can be used to make deals more favorable for tenants and still protect the interests of the investor by splitting some of the property expenses. The property and business type of the location are often factors that drive the need for a modified net lease, and they’re most often used on retail, industrial, and multi-tenant properties.
Who Benefits From a Modified Net Lease?
The biggest advantage of a modified net lease is compromise. Triple net real estate is very attractive to both investors who want a low-touch, low-risk investment with consistent returns and tenants who want a key location or established building to operate their business. However, there may be factors that will cause tenants to shy away from a deal, and that is where a modified net lease can come about to secure a reputable tenant or business in an investment property over a long-term period.
Negotiation is key in structuring new modified leases, as each deal will have unique parameters and cost divisions. For example, a retail location that will be used by the tenant to sell apparel and footwear will likely need special display lighting (whether seasonal or ongoing) to feature products and showcase deals effectively, which will increase the operating costs of the building. In many deals, utilities are the responsibility of the tenant, but in a modified net lease, negotiations can lead to shared utility costs to secure the tenant. If the tenant has a reputable brand and potential for longevity and success in the space, then sharing costs can be beneficial to both the tenant and the property owner.
If you’re considering a property with a modified net lease already in place, it’s important that you fully understand the details of the contract so you can determine if those terms fit your investment criteria and portfolio plans.
Sands Investment Group is made up of experienced net lease advisors and leading brokers who have extensive expertise in gross leases, triple net leases, and any variations of those deals including the modified net lease. Our team can advise you on all the intricacies and benefits of an investment, based on our proven track record of successfully closed deals and satisfied investors (in fact, we’re the fastest growing net lease investment company in America, with over 1,700 transactions in 48 states – to the tune of over $4 Billion since 2010.)
Want to learn more and speak with an industry expert about current investment opportunities? Get in touch with a net lease expert today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.