Apex Real Estate Services · DRE #01422904 · CCIM-Led
Hemet, CA · (951) 977-3251
How a modified gross lease splits operating costs, who pays for what, and how it compares to gross and triple net leases — explained by Inland Empire commercial real estate experts.
If a space is quoted as “modified gross” (or “MG”), the operating costs are split — and exactly how they split is negotiated lease by lease. That flexibility is why modified gross is so common in multi-tenant office and flex space across the Inland Empire. Here is how it works, who pays for what, and how it compares to the other types of commercial leases.
Commercial leases sit on a spectrum of who pays the building’s operating costs — property taxes, insurance, common area maintenance (CAM), utilities, and janitorial:
The word “modified” is the key: it tells you the costs are split, but not which ones. That is always spelled out in the lease.
Base rent is set, then the lease defines which operating expenses the tenant reimburses. Two mechanisms control how expense growth is shared:
In a typical office modified gross deal, the tenant pays base rent plus in-suite utilities and janitorial, while the landlord covers taxes, insurance, and structural costs — with a base year governing expense increases. But every split is negotiable.
Key Takeaway: In a modified gross lease, the base year (or expense stop) is where the real cost lives. A low or poorly defined base year can mean the tenant pays escalating “increases” fast — always check how it is set.
The split is negotiable, but a standard office modified gross deal usually breaks down like this:
| Expense | Tenant | Landlord |
|---|---|---|
| Base rent | Pays | Collects |
| In-suite utilities | Usually pays | No |
| Janitorial (own suite) | Usually pays | No |
| Property taxes | Increases over base year | Base year |
| Building insurance | Increases over base year | Base year |
| Common area maintenance (CAM) | Negotiated / increases | Often base year |
| Roof & structure | No | Pays |
Always confirm the specific split. “Modified gross” only tells you costs are shared — the lease language tells you exactly how.
Here is where modified gross sits on the commercial lease spectrum:
| Lease Type | Who Pays Operating Costs | Base Rent |
|---|---|---|
| Gross / Full-Service | Landlord pays all | Highest |
| Modified Gross | Split — negotiated (base year) | Middle |
| Triple Net (NNN) | Tenant pays all three nets | Lower |
| Absolute Net | Tenant pays everything, incl. roof & structure | Lowest |
For a full breakdown of the tenant-pays-everything end of the spectrum, see our guide to the triple net (NNN) lease.
Often, partially. In many modified gross leases the landlord covers common area maintenance — or covers it up to a base year, with the tenant paying its share of increases after that. But it is negotiable: some modified gross leases pass through the tenant’s pro-rata share of CAM from day one. Because “modified gross” only signals that costs are split, the CAM treatment always comes down to the specific expense clauses in the lease.
The base year is the trap. A landlord-favorable base year — set artificially low, or excluding costs that later appear — can push expense “increases” onto the tenant quickly. Smart tenants confirm exactly what the base year includes, negotiate a fair gross-up clause, cap controllable expenses, and secure audit rights. Smart landlords define the base year cleanly to avoid disputes down the line.
Modified gross is most common in multi-tenant office and flex / creative space, where splitting costs keeps base rent competitive while protecting the landlord from runaway expenses. It also appears in some industrial space as an “industrial gross” structure. It is the default in many Class B and Class C office buildings.
Across the Inland Empire’s multi-tenant office and flex market — Riverside, San Bernardino, Ontario, and the Hemet / San Jacinto corridor — modified gross is a common structure, and the base-year and expense-stop terms are where a deal is won or lost. Owners and tenants who only compare base rents miss the real number.
That is where CCIM-level analysis matters. At Apex Real Estate Services, we model the full occupancy cost — base rent plus the negotiated expense load — so you see what a modified gross lease will actually cost over the term, not just the headline rate.
What are the disadvantages of a modified gross lease?
The main downside is the base year (or expense stop): a low or poorly defined base year can push escalating expense “increases” onto the tenant. Modified gross is also less transparent than NNN, which makes it harder to audit exactly what you are paying for.
Who pays what in a modified gross lease?
The tenant pays base rent plus some operating costs — often in-suite utilities and janitorial — while the landlord typically covers property taxes, insurance, and structure up to a base year. CAM and expense increases are negotiated. Always confirm the specific split in the lease.
What is the difference between modified gross and gross?
In a gross (full-service) lease the landlord pays all operating costs for one flat rent. In a modified gross lease, the tenant takes on some of those costs — commonly in-suite utilities and janitorial, plus expense increases over a base year — on top of base rent.
Does a modified gross lease include CAM?
Sometimes. Often the landlord covers CAM, or covers it up to a base year with the tenant paying increases after that — but some modified gross leases pass through the tenant’s share of CAM from the start. It is negotiable, so read the expense clauses.
This article is general educational information, not legal, tax, or investment advice. Lease terms vary — always review the specific lease and consult qualified professionals. Apex Real Estate Services · Robert Mendieta Jr., CCIM · DRE #01422904 · (951) 977-3251.
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