Modified Gross Lease: Which Expenses Require Reconciliation?
Modified gross leases split operating expenses between landlord and tenant. The specific split determines which expenses need annual reconciliation — and which the landlord absorbs.
Last updated: March 2026
Definition
A modified gross lease is a commercial lease where the landlord and tenant split operating expenses — the tenant pays base rent plus some (but not all) operating expenses, with the specific pass-through categories negotiated and defined in the lease agreement.
CAM Reconciliation at a Glance
| Attribute | Modified Gross Lease |
|---|---|
| CAM Included in Lease | Yes |
| Annual Reconciliation Required | Yes |
| Gross-Up Applicable | Yes — variable expenses |
| CAM Caps Applicable | Yes — by negotiation |
| Common Property Types | office, medical office, flex space, creative office, mid-size commercial buildings |
Who Bears Operating Expenses
Split between landlord and tenant per lease negotiation. Common structures: tenant pays utilities only; tenant pays utilities plus janitorial; tenant pays utilities, janitorial, and their pro-rata share of taxes and insurance above a base year; landlord covers structural repairs and roof. The exact split must be defined in the lease.
CAM Reconciliation Notes
Modified gross leases require partial reconciliation for the pass-through expense categories. The landlord must reconcile actual costs against estimates for those specific categories. Reconciliation is not required for expenses the landlord retains. Clarity in the lease about which expenses are 'pass-through' vs. 'landlord-borne' is essential — ambiguity in this language is a frequent source of disputes.
Formulas
Pass-Through Expense Reconciliation
Tenant Settlement = (Actual Pass-Through Expenses × Tenant Pro-Rata Share) − Estimates Paid
| Variable | Definition |
|---|---|
| Actual Pass-Through Expenses | Total actual costs for only the expense categories specified as tenant pass-throughs in the lease |
| Tenant Pro-Rata Share | Tenant RSF / Applicable Building Denominator |
| Estimates Paid | Monthly pass-through estimate payments collected during the year |
Worked Example
A 15,000 SF office building. Tenant leases 5,000 SF on a modified gross lease: tenant pays utilities and property taxes as pass-throughs; landlord retains insurance, maintenance, and janitorial. Total actual utilities: $60,000. Total actual property taxes: $90,000. Tenant pro-rata share: 5,000/15,000 = 33.3%. Estimates collected from tenant: $45,000.
Actual pass-through charges: ($60,000 + $90,000) × 33.3% = $50,000.
Balance due from tenant: $50,000 − $45,000 = $5,000.
Landlord Risks Under This Lease Type
Lease language that is ambiguous about which expense categories are passed through, creating dispute risk
Failing to reconcile the pass-through categories annually, allowing underpayments to accumulate
Omitting gross-up provisions for the variable pass-through expenses, resulting in underrecovery during high-vacancy periods
Common Reconciliation Mistakes
- Treating a modified gross lease as a full gross lease and skipping reconciliation entirely for the pass-through categories
- Including expenses in the reconciliation that the lease specifies as landlord-borne (e.g., structural repairs, roof replacement)
- Not documenting the expense split clearly at lease commencement, making year-end reconciliation difficult to defend
Frequently Asked Questions
Does a modified gross lease require CAM reconciliation?
Yes, but only for the expense categories specified as tenant pass-throughs in the lease. The landlord must reconcile actual costs for those specific categories against estimates collected. Expenses retained by the landlord (typically structural repairs, some maintenance) are not reconciled. The reconciliation scope is defined by the lease's operating expense section.
How do I know which expenses to reconcile in a modified gross lease?
Read the lease's operating expense section carefully. It should specify a list of 'pass-through' or 'tenant expense' categories. Common pass-through categories in modified gross leases include utilities, property taxes, and insurance. Less commonly, janitorial, landscaping, or maintenance may be passed through. If the lease is ambiguous, document your interpretation in writing and have tenant acknowledge it before the first reconciliation.
Free Calculators for This Lease Type
Related Resources
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