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Basics you must know about a Modified Gross Lease

A Modified Gross Lease is a type of lease agreement that is commonly used in commercial real estate for office space. It is a hybrid between a Full Service lease and a Triple Net lease, which allows for some flexibility in terms of which party is responsible for certain expenses associated with the property. In a Modified Gross Lease, the Landlord and Tenant share some of the costs associated with the property, while others are the sole responsibility of one party or the other. 

The Tenant’s rents include paying the base rent and the budget expenses including taxes, maintenance, and other operating expenses. The Tenant is responsible for their own electricity and their janitorial cleaning services. Tenants may receive an invoice for their proportionate share (based on their square footage) based on the Landlord’s reconciliation of their annual budget which surpassed the Tenant’s Base Year or expense stop. The Tenant is responsible to pay any increase in those expenses above the Expense Stop amount. These overages should be nominal since these expenses are budgeted by the Landlord. 

The specific terms of a Modified Gross Lease can vary, but generally speaking, the Landlord will be responsible for paying certain expenses related to the property, such as property taxes, insurance, and maintenance. Meanwhile, the Tenant will be responsible for paying for certain utilities, such as electricity and water, as well as any expenses related to their specific use of the property, such as cleaning, HVAC repairs, plumbing within their Suite etc.

Advantages of Modified Gross Lease for Tenants

Flexibility in terms of which party is responsible for certain expenses can be a great advantage for Tenants who may not have the financial resources to pay for all of the expenses associated with a property on their own. By sharing some of these costs with the Landlord, Tenants can reduce their overall expenses and potentially afford a property that would otherwise be out of reach.

Minimize disputes between Landlords and Tenants by clearly defining which expenses are the responsibility of each party, there is less room for misunderstandings or disagreements. This can help to create a more positive and productive relationship between the Landlord and Tenant, which can be beneficial for both parties in the long run.

Disadvantages of Modified Gross Lease for Tenants

There are also some potential drawbacks to a modified gross lease. Monthly office expenses can fluctuate because the Tenant is paying utilities directly. An issue arises when you have fluctuating utilities so you must make sure they have a buffer in their budget when budgeting expenses because the cost can vary each month.

 

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The basics you must know about a Triple Net Lease

Triple Net Lease, also known as NNN lease, is a commercial real estate lease in which the Tenant is responsible for paying for all or some of the property’s Operating Expenses or sometimes called, Common Area Maintenance. These expenses can include property taxes, insurance, maintenance for common areas costs. In a Triple Net lease, the Tenant not only pays rent but also assumes financial responsibility for the upkeep and maintenance of the property. This type of lease is common in commercial real estate, particularly in retail and warehouse spaces and less likely to come across in office space. 

Benefits of Triple Net Leases For Landlords

Landlords can easily project their income stream, as the Tenant is responsible for the expenses associated with the property. There can be years when Real Estate Taxes and Insurance increase, those increased amounts can be passed directly to the Tenants.  Landlords can use this predictable income stream to secure financing for additional real estate investments or to reinvest in the property itself. Tenants being responsible for maintaining the property, Landlords can minimize their involvement in the day-to-day management of the property.

Disadvantages of Triple Net Leases For Landlords

If the Tenant fails to pay for expenses such as property taxes or insurance, the Landlord may have to cover those costs, leading to financial losses. Furthermore, if the Tenant is responsible for maintenance, the Landlord may not be aware of issues that arise, leading to potential property damage that could reduce the property’s value.

Benefits of Triple Net Leases For Tenants

Triple Net leases can provide more control over the property and potentially lower costs since they are responsible for maintenance and repairs by choosing which vendors to use or update themselves. Additionally, since Tenants have more control over the property’s upkeep, they can customize the space to fit their specific needs. This can be particularly advantageous for businesses with unique requirements, such as medical offices or laboratories.

Disadvantages of Triple Net Leases For Tenants

Tenants should also be aware of the potential downsides of Triple Net leases. If the property requires significant maintenance or repairs, the Tenant may be responsible for substantial expenses. Property Taxes and Insurance can fluctuate and subsequently may face higher costs if Property values or Insurance rates increase.

Triple Net leases can benefit Landlords and Tenants. Landlords can secure a stable income stream and minimize their involvement in property management, while Tenants can have more control over the property and potentially lower costs. It is essential for both parties to understand the potential downsides of triple net leases, such as financial risks and increased expenses. As with any real estate transaction, it is crucial to carefully review and negotiate the lease terms to ensure a mutually beneficial arrangement.

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The Rise of Florida Commercial Real Estate Market Trends

Florida's commercial real estate markets poised for continued growth - South Florida Business Journal

 

The Rise of Florida Commercial Real Estate Market Trends

The Commercial Real Estate market in Florida has experienced significant growth and change over the past few years. Due to the state’s favorable business climate, growing population, and low taxes have made it an attractive destination for companies looking to expand or relocate. We will discuss five of the current trends in Florida’s Commercial Real Estate market.

Growth of the Industrial Warehouse Sector

With The rise of e-commerce and online shopping and specifically service-based industries in Florida,  the demand for warehouse and distribution facilities has increased significantly. As a result, developers are building larger and more sophisticated industrial buildings to meet this demand. According to CBRE Florida ranks third in the nation for the total square footage of new industrial construction.

Flight To Quality and Flexible Office Arrangements 

The growth of remote work and the gig economy, many companies are seeking flexible workspace solutions that can accommodate their changing needs. Co-working spaces, which offer shared office space and amenities, have become increasingly popular in Florida’s urban areas. We are calling a “flight to quality” for companies who are choosing to lease office space in locations with buildings that provide amenities for Tenants and located where their ideal employers live, work and play. In Tampa, we are seeing this example in Westshore and Downtown Tampa. 

The Hospitality Sector Has Bounced Back and There Is No Looking Back

Florida’s tourism industry continues to thrive, with record numbers of visitors each year. According to Visit Florida, the state’s official tourism marketing corporation, Florida welcomed a record-breaking 135.5 million visitors in 2022. As a result, developers are building new hotels and resorts to meet the demand. Additionally, there is a growing trend of mixed-use developments that combine hotel, residential, and retail space. In Tampa Bay we have experienced an influx of new restaurants in Downtown Tampa’s Water Street community and Midtown, both mixed use developments which opened their doors to Tenants and patrons in the past two years. 

Retail Isn’t Dead, It Might Look a Little Different Though

Florida’s retail sector has been impacted by the growth of e-commerce, with many brick-and-mortar retailers struggling to compete. Fair to say we will be seeing changes in malls and the reuse of some of the big box Tenants being reimagined to smaller footprints and more experienced focused purposes. 

Florida’s favorable business climate and growing population have created opportunities for retail developers who can provide unique shopping experiences. According to Macro Trends Tampa Bays Population was 2,945,000 in 2022 and currently 2,977,000 in 2023. For example, outdoor shopping centers that offer dining, entertainment, and community events have become popular in Florida’s urban areas. Midtown which is centrally located between Westshore, South Tampa and Downtown Tampa is a prime example of new national retailers and restaurants who have expanded into Tampa Bay. 

Race for Multifamily Developers

Florida’s population is projected to continue to grow, with many young professionals and retirees moving to Florida. As a result, developers are building new apartment buildings and condominiums to meet the demand. Tenant’s are demanding convenience and desiring more than an apartment but built in a community with a small grocery and other day to day needs. No longer are the days where developers are delivering apartment complexes without a retail component for their Tenants.

Florida’s commercial real estate market is evolving to meet the increased demand by population growth plus the lack of existing housing. Florida’s  favorable business climate and low taxes are playing a key role in driving the economy forward. Developers are building larger and more sophisticated industrial buildings, co-working spaces and flexible office arrangements are becoming increasingly popular, and the hospitality, retail, and multifamily sectors are all experiencing growth. As the state’s economy continues to thrive, it is likely that these trends will continue, creating opportunities for real estate investors and developers in Florida.



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4th Quarter 2022 Tampa Bay Office Market Report and Q1 Forecast

Important Highlights:

Tampa Bay:

  • Hillsborough and Pinellas Counties’ unemployment rate of 2.6% is drastically lower than the nation’s rate of 3.7%. 
  • Year over year, average asking rates remained the same, falling by little than 1 cent per square foot. 
  • The Tampa Bay area continued to win awards for its workforce, with Lightcast ranking Florida as the top state and Hillsborough as the eighth-best county for talent attraction in 2022. 

Office Market:

  • Vacancy increased to just over 20% primarily due to the increase in large sublease space that came back to the market totaling Approx. 900,000 SF
  • Leasing activity was robust, over 3 million SF leased but did not hit record-breaking numbers in 2021. Over 80% of the activity was accounted for in Hillsborough County and a substantial decrease in Pinellas County. Westshore experienced the most leasing activity.
  • Direct Face Rents were up over 1% compared to Q4 2021. 
  • Direct absorption trended favorably, finishing the year with more than 105,000 square feet. In addition, the main submarkets’ combined direct absorption of 535,000 square feet per year, comprising Westshore and CBD markets, highlights those submarkets’ demand under the current economic uncertainty.

                                                   

Let’s Talk Rent Numbers:

Submarket Overall Average Asking Rent-All Classes Overall Asking Rent Class A
Westshore $34.01 Sq. Ft.  $38.81 Sq. Ft.
Downtown Tampa $29.19 Sq. Ft. $31.95 Sq. Ft.
Northwest Tampa $26.17 Sq. Ft. $28.19 Sq. Ft.
South Tampa $23.82 Sq. Ft. N/A
I-75 Corridor $26.08 Sq. Ft. $27.22 Sq. Ft.
Downtown St. Petersburg $28.29 Sq. Ft. $34.61 Sq. Ft.

 

Building Highlights: 

  • Despite the current economic instability, such submarkets continue to be in great demand. As they search for space in mixed-use buildings, Tenants like Aviation Authority, White & Case, and Primo Water moved into 174,000 s.f. of new construction in Westshore and Tampa CBD this year. Companies believe these mixed-use developments may entice workers back to the workplace.
  • A focus on a flight to quality buildings providing Tenant focused amenities and strategically located where employees currently live, near their grocery store, gym, and where they spend free time.

2023 1st Quarter Forecast:

  • The regularity for businesses to invite workers back into the office will continue to rise. In order to sustain teamwork, camaraderie, and creative collisions, those that have flexible schedules may find it advantageous to base their scheduling on personnel who operate in the same teams or departments. 
  • If a business delays office space matters [renewing a lease vs. relocating] until the last minute, Tenants will find themselves at a disadvantage, with few alternatives, and minimal, if any leverage with negotiating based on the construction timelines and competing for availability in popular submarkets such as Westshore and Downtown Tampa. 
  • Tampa Bay will continue to see out-of-state businesses migrate and expand to Tampa Bay. 
  • Demand for under 5,000 SF office space could continue to remain high

What does this mean for Tenants?

  • Evaluate what is the best long solution for your company. What is best for the long-term well-being of the company. In a world where some work is moving more remote, how could mentoring, professional growth, and possibilities for younger employees look? Is it a hybrid, remote, or in-office job? 
  • Vacancy rates continue to be lower in comparison to those in other major US cities and are not feeling the same “pain” despite the fact that Landlords are more prepared to offer rent abatement and increased Tenant Improvement allowance due to high construction costs.

What does this mean for Landlords?

  • In order to provide at least basic building standards and Tenant specific finishing, Landlord’s must consider increasing Tenant Improvements allowances for construction expenses to compete for the right Tenants.

  • Profit margins will be impacted by inflation, but increased rents and 3-4% annual increases can aid in the impact of inflation.

  • Capturing Tenants will be easier when Landlord’s provide turn-key spec office spaces that are move-in ready for companies with pressing deadlines.

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Why the Hybrid Work Model is Important 

When the whole globe went into lockdown in 2020, many of us were forced to test out alternative employment arrangements. The majority of businesses took advantage of this as a chance to review their workplace cultures. The traditional full-time office model may soon be replaced by the hybrid model, which will fundamentally alter how businesses operate and interact with their clients, workers, and suppliers. This being said there are many benefits of the hybrid work model. According to Forbes, 83% of 9,326 workers surveyed say they prefer a hybrid model, in which they can work remotely at least 25% of the time.

 

  • A Rise in Productivity 

With more freedom to play to their strengths, people can work more productively under a hybrid approach. Teams may achieve a solid mix of creativity and cooperation by promoting a culture that sees remote work as a beneficial option for finishing deep-focus projects in the office. Giving employees the option to work where and when they are most productive might benefit those who require quiet, alone environments to concentrate. According to PWC, new Research shows that as many companies have boosted workforce productivity and performance during the pandemic

 

  • More Possibilities For Lifelong Learning 

The ability for employees to engage in continual learning outside of the busyness of their typical work environment is another significant and perhaps underappreciated feature of a mixed work arrangement. This implies that if they are working from their office for a portion of the workweek, they may work from home for the remaining time on personal development goals to improve their job performance and career prospects. Especially for those with long commutes, removing the community to and from the office can free up time for personal development and hobbies which would positively impact work performance. 

 

  • Improved Relationships & Collaboration 

Unlike remote work, hybrid work allows for face-to-face contact and cooperation, which promotes healthy team-building and, as a result, improves employee collaboration. Employees will be able to interact and build deeper working connections as a result of being given the opportunity to speak and socialize in person. This will also enhance departmental, team, and workgroup collaboration. This mainly can be true in our present environment, where many employees communicate and collaborate with their coworkers via screens rather than in person. Every face-to-face communication, which might only take place during scheduled meetings when working remotely, might create a chance for mentoring, knowledge sharing, or making crucial business connections.