This is also true of office, retail, and industrial properties, which are leased strictly under terms of gross leases.
In mixed-use or multi-tenant properties, an entirely different problem can present itself: Sometimes they are leased up on a mix of net and gross leases.(4)
Seventy-five percent of this income is generated by net leases, and the balance by gross leases. Assume that the center is 80% occupied, or has a 20% vacancy.
Since there is a 20% vacancy, and 25% of the occupied space is leased without requiring the tenant to pay any participations - straight gross leases - the appraiser knows that 80,000 square feet in the center generates no recoveries.
But bear in mind that the example showed a 20% vacancy in the center, and that 20% of the tenants refused to pay any participations; they wrote gross leases. This situation hardly demonstrates a trend toward higher rents.
The modified load formula is merely an extension of this procedure to include consideration of gross leases in properties that are leased up on a mix of net and gross leases.
Gross leases can be escalated using many different methodologies.
For example, the actual occupancy costs for a $10.00 per square foot (PSF) Net lease is going to be much higher than for a $10.00 PSF Gross lease. Tenants must be aware of the differential to be able to make a sound financial comparison.