Understanding Leased Investments
The primary aspect of certain lease structure is investment grade, long term net leases. In relation to long term however, this means the length of lease in general while the net leases means the structure of these lease obligations.
I recommend you to read the next lines if you wish to learn more about these subjects.
Number 1. Investment Grade – as a matter of fact, this lease basically refers to tenants that maintain good credit of Better Business Bureau or even higher. The investment rating is represented by a company’s ability of repaying its obligations. In line with the agency’s rating, it is how BBB is representing good credit. Most of the time, only bigger, national companies are able to maintain good credit rating.
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Both franchise and regional tenants are actually small for the rating agencies to monitor. For this, it is ideal that the lease is corporate backed by parent company and isn’t just regional franchisee. There’s a huge difference between the strength and credit of regional franchise owner and the actual corporation itself. It is the corporate parent that generally provide a better rent stability even in economic downturn while the rent stability is similar to having improved stability for the price and value of your real estate.
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Number 2. Long Term – long term most of the time means having fixed length obligation in lease term or beyond ten years. There are some advisors or brokers that might include lease option as part of fixed lease term. It is vital to distinguish between obligations and options. If the tenant for instance has option to renew for additional 5 years after the initial 5 year term, then the lease term has to be considered 5 year lease with additional 5 years in option and not a 10 year lease.
As a client, you must find out the rent terms and on how long the tenant is obligated to pay because it makes a significant difference when you start considering your returns, risks, ability to acquire financing and also your ability to resell property for profits.
Number 3. Net Leases – Double Net or NN and Triple Net or NNN leases are the types of leases in which tenants are in charge for the operating expenses which include the structure, insurance and the roof. In pure NNN lease, it is covering such cost through term of lease is called also as absolute NNN lease. Some even call it as Triple Net that don’t include expense on roof or structure of the building. As a matter of fact, these leases are also known as modified NNN or double net NN leases.