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Understanding Leased Investments Investment grade, long term net leases means the primary aspect of a certain lease structure. Investment grade means the quality of tenant to which the lease is made. On the other hand, long term indicates the general length of lease as well as net leases which refers to structure of these lease obligations. If you wish to know more about these subjects, then I recommend you to read the next paragraphs. Number 1. Investment Grade – this lease is basically lease to tenants that are maintaining a credit rating of Better Business Bureau or even higher. The rating investment is being represented by the company’s ability to repay its obligations. BBB is representing good credit rating according to the agency’s ratings. 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 small for 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 is a significant difference between strength and the credit of regional franchise owner and the corporation itself. Corporate parent will generally provide better rent stability in midst of economic downturn while rent stability is equivalent to improved stability for the price and value of your real estate.
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Number 2. Long Term – as for long term, it is usually fixed length obligation in lease term or beyond ten years. There are instances to which the lease option is included by advisors or brokers as part of fixed lease term. It is vital to distinguish between obligations and options. Say that the tenant for example has an option to renew additional 5 years after the initial 5 year term, the term then should be considered as 5 year lease with additional 5 years in option and not a 10 year lease. As being a client, it is your job to learn about the rent terms and on how long the tenant is obligated to pay as it can make a big difference as soon as you start considering returns, risks, ability to acquire financing and also your ability to resell property for profits. Number 3. Net Leases – there are two types of leases wherein it’s the tenants who are responsible for operating expenses which include the structure, insurance and the roof and these are Double Net or NN and Triple Net or NNN leases. Pure NNN lease that covers such costs via the term of lease is typically referred as absolute NNN lease. Then again, there are those who call it as Triple Net that don’t include expense on roof or structure of the building. These leases are precisely known as modified NNN or double net NN leases.