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. Long term on the other hand indicates the general length of lease and the net leases refers to structure of these lease obligations. Learn more about these subjects by reading the next lines. 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 then represented by the ability of the company to repay its obligation. BBB is representing good credit rating according to the agency’s ratings. Only bigger and national companies have the ability to maintain good credit rating most of the time.
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Both franchise and regional tenants are actually small for the rating agencies to monitor. For this, it is important 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 essential to know what is 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 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 – 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 are even calling 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.