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. I recommend you to read the next lines if you wish to learn more about these subjects. 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 investment rating is represented by a company’s ability of repaying its obligations. BBB is actually representing only good credit rating in line with the agency’s rating. Most of the time, it is only the big and national companies that are able to maintain good credit rating.
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Both franchise and regional tenants are small for rating agencies to monitor. With this in mind, it is suggested 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 – most of the time, long term means fixed length obligation in lease term or beyond ten years. There are advisors or brokers that can also 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 – the types of leases to which tenants are in charge for operating expenses which include the structure, insurance and the roof are referred to as 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. Some are even calling it as Triple Net that don’t include expense on roof or structure of the building. These leases are known precisely as modified NNN or double net NN leases.