Tips on Selecting an Investment Grade Tenant
When buying a single tenant leased investment, the financial ability and the quality of the tenant is very vital because in essence the person is purchasing the income source and the bundle of rights that is subject to the leasehold and the investor needs to evaluate the tenant as being investment grade. Doing an investment analysis grade of the tenant enables the person to make a logical assumption that the landlord will be able to get their monthly rent for 20 years and they can do this analysis by asking the market to rate the risk for them.
When assessing credit ratings, there are acronyms used to evaluate the various tenants and most sound investment grade tenants have a rating of BBB or better. The credit ratings depend on various factors such as the likelihood of payment which is the capacity and willingness of the obligator to meet the financial requirements on a duty according to the obligation terms, protection afforded by, nature of and the provisions of the obligation, the relative position of, reorganization, the obligation in the event of a bankruptcy and other laws that affect the creditor’s rights.
In most instances issue ratings are an assessment of default risk, but it may also involve an evaluation of the relative seniority or the ultimate recovery in case the person defaults and in most cases, junior obligations are rated lower than senior obligations to reflect the lower priority in bankruptcy. Such a level of differentiation may apply when the entity has both senior and subordinated obligations, and duties that are either secured or unsecured or the person operates a company or has holding company obligations.
It is worth noting that the rating ‘AAA’ has the highest ratings that can be assigned, and in this case, the obligator’s capacity to meet their financial commitment on the duty is very high whereas an AA rating differs from the maximum score by a minimum degree, but the capacity to meet the financial commitment of the obligation is quite strong. An A rating is more susceptible to the adverse effects of alterations in situations and economic conditions than obligations in the high rated categories, but the capacity of the obligator to meet the financial duty on the obligation is still unyielding, and an obligation rated BBB offers some adequate protection parameters and adverse economic conditions or changing situations are more likely to lead to a weak capacity of the obligator to meet their financial commitment on the obligation. Obligations that are rated BB, B, CCC, CC, and C are viewed as having particular speculative properties, and BB indicates the lowest degree of speculation and ‘C’ is the highest.
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