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For some properties, it is important to consider the initial annual return.
But for other properties, it is more appropriate to consider the *stabilized
return* – ones that are either not well leased, have leases that are about
to expire or are candidates for conversion to other uses. The stabilized
yield is determined by calculating a projected yield after the building's
performance has been maximized.
Properties can have various types of *leases.* A traditional office lease is
considered a *gross lease* – meaning the property owner is responsible for
virtually all costs related to the leased space, ranging from taxes and
insurance to water and power costs. By contrast, some office tenants, and
most industrial and retail tenants, pay a *net lease.* In such a scenario,
the tenant is responsible for the costs related to the space. Depending on
how many of the costs are assumed by the tenant, a lease may be considered
single-net, double-net or triple-net. The charges and payments of building
expenses are also known as *Common Area Maintenance (CAM)* expenses. In a
typical net-lease, the tenant shall reimburse the landlord for all expenses
related to the maintenance of the property such as cleaning, gardening,
snow-removal, lobby, lights and the like. In a double-net lease, the tenant
also required to cover insurances, accounting, and certain legal expenses
incurred by the landlord. In a triple-net lease, the tenant is also
responsible for property taxes and certain improvements of the leased
property.
The difference in rates of the various types of leases can be great. An
office space could conceivably be advertised as having an annual rent of $50
per square foot as a gross lease, and $35 per square foot (annually) if the
lease is triple-net.
Some property owners prefer to deal only with *credit tenants* (see example),
which have investment-grade credit ratings, as rated by a third-party agency
such as Moody's, Standard & Poor's and Fitch. Any rating above BBB-minus is
considered investment grade. Properties with investment-grade tenants are
often considered more valuable by investors.
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