Is a NNN Ground Lease a Good Investment?

Is a NNN Ground Lease a good investment alternative? The short and straight answer is yes, and I’m going to give you 3 simple reasons why, and I’m also going to explain to you why some investors don’t like to buy grounde leases.

Hi, my name is Alex Casablanca, Managing Broker at Casablanca Triple Net Advisors. We are a boutique brokerage firm based in Orlando, Florida specializing in Selling NNN Investment Properties nationwide USA. We represent NNN Buyers and 1031 Exchange investors in finding and negotiating the best NNN property according to their investment goals and risk tolerance. 

First and foremost, what is a NNN Ground Lease? 

An NNN ground lease is an agreement between a landlord and a tenant, in which the tenant leases the land only, and with their own money their build a new building that meets their own particular needs. The Tenant “technically” owns the building only, and at the same time is responsible for all the expenses and costs associated to constructing and maintaining the building, and on top of that the Tenant is also responsible for the property taxes, insurance, and maintenance costs.  And now it comes the “sweet” part that most investors don’t take into consideration, if the tenant ever defaults on the lease or the term of the lease expires, then the landlord will take over ownership of the building on their land as well. So bear with me on this, you did not pay for the construction of the building that was built on your property, but you will end up taking ownership of that building at some point in the future, either when the lease expires or if the tenant defaults or leave early. Sounds like a good deal to me, right.

But, why most investors don’t like ground leases? For one simple reason, since they technically don’t own the building they cannot depreciate the building and use it as an additional tax incentive as a depreciation expense. It’s a fair argument, but it has two caveats. First, you can only depreciate the replacement costs of the building itself, not the land, so if you buy a Chipotle, the replacement cost of a 2,500 square foot building will not be that significant. Second, depreciating the building over the course of a long period of time like 10 or more years will result in a substantial reduction of the cost basis of the asset, that at the time that you decide to sell the property, unless you do a 1031 Exchange, the capital gain will be substantially higher. 

Now let me share with you my three top reasons to buy a NNN Ground Lease.

  1. Ground Leases are less risky investments, and why they are less risky. Because of two major reasons. First, the rent of a ground lease is lower, and it is lower because the building construction costs are not factorized in the annual rent. And why that fact make them less risky? Because the lower the rent the more comfortable those rent payments will be and will allow the tenant to operate with a favorable rent to income ratio. 

And I’m going to give you an example of that: the rent of a fee simple fast food restaurant could be in the $150,000 per year because of the fact that construction costs are factorized in that rent, and the annual rent for the same fast food restaurant in ground lease structure could be $90,000. And now the questions is: Which Tenant will be able to pay the rent more comfortably? 

The second reason why ground leases are less risky investment is pure common sense. The Tenant invested a substantial amount of out of pocket money to develop and build a building on your property. Therefore, the commitment with the property will be substantially higher than being in a place in which the Landlord build the building for them.

Remember this key concept, Ground Leases are less risky and they are less risky because the rent is lower, which allows the Tenant to operate more comfortably. And second the Tenant has more commitment with the property as they invested their own money in developing the building.

  1. The second reason to buy a NNN Ground lease is a simple one. Because they are cheaper, and why they are cheaper. They are cheaper because you are not paying for the building, as simple as that. They are also cheaper because of the fact that the annual rent of a ground lease is substantially lower, which makes the acquisition price lower. 
  2. The third reason why a NNN Ground Lease is a good investment is because you don’t have to pay for the building, making the acquisition price lower. But the important key concept here is that the building is going to be yours regardless either when the lease expires or if the Tenant defaults or leave early. As one of my clients used to tell me one time. I love ground leases because I don’t have to pay for the building now and it is going to be mine at some time in the future no matter what. 

In summary a NNN ground lease is a great low risk investment alternative either for a 1031 Exchange or a traditional NNN acquisition. However, if taking a depreciation expense is important to your particular situation, then a ground lease will not be for you. 

If you are interested in buying a NNN Ground Lease, at Casablanca Triple Net Advisors, we specialize in representing NNN Buyers and 1031 Exchange Investors Nationwide USA. We have the knowledge and expertise to guide you along the way, from market research, identifying potential properties, submitting offers and negotiating them, due diligence, up to the closing table. 

Moreover, we represent our Buyer’s for Free since we get paid from the Seller, and we also Pay for our Buyer’s Closing costs up to a maximum of $10k. This incentive will offset or cover completely some of the major Buyer’s closing costs expenses such as Title Fees, Attorney Fees, Recording Fees, among others. We are the Brokers that give you more in exchange for your trust. 

If you have any questions or need guidance with your upcoming NNN investment or 1031 exchange, call me at 407-205-7570 or email me at [email protected], and I will be in contact with you. 

Thank you so much for watching this video and if you found this helpful, please like this video and consider subscribing to the channel for more upcoming videos about NNN Properties. 

I’m Alex Casablanca, and I am looking forward to working with you in your next 1031 Exchange closing.