Ground lease investment properties are a refined but conservative type of NNN property investment. Whilst a “fee simple” triple net NNN investment property refers to both – building and the land – on which it sits, a ground lease investment (which is also fee simple, legally) consists of just the land (or ground).
Both modes of investing, however, offer the following benefits to triple net lease investors:
· relatively passive property management,
· lowered investment risk and,
· predictable income stream,
subject to the conditions of strong tenants and, well-negotiated leases.
An investor in ground lease property, faces different risks, rewards, and circumstances, than one who has invested in a fee simple NNN lease property.
In a ground (or land lease), the tenant is charged rent only for use of the land, and allowed to improve the land with buildings, in order to operate a business. However, all such improvements revert to the owner at the end of the lease term, which tops out at 99 years, although this time frame is not a maximum under U.S. law. Thus, an investor has great potential for significant appreciation in investment due to the long lease term and low risk due to the absence of any investment in the improvements of the land. Under such a lease, the investor can also easily repossess the building and evict the tenant in case of tenant default, under common Reversion and Surrender clauses.
There are also tax savings to an investor offering a ground lease to tenants. If the investor sells a property to a tenant outright, they will realize a gain on the sale. In contrast, if executing a ground lease with a tenant, the investor avoids reporting any capital gains. But the steady stream of rental income, which features periodic escalations, will be subject to tax.
Depending on the provisions of the negotiated ground lease, a landlord may also be able to retain some control over the property including its use and how it is developed. This means the landlord has a degree of veto on land improvements.
Depreciation on the improvements made to the land under a ground lease is captured by the tenant, which is a significant disadvantage to an investor in ground leases. Also, taxes on the land itself, are a liability borne by the investor or landlord in a ground lease.
As an investor in fee simple NNN lease property, both land and improvements are leased to tenants in exchange for predetermined rent for short or long lease terms – although shorter than 30 years. So, development expense is borne by the investor but this also forms the basis for a tax shelter because of eventual depreciation recovery. In fee simple NNN lease property, the entire risk and the expense stream of taxes, repairs and insurance of operating the property, is shifted to the tenant.
It is important to note that a ground lease investment will usually trade at a lower cap rate than fee simple triple net NNN property. Reasons being:
a. ground leased property features tenants with strong credit ratings, which in and of itself carries a lower cap rate, and
b. income from land is usually valued at a higher multiple than income earned from a mixture of land and building.
While a NNN fee simple leasehold interest can be a good choice, it’s very different from a true ground lease investment and is less expensive for a reason.
If you are in the throes of an NNN ground lease property investment decision, call the best: the brokers at Triple Net Investment Group will offer you nuanced expertise, with excellent and timely advice to efficiently bring your ground lease or fee simple NNN property transaction to a close.
