NNN Ground Lease Investment for Passive Income
Triple-net (NNN) properties leased to credit-worthy tenants are long-term, sound commercial investments with passive, reliable income, tax advantages, and no landlord expenses. When one thinks of NNN real estate, it’s usually in the context of owning the land and the building with a 10-to 20-year lease on the building. However, as a ground lease investor, you can enjoy the many benefits of a traditional NNN lease without building ownership.
Ground Lease 101 – Mutually Beneficial
A ground lease is a land-only rental from 20 to 99 years. As the property owner and landlord, you hold the title on the property, and just like with a traditional NNN lease, the tenant is responsible for all expenses related to the development and improvement of the property, taxes, repair and maintenance, insurance, and financing costs.
It may seem odd for a company to lease the ground and own the building, however, there are many beneficial reasons large corporations like McDonald’s and Chase Bank choose this route. Fortunately, for the property owner, or “landlord,” a ground lease investment is just as advantageous.
Why would high-value national corporations invest in buildings and land improvements yet lease the ground? They want access to prime locations that may not be for sale. If there is a grade-A piece of land already owned by an investor, a corporation may enter into a ground lease that gives it the right to build out the property in accordance with their brand. This provides total control of the property and frees-up capital for growth by reducing the front-end costs and eliminating land acquisition costs. Ground lease rent payments are also tax-deductible.
As for the landlord, you reap the NNN benefits of passive, reliable monthly income with no responsibilities. You hold fee ownership of the leased property for financial leverage and avoid the capital gains taxes you would otherwise pay from the sale. You may also use a 1031 exchange to buy the raw land with proceeds from the sale of other commercial real estates, like a high-maintenance property, and defer capital gains taxes on that sale, possibly indefinitely.
When it comes to the lease, there should be a lease clause that gives you possession of the building if it is canceled early. This provision helps ensure the terms of the lease are fulfilled and at the end if the tenant vacates, the building and improvements that make the property more valuable, become yours. In this case, you not only own land that may have appreciated, but you own a building that’s re-tenantable.
At any time during the lease term, or if the tenant decides to extend the lease, there may be an investment opportunity to buy the building and utilize a sale-leaseback option. Building ownership with a lease back to the corporation converts your investment to a traditional NNN investment, where you may benefit from immediate tax advantages, earn a higher monthly income, and receive a higher cap rate on the entire NNN lease property.
Top 5 Reasons to Invest in a NNN Ground Lease
- Long-term lease guarantee (20-99 years) from a credit-worthy national corporation.
- A reliable, nearly-risk-free investment that bolsters your portfolio and provides financial leverage.
- Accrue passive, stable monthly income without landlord responsibility year after year.
- Periodic rent increases and option periods throughout the base term protect against inflation.
- If it converts to a sale-leaseback, monthly rental income and cap rate increase, and there would be additional tax benefits.
Many investors have the option to own NNN properties as a sidelight to their full-time jobs and those near retirement can eliminate the headaches of active property management and enjoy a reliable, passive income approach.
Know What to Look for as a Buyer
Just like traditional NNN lease investments, raw land in a prime location can be difficult to find on your own. These plots tend to sell fast before they ever hit the open market, and developers often work with landowners who have no intention of selling but instead enter into a ground lease. So, what do you look for and how do you find just the right opportunity?
- Look for a prime location that’s a true ground lease opportunity instead of a leasehold interest.
- Watch for a subordinated versus a non-subordinated lease, of which you want the latter.
- Be sure to draft up the lease with an experienced attorney as there is no pre-drafted standard for each lease.
- Partner with a buyer’s advisor to find the best investment for your goals; one who represents you throughout the process from the search and negotiation to lease drafting and closing.
Partner with a Buyer’s Advisor
A reputable buyer’s advisor is extremely valuable to walk you through the numerous NNN ground lease investment details, protect your best interests, and make the investment work in your favor. It is a complex process that requires time and experience – Westwood Net Lease Advisors has that expertise and decades of history in the industry. And, the best part – a buyer’s advisor costs you nothing.
To Wrap it Up – NNN Ground Lease is a Strong Investment
Westwood Net Lease Advisors consider ground lease investments a solid, conservative NNN opportunity with plenty of financial benefits and options along the way. When we partner with you as your personal representative, our inside knowledge of the national market will help us locate the perfect property for your goals, then work closely with you and all parties concerned to free up your time, help avoid mistakes, and provide peace of mind that your investment is sound.
Throughout the entire process, we are here for you to provide advice, advocacy, and resources – all at no cost to you. Contact us today for your free consultation and see where the NNN investment market can take you. 314-997-5227