The Difference Between Fee-Simple and Ground Lease Investments

Aug 27, 2020

Let’s talk about NNN fee-simple and NNN ground lease investments. As triple-net (NNN) buyers’ advisors, we get asked about the difference between the two often.

When you invest in a brick-and-mortar, single-tenant, fee-simple NNN property, you have total ownership. You are the landlord of the building and the ground it sits on, leasing both to the tenant. A NNN fee-simple property has the benefits of being a low- or no-maintenance property with recession-resistant tenants and the tax benefit of depreciation.

A NNN ground lease, on the other hand, separates ownership of the building from that of the underlying ground. If you own a ground lease property, you own a fee-simple interest in the ground only − not the building. As the landowner, you have zero responsibility, very low risk, favorable financial leverage, and appreciation, which means you cannot take depreciation because you don’t own the building (unless the tenant vacates).

Which is a better investment – NNN fee-simple or NNN ground lease? That depends on your financial and lifestyle goals.

Fee-simple NNN Lease Property Investments

As stated, a fee-simple, NNN lease investment gives you complete ownership of a commercial property. Most absolute NNN fee-simple properties are leased to high-credit, recession-resistant tenants such as Dollar General, Walgreens, KFC, and 7-Eleven, for 10-25 years. These corporations typically do their own maintenance and pay for everything, plus they offer lease guarantees and lease extension options, which bolster the asset and provide peace of mind.

As you define your financial and lifestyle objectives for your NNN investment strategy, you may find that you don’t want any landlord responsibility so that you can own in any state. You may also decide that you want to build a diversified portfolio of tenant types with slightly higher than average cap rates, and you need depreciation and the tax benefits of owning a fee-simple property. All of these considerations make a fee-simple NNN property an excellent choice for your investment portfolio.

A NNN lease, fee-simple property investment also makes an excellent replacement property in a 1031 exchange, whereby you can defer 100% capital gains tax on your sold property.

If during your initial assessment, you discover owning parcels of land with longer leases suits your goals better, or you want a mix of property types, then NNN ground lease investments are a great option.


NNN Ground Lease Investments

Where a fee-simple NNN investment gives you total ownership of the building and the land, a NNN ground lease investment gives you ownership of the plot of land under and around the building. As the property owner and landlord, you hold the title on the property, and just like with a fee-simple NNN lease property, the tenant is responsible for all expenses related to the development and improvement of the land, taxes, maintenance, insurance, and financing costs.

Creditworthy tenants like McDonald’s, Chick-fil-a, Firestone, and Chase Bank operate with corporate- guaranteed, NNN ground leases between 15 and 20 years. They typically offer regular rent increases throughout the base term with optional renewal periods, which helps protect you from inflation and makes the investment quite valuable.

At the end of the ground lease or if the tenant vacates early, ownership of the building typically reverts to you, the landowner, then you can re-tenant the property. This increases the likelihood of higher rent and more income from the next tenant, which can increase the value of the property tremendously.

Top 6 reasons to invest in a NNN ground lease:

  1. Long-term lease guarantee (15+ years) from a creditworthy national corporation.
  2. Reliable, low-risk investment that bolsters your portfolio and provides financial leverage.
  3. Accrue passive, stable monthly income without landlord responsibility.
  4. Periodic rent increases and option periods protect against inflation.
  5. Utilize a 1031 exchange to buy raw land and defer 100% of the capital gains tax.
  6. If you’ve maxed out on depreciation recapture, you can still benefit from NNN stable monthly income and long-term returns.

Though ground lease investments tend to trade at a lower cap rate, they are also typically purchased at a lower price compared to a fee-simple investment. In combination with ground leases being absolute NNN lease properties, this makes them ideal for investors seeking completely passive income at a lower price point.

light bulb 3d and hand drawn passive income as concept

NNN Benefits with Fee-simple & Ground Lease Investments

Properly chosen NNN fee-simple and ground lease investment properties are safe assets that preserve cash flow and yield a reliable, increasing return with little or no owner responsibility. And because a triple-net lease is a legal contract with pre-set rental increases, it will not suddenly disappear or lose value tomorrow. When you own a NNN property that has an investment-grade tenant, such as McDonald’s or Dollar General, you benefit from a worry-free, recession-resistant investment.

For added stability, you may choose to diversify by owning fee-simple and ground lease properties nationwide with different tenant types and asset classes, lease durations, and industries – think retail, medical, industrial, warehouse, restaurant, pharmacy, banking, and gas stations. Typically, these investments average 5.00% to 7.00% capitalization rates, depending on certain variables, and an internal rate of return (IRR) from 8%-20% over time.

Fee-simple & Ground Lease NNN Investment Benefits

  • Income and asset stability
  • Consistent monthly income with periodic increases
  • 10-20 years of passive, steady returns with extension options
  • No maintenance, operations, or management concerns or costs
  • Strong corporate-backed lease guarantees
  • Tax benefits (fee simple)
  • Appreciation (ground lease)
  • Deferral of 100% capital gains tax with 1031 exchange

To Wrap it Up – NNN Fee-simple & Ground Lease Are Strong Investments

Because NNN property investments are strong investments, they are highly desirable, often difficult to locate, and they sell fast. Westwood Net Lease Advisors are in touch daily with nationwide industry connections to find properties for clients, often before they hit the open market. Our advisors will help you 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, from pre-property search to closing, we are here to provide advice, advocacy, and resources – all at no cost to you. Contact us today for your no-obligation consultation and see where the NNN investment market can take you. 314-997-5227

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