When most people think of a triple net lease, they think of a commercial property tenanted by creditworthy national tenants. However, Triple Net properties don’t always include the building.
Triple net ground leases are a little-known asset type where the land a building sits on is owned by the investor. This land is leased out to a tenant, and in return, the tenant then constructs a building on the land while paying monthly to the lease the land for an extended period of time (often 20 years plus option periods).
The bonus of this triple net asset type lies in the fact that at the end of the lease – or if the tenant defaults – the ownership of the building reverts to the investor.
Why Would A Tenant Choose A Triple Net Ground Lease?
Tenants may choose a triple net ground lease for several reasons. For example, there may be undeveloped land available in prime areas where the owner is unwilling to sell. At the same time, they may also be uninterested or unable to develop the land themselves.
By choosing a triple net ground lease, the tenant is able to gain access to a property in a prime location.
Another common reason is similar to the reason why some businesses choose to do a sale-leaseback. Instead of tying up money in land ownership, the tenant can divert the money saved to pay off debts or expand the business.
The final reason is that land ownership offers no tax benefits to businesses. It can’t be depreciated nor deducted for tax purposes. Lease payments, on the other hand, are deductible. Being able to deduct monthly rent can significantly add to their bottom line, making a triple net ground lease a good option for many tenants.
Triple Net Ground Leases Provide A Unique Opportunity For Investors
Most Triple net ground leases include a provision in the lease which allows the owner of the land to take possession of the building at the end of the lease or in case the lease is canceled early. Because of this provision, tenants have an extra interest in making sure the terms of the lease are fulfilled.
At the same time, the investment to the investor has no management responsibilities and no expenses while accruing a steady, reliable income year after year. As with most triple net leases, regular rent increases throughout the base term and option periods are standard and help protect the investor from inflation.
Remember, you’re still dealing with creditworthy tenants such as McDonald’s, Chick-fil-a, and national banks such as Bank of America or Chase Bank, which means parent companies guarantee the lease instead of a smaller franchisee.
Triple Net Ground Leases are often as long as 20 to 25 years. With the options to renew, leases are quite valuable and could be as long as 40 years.
At the end of the lease, the investor gets ownership of the building and can then re-tenant the property. Although the property will most likely need to be upgraded for a new tenant, the investor now owns the building in addition to the land which increases the likelihood of a higher rent than what they investor was previously receiving. This can increase the value of the property tremendously.
Things To Watch Out For
There are two types of triple net ground leases: subordinated and non-subordinated. In the latter type of lease, loans made to a lender are secured by the property, not the land. Thus, if the tenant defaults on the loan, only the property and its assets can be repossessed – not the land.
In the case of a subordinated lease, however, the lender can repossess the land since a subordinated lease gives the lender first right to collateral.
These are very rare, but it’s still important for investors to make sure they have a non-subordinated lease when buying a property or creating a lease with a tenant.
To Wrap It Up
For investors interested in relatively low-risk investments, a triple net ground lease offers a unique opportunity to take advantage of land located in prime areas without taking on the expense and risk of constructing a building.
Although prime spots are hard to find, keeping your ear to the ground and staying in touch with an experienced broker can help you find the right property for your investment goals.
