Net lease real estate is attractive for conservative investors who are looking for long-term profits and benefits from their investment in a property. In addition to net lease opportunities on existing structures, there is another avenue of revenue you can explore for your portfolio-ground leases.
As you’re considering investing in a ground lease for sale, it’s important that you understand the benefits and responsibilities you’ll have as the landowner. While a ground lease can be advantageous over a very long-term period for property owners, there are some key details to understand before adding a ground lease to your portfolio.
What is a Ground Lease?
A ground lease is an agreement between a landowner and a tenant, in which the tenant leases land for a new build. The lessee is the owner of the building only, and is responsible for all the expenses and costs associated to constructing and maintaining a business location on a leased piece of land. The landowner, however, is typically still responsible for the property taxes on the land itself each year.
NNN ground leases are usually very long-term (lasting anywhere between 50 and 99 years), but if the tenant ever defaults or the term of the lease expires, then the landowner will take over ownership of the building on their land as well.
Subordinated Vs. Unsubordinated Ground Leases
There are typically two different types of ground leases: subordinated and unsubordinated.
In a subordinated ground lease, a tenant can finance property improvement by taking on separate debt that is leveraged with the ground as collateral on improvement-based net lease financing. Since there is more risk involved for the property owner, they may charge higher rent payments in this type of lease to account for that added risk of financial responsibility should the tenant default on their loan.
In an unsubordinated ground lease, the land owner retains top priority on claims to the land in the event of default, which means that a lender will not be able to take over the land if a tenant defaults. Unsubordinated leases are less common, as lenders are more hesitant to offer funds without collateral.
Advantages of a Ground Lease
Ground leases can be advantageous for both the landowner and the lessee. Here’s a closer look at the benefits of a NNN ground lease, from the perspective of the property owner:
- Stable Income Stream
- Low-Risk Investment
- Low-Touch Management
Most NNN ground lease agreements also include a Reversionary Clause, so that if a tenant defaults on their lease or the term of their lease ends, ownership of the building then goes to the landowner as well (and usually at no significant cost to the landowner). This clause protects your investment and gives you the opportunity to continue profiting from the land lease agreement and the building in the future should the lease go into default or end.
Tenants also benefit in a NNN ground lease, because they can often find a desirable location for their business that wouldn’t otherwise be available to them without having to fund a property purchase themselves. Ground lease tenants may also have some tax benefits they can take advantage of, like deducting their land rental payments against their business income.
Drawbacks of a Ground Lease
While NNN ground leases can be very beneficial for investors, there is an important tax consideration to make when determining if this type of lease and investment is the right one for you.
As a landowner in a NNN ground lease, you’ll typically be responsible for the annual taxes on the land itself. Taxes on land alone do not depreciate over time, and since the land and building are under separate ownership in this type of commercial real estate lease, it means that the investor (and land owner) will not be able to receive tax benefits over time since land does not depreciate.
Sand Investment Group (SIG) has expertise in the commercial net lease industry, spanning all types of NNN properties, and we offer NNN ground leases for sale as part of our $700,000,000 in inventory. Our client-focused approach, extensive connections, ground lease valuation and marketing expertise are just a few of the reasons we’re the fastest growing net lease investment company in America, with 1,900 closed transactions worth $4.5 Billion since 2010.
Get in touch with a NNN ground lease expert today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.