As an investor interested in commercial property for lease, you probably already understand some of the types of commercial lease opportunities available to you on existing buildings, such as triple net (NNN) leases and absolute NNN leases. However, there is another route you can consider when scoping out absolute NNN properties for sale, which can be more advantageous for conservative, long-term return investments: an absolute NNN ground lease.
This post will explain everything you need to know about absolute NNN ground leases, including what they are, the advantages of being a commercial land owner, and important considerations to make when exploring an absolute NNN ground lease property.
What Is an Absolute NNN Ground Lease?
An absolute NNN 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.
Absolute 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.
Absolute NNN Ground Leases Vs. Absolute NNN Leases
The difference between an absolute NNN ground lease and an absolute NNN lease comes down to one word…ground.
An absolute NNN lease on a commercial building generally only covers the building itself, and the tenant is responsible for all the expenses on that location, from taxes and insurance to maintenance and repairs.
In an absolute NNN ground lease, only the land itself is being leased to the tenant for a monthly rental rate. The tenant pays the landowner for use of the land they plan to build a business location on, and takes on the expenses and responsibilities of a building owner.
Absolute NNN Ground Lease Benefits
Absolute NNN ground leases can be advantageous for both the landowner and the lessee. Here’s a closer look at the benefits of an absolute NNN ground lease, from the perspective of the landowner and the tenant.
Property Owner/Investor Benefits of an Absolute NNN Ground Lease
- Stable Income Stream: Absolute NNN ground leases are a good way to earn steady, reliable income by leasing a piece of land you own for a long period of time.
- Low-Risk Investment: Absolute NNN ground leases are a low-risk investment because your tenant takes on all the financial responsibilities of building and maintaining a building on your land, in exchange for a payment you can count on every month.
- Reversionary Clause: Most absolute NNN ground lease agreements 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 and the building in the future should the lease go into default or end.
- Low-Touch Management: Absolute NNN ground leases are very low-touch from the investor standpoint. The lessee is responsible for all building, insurance, and maintenance fees and responsibilities for the structure itself, which means the investor involvement is minimal.
Tenant Benefits of an Absolute NNN Ground Lease
- Desirable Location: With an absolute NNN ground lease, a lessee has the opportunity to claim a location for their business in a desirable location that may not be available to them otherwise. By choosing to lease a parcel of land to build on, they’ll have more options available to them in places their businesses are most likely to succeed.
- No Land Purchase Costs: Lessees who choose to go with an absolute NNN ground lease do not have to come up with a large amount of capital to purchase land needed to build their new business structure. With this cash freed up, they are able to invest more into constructing the building to get up and going sooner.
- Tax Advantages: Absolute NNN Ground Lease tenants can also enjoy some tax advantages, including deducting their land rental payments against their business income.
What Investors Should Know Going Into an Absolute NNN Ground Lease
While absolute NNN ground leases can be very advantageous 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 an absolute 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 lease, it means that the investor (and land owner) will not be able to receive tax benefits over time since land does not depreciate.
Who Are Absolute NNN Ground Leases Best For?
Absolute NNN ground leases are best for investors who want a low-risk investment that offers a steady income stream over a long period of time, with little to no management. Absolute NNN ground leases are considered one of the more conservative commercial property investment opportunities, which makes them appealing to investors who want consistent income from a low-touch investment.
Sands Investment Group (SIG) has expertise in the commercial net lease industry, spanning all types of NNN properties for sale, including absolute NNN ground lease investments. Our client-focused approach, extensive industry relationships, and marketing expertise are just a few of the reasons we’re the fastest growing net lease investment company in America.
Get in touch with an absolute NNN ground lease expert today by contacting Sands Investment Group at 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.