Benefits and Negatives: Ground Lease vs. NNN Lease
Ground leases and NNN leases have different responsibilities for the tenant and investor. Both have great benefits, but there can be a few negatives to your investments as well. Let us take a closer look at these.
Ground Lease
A ground lease investment covers the land, so only the land is charged rent. Any improvements made to the building on the land will be the responsibility of the organization or individual renting it.
Benefits
One of the benefits of a ground lease is that the investor has some control over the property's developments, including having a say on how the property will be used.
With tenants leasing their property for several years, this brings in a significant appreciation to the investment. The long lease term and the absence of any investment in the land’s improvement are considered lower risk. In such cases where the tenant cannot pay rent, the investor can repossess the building.
Tax savings are also great benefits to ground lease investments. An investor selling the property to the tenant can gain through the transaction. With no capital expenditure obligation, the investor can trade with a lower cap rate, and they will not have to report any capital gain. This is mainly because a strong credit rating from the income of the land is valued higher than the income from the lease that has both land and building. Compared to other leases, this investment is less expensive in the long run.
Negatives
There are some negatives as well. Depreciation of any improvements done on the land is the responsibility of the tenant. Once the lease has expired, all renovations made on the property during the entire duration go back to the investor, including the problems. Alternatively, many large national companies place terms in the ground lease that they have the right to remove any improvements at the end of the lease, leaving an investor with just the land.
NNN Lease
Unlike the ground lease investments, NNN (triple-net) leases include the responsibility of paying the rent of the land and all of the other financial obligations such as real estate taxes and the building's insurance and maintenance costs.
Benefits
NNN provides many benefits for both tenants and investors. For the investor, as part of the agreement, the lessee is required to pay the expenses regarding the property that includes, including real estate taxes, building insurance, and maintenance. On the part of the tenant, they can lease the property for several years, even decades, on a fixed rent for their entire period or a fixed 3% increase.
Negatives
The NNN leases take away the investor's obligations to pay several expenses. Although, in the cases where the lessees are unable to pay, such as property insurance, the investor will need to cover all those payments or risk the probability of bigger problems. These burdens fall all on the investor.
If you’d like more detailed information on how ground leases and NNN leases work, or if they are the best investment vehicle for you, please contact: info@cbicommercial.com