Ground lease investment properties are some of the most unique types of NNN opportunities. While a regular "fee simple" triple net investment consists of both a building and the land on which it sits, a ground lease investment (which is also, technically fee simple) consists of just the ground. Instead of getting rent for the building, you get rent for the use of your ground.
Here are some tips for how to buy and profit from a ground lease investment:
- Look for good tenants. Frequently, a ground lease investment will have a very strong tenant. McDonalds locations are frequently available as ground leases and many bank branches can also be purchased as ground leases.
- Plan on appreciation. One of the drawbacks to buying a ground lease investment property is that you usually won't be able to depreciate it. The IRS doesn't let you depreciate land since it doesn't lose value over time through deterioration like a building would. The upshot of this is that you're not buying the part of real estate that loses value -- you're getting the good part. While the building on your land might be obsolete in 20 years, the land itself shouldn't be.
- Pay a little bit more. A ground lease investment will usually a carry a lower cap rate than other triple net properties. First, you're usually buying a property with a good tenant, which in and of itself carries a lower cap rate. Second, income from land is usually valued at a higher multiple than income that comes from a mixture of land and building.
- Leverage capital that's been 1031 exchanged a few times. When you've done a few 1031 exchanges, you end up with so much old basis that it gets part to effectively depreciate a new investment. Since you generally can't depreciate a ground lease investment anyways, using your oldest capital to buy it helps to free up money with more basis attached to it for acquiring depreciable assets.
- If it looks too good to be true, it is. Sometimes, you'll see a ground lease asset that seems like a screaming deal -- instead of being a 6.5 cap in an 8 cap marketing, it'll be a 10 cap. If you find one of these, proceed with caution. Sometimes, a broker will list a leasehold interest as a ground lease. When you buy a leasehold interest, you aren't buying dirt, though. You're buying the building and its right to use the land -- which eventually expires. While a leasehold interest can be a good choice, it's very different from a true ground lease investment and is less expensive for a reason.