Ground Lease

A ground lease is a long-term lease arrangement where a tenant leases land from the landowner and constructs or operates improvements (buildings) on that land. The tenant owns the improvements during the lease term but the land reverts to the landowner-along with all improvements-when the lease expires. Ground leases typically run 50-99 years.

Ground lease investments represent the safest tier of the NNN investment spectrum. Because the landowner's position is senior to the building and tenant, ground lease investors are protected even if the tenant's business fails-the land retains its value and the improvements revert to the landowner at lease expiration or default. This seniority creates a virtually bond-like income stream.

Major NNN ground lease tenants include national retailers (Walmart, Costco, Home Depot), fast food restaurants (McDonald's, Chick-fil-A), and convenience stores (Wawa, Buc-ee's) that construct buildings on leased land. The tenant pays ground rent, typically with annual escalations, and is responsible for all property taxes, insurance, and maintenance on the improvements.

Ground leases trade at lower cap rates than standard NNN leases because of their superior risk profile. A ground lease Starbucks might trade at 4.5-5.0% while the building NNN lease trades at 5.5-6.0%. The lower yield reflects the residual land value protection and the improvement reversion at lease expiration-potentially representing significant bonus value for the landowner.

Ground leases offer NNN investors the lowest risk profile in commercial real estate. The land position is senior to all improvements and tenant obligations. Even in a worst-case scenario where the tenant defaults, the landowner retains the land plus any improvements. Ground lease rents are typically modest relative to the total property value, creating strong coverage ratios. The tradeoff is lower yields-but for investors prioritizing capital preservation and predictable income over maximum returns, ground leases are the ideal NNN vehicle.

Ground leases typically run 50-99 years, with the most common terms being 55-75 years. These long terms allow the tenant to amortize the cost of constructing improvements over a sufficient period. Some ground leases include renewal options that can extend the total potential term beyond 99 years.