Ground Lease
vs
NNN
In a ground lease, you own the dirt and the tenant builds, owns, operates, and pays for the improvements (which revert to you at lease end); in a standard NNN, you own both the land and the building, and the tenant pays rent plus reimburses operating expenses on a typically 10-25 year lease.
TL;DR
Ground leases are the safest, longest-duration form of CRE — you own dirt, the tenant builds the building, and you collect rent for 50-99 years. They trade at tighter cap rates (3.75-5.5%) than NNN (5.0-7.0%) for a reason. NNN gives you more yield and a building you can refinance against.
What is Ground Lease?
A ground lease is a long-term land lease — typically 50-99 years — under which the tenant builds, owns, operates, and finances the improvements at their own cost. Tenant pays ground rent plus all property expenses, including taxes, insurance, capex on the building they built, and any environmental obligations. At lease termination, all improvements revert to the landowner. McDonald's, Starbucks, Chick-fil-A, and bank branches frequently sit on ground leases.
What is NNN?
A standard NNN lease is a 10-25 year single-tenant lease where the landlord owns both the land and the building. Tenant pays base rent and reimburses property taxes, insurance, and CAM (and in absolute-net deals, roof, structure, and capex too). Landlord retains the depreciable building basis and bears reversionary risk on the improvements at lease end.
Side by side
Ground Lease vs NNN — the differences.
| Dimension | Ground Lease | NNN |
|---|---|---|
| What you own | Dirt only — tenant owns the building during the lease | Dirt and building — full fee-simple |
| Lease term | 50-99 years (commonly 50, 75, or 99) | 10-25 years with options |
| Tenant builds the improvements | Yes — tenant funds 100% of construction | Landlord typically owns the building from day one |
| Capex on the building | Tenant — they built it, they maintain it | Landlord in classic NNN; tenant in absolute net |
| Reversion at lease end | Improvements revert to landowner — huge value upside or basis problem | Landlord already owns the building; lease renewal or re-tenant |
| Cap rate range | 3.75-5.5% (credit-tenant ground leases trade tightest) | 5.0-7.0% (credit retail to regional) |
| Depreciation benefit to landlord | None — land doesn't depreciate | Yes — building basis depreciates over 39 years (or via cost seg) |
| Landlord financing | Complex — lenders often want SNDA from ground lessee + leasehold lender | Standard CRE financing at 50-65% LTV non-recourse on credit deals |
| Tenant financing | Leasehold mortgage on the improvements; requires landlord cooperation (SNDA) | Tenant doesn't finance — landlord does |
| Risk profile | Bond-like — credit tenant on 50-99 year lease, dirt under them | Bond-like at the lease level, but building obsolescence is landlord's problem |
| 1031 reversion question | Reverted improvements have $0 basis — significant taxable gain on eventual sale | Standard depreciable basis through ownership |
| Best for | Ultra-long-duration income, generational holds, estate planning | Income with growth, refinanceable equity, eventual repositioning |
When to use Ground Lease
- You want the absolute safest, longest-duration cash flow CRE offers
- You're building a generational hold and don't need depreciation today
- Your estate plan benefits from a step-up at death erasing the reversion gain problem
- You're comfortable accepting 100-200 bps tighter cap rate for safety
- You want zero exposure to building obsolescence, capex, or repositioning risk
When to use NNN
- You want depreciation benefits including potential cost segregation
- You want the option to refinance equity out of the building over time
- You want higher going-in yield (5.0-7.0% vs 3.75-5.5%)
- You can underwrite eventual building obsolescence and re-tenant risk
- You want a more liquid exit — NNN buyer pool is deeper than ground lease buyers
Verdict
Ground leases are the closest CRE gets to a Treasury bond — and they're priced like one. If you want maximum safety, generational duration, and zero operational exposure, ground leases earn the cap rate compression. For most active investors, NNN delivers better risk-adjusted returns: more yield, depreciation, refinanceable equity, and a deeper exit pool. The reversion question on ground leases is real and underwritten poorly by most buyers.
Frequently asked questions
What's the deal with reversion at the end of a ground lease?
When the lease ends (year 50, 75, or 99), the building reverts to the landowner with $0 basis. If you sell shortly after reversion, the improvements value flows through as taxable gain. Most ground lease holds end well before reversion — but if you hold to expiration, plan for the basis problem (or hold to step-up at death).
Why do ground leases trade at tighter cap rates than NNN?
Three reasons: longer lease term reduces re-leasing risk, dirt is more durable than buildings (no obsolescence), and the eventual reversion creates upside even if you discount it. Credit-tenant ground leases also attract a deep institutional buyer pool of pension funds and sovereigns chasing duration.
Can I get a mortgage on ground-leased land?
Yes, but it's harder. Lenders typically require an SNDA from the ground lessee and the leasehold mortgagee, plus longer remaining lease term than the loan amortization (lenders often want lease term ≥ loan term + 10-15 years). Plan financing earlier in the deal than a standard NNN.
Are ground leases always absolute net?
Almost always. The tenant built the building and operates the entire site; the landowner has no operational role. Most ground leases push every expense — taxes, insurance, all building capex, environmental obligations — to the tenant. Read the lease to confirm; some older or hybrid ground leases retain landlord obligations.
Can I 1031 out of a ground lease?
Yes — fee interest in ground-leased land is real property and qualifies for 1031. The leasehold interest is also like-kind real property if the remaining lease term is 30+ years. Both directions of trade are workable.