What is a 1031 exchange in real estate?

A 1031 exchange (named after IRS Section 1031) allows real estate investors to defer capital gains taxes by reinvesting the proceeds from a sold investment property into a 'like-kind' replacement property. Key rules: (1) The replacement property must be identified within 45 days of closing the relinquished property; (2) The exchange must close within 180 days; (3) To defer all capital gains, the replacement property must be equal or greater in value and you must reinvest all net equity; (4) A qualified intermediary (QI) must hold the proceeds — you cannot touch the money. 1031 exchanges work for any investment real estate: residential rentals, commercial buildings, vacant land, NNN leases. Primary residence and fix-and-flips do not qualify. The tax deferral compounds over time — investors use serial 1031 exchanges to build wealth over decades, ultimately stepping up the cost basis at death, eliminating the deferred gain for heirs.

What is a triple net (NNN) lease?

A triple net (NNN) lease is a commercial real estate lease structure where the tenant pays the three 'nets' in addition to base rent: (1) Property taxes — the tenant pays the real estate taxes on the property; (2) Building insurance — the tenant maintains and pays for property insurance; (3) Maintenance/CAM — the tenant is responsible for maintenance, repairs, and common area maintenance. NNN leases are common in retail (fast food, dollar stores, pharmacies, auto parts) and industrial properties. From an investor's perspective, NNN leases are attractive because they provide passive, predictable income with minimal landlord responsibilities — making them ideal for 1031 exchange buyers seeking management-free ownership. Cap rates for investment-grade NNN properties (McDonald's, Dollar General, CVS, AutoZone) typically range from 4.5-6.5%. Lease terms are usually 10-25 years with rent escalations of 5-10% every 5 years or 1-2% annually.

What is a cap rate in commercial real estate?

Cap rate (capitalization rate) is the primary metric for valuing income-producing commercial real estate. Formula: Cap Rate = Net Operating Income (NOI) ÷ Property Value. Example: A property with $100,000 NOI selling for $1,500,000 has a 6.67% cap rate. NOI = Gross rental income minus operating expenses (taxes, insurance, maintenance, management) — before debt service. Cap rates reflect risk: lower cap rates = lower risk, higher prices (Class A multifamily in major markets: 4-5%); higher cap rates = higher risk, lower prices (secondary markets, older buildings: 7-9%). Cap rates move inversely with interest rates — when interest rates rise, cap rates tend to rise (prices fall). For 1031 exchange buyers: the spread between cap rate and borrowing rate (debt yield spread) determines cash-on-cash returns; a 6% cap rate with 7% mortgage rates creates negative leverage. Current (2026) NNN market: investment-grade single-tenant net lease properties trade at 5-6.5% cap rates depending on tenant credit, lease term, and location.

Costco (Ground Lease) NNN
lease analysis.

Costco is among the strongest-perceived retail tenants in the United States. The company's ground leases trade at extremely tight cap rates — among the tightest in U.S. single-tenant retail, comparable to Chick-fil-A ground leases. Costco typically signs long-term ground leases (25+ years) and builds its own warehouse and fuel center. Supply of available Costco ground lease product is extremely limited.

GM By Glen Gomez-Meade~7 min read Published Apr 23, 2026

Read this first

Credit ratings, cap-rate bands, lease structures, and corporate strategy shift constantly. Every figure on this page — credit profile, capitalization rate range, prototype size, lease term — may be stale by the time you read it. The tenant's credit can change between rating-agency reviews; cap rates move with interest rates and market sentiment monthly.

The Upleg makes no representation that any specific number, rating, or lease characteristic is current or correct for any particular Costco (Ground Lease) property you are evaluating. Pull current credit reports, verify the actual lease document, and confirm market cap rates with a working CRE broker before you bid. The Upleg, its author, and its parent disclaim all liability for any outcome resulting from reliance on this content.

Quick reference · Costco (Ground Lease)

Legal entity: Costco Wholesale Corporation
Parent: Costco Wholesale Corporation (COST)
Credit profile: Investment-grade (A+/A+). One of the largest retailers in the world with dominant same-store sales.
Typical lease: Typically ground lease; occasional building lease in mall-adjacent locations.
Typical term: 25 years initial with multiple 5-year options.
Rent bumps: Varies; 10% every 5 years common on ground leases.
Prototype size: Ground lease typically 15-20 acres for a 150,000+ SF warehouse plus fuel center.
Cap rate band: 4.00–5.00% (ground lease) (2026)

About Costco (Ground Lease) as a NNN tenant

How Costco (Ground Lease) structures its NNN leases

Costco ground leases are typically absolute net at the land level — Costco handles all property taxes, insurance, and operations on the leased land. Corporate guarantee from Costco Wholesale Corporation.

Store specs and site profile

Costco prototype is a 140,000-180,000 SF warehouse on 15-20 acres with a dedicated fuel center. Very large format with substantial parking and traffic counts.

Red flags on a Costco (Ground Lease) NNN deal

Basis relative to land replacement cost — Costco ground leases can trade well above local land comparables
Scarcity drives aggressive pricing on auctions
Short remaining primary term (uncommon but existed on some older leases)

What to underwrite before buying a Costco (Ground Lease) property

Remaining primary ground lease term and options
Basis per acre vs. local land comparables
Trade-area traffic counts (Costco sites are extremely high-traffic)
Rent escalation structure at option exercise

Frequently asked questions

Why do Costco ground leases trade at such tight cap rates?

Costco is viewed as among the strongest retail credits in the United States. Combined with long lease terms (25+ years) and scarcity of available product, Costco ground leases trade at 4-5% cap rates — among the tightest in single-tenant retail.

Are Costco building leases available?

Rarely. Most Costco real estate is either owned outright by Costco or held under long-term ground leases. Full-building Costco leases exist in specific mall-adjacent configurations but are uncommon in the NNN market.

Using Costco (Ground Lease) in a 1031 exchange

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Author

Glen Gomez-Meade

Glen writes The Upleg. More about Glen →

Disclaimer

The Upleg provides general educational information about commercial real estate. Nothing on this site or in any email, guide, or playbook constitutes tax, legal, financial, or investment advice. No attorney-client, broker-client, or fiduciary relationship is created by your use of this site. Reading any content does not retain the author or The Upleg to represent you in any transaction.

Before acting on anything you read here: consult a Qualified Intermediary (QI) for 1031-specific matters, a Certified Public Accountant (CPA) for tax treatment, and a licensed real estate attorney for contract and closing matters. Rules vary by state, and fact-specific outcomes cannot be predicted from general content. The Upleg and its author make no representations or warranties about the accuracy, completeness, or currency of any information presented, and disclaim liability for any outcome resulting from reliance on this content.

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