Real estate investors often leverage structured lease agreements to ensure steady income and long-term investment success. While many lease variations exist, there are two that share similarities: the triple net lease and the ground lease. Both provide benefits such as predictable cash flow and hands-off involvement, but each one has its own pros and cons that can complicate the selection process.
In this article, Realized 1031 shares a guide comparing triple net leases to ground leases, so you can determine which one best aligns with your financial goals.
Triple Net Lease Pros and Cons
A triple net (NNN) lease structure transfers financial responsibility to tenants for the three net operating expenses: property taxes, insurance coverage, and maintenance costs. As such, the investor can enjoy a more hands-off experience, handling only the rare non-operating expenses.
NNN Pros
- Passive and Stable Income: You receive income from monthly rental payments. There’s no need to worry about rising maintenance costs or insurance premiums.
- Hands-off Management: Since tenants handle taxes, insurance, and maintenance, investors have minimal day-to-day involvement. Those who want a more passive investment will find the NNN lease appealing.
- Long-term Stability: A triple net lease typically lasts from 10 to 25 years, though these terms can be extended based on the agreement. This longevity ensures long-term income for investors.
NNN Cons
- Limited Rent Growth: While rent escalation clauses can be included in the agreement, rent increases are usually modest in NNN leases.
- Property-specific Risks: One of the triple net cons is that if the tenant leaves, re-leasing can be challenging, particularly for specialized buildings like fast-food outlets or pharmacies.
- Tenant Credit Dependency: Lease stability is highly reliant on the tenant’s financial health.
Ground Lease Pros and Cons
In a ground lease, there is no transfer of financial responsibility over net operating expenses. Instead, the landlord leases the land to the tenant, who builds the property over it. These leases are often long-term, ranging from 50 to 99 years.
Ground Lease Pros
- Long-term Cash Flow: Given how ground lease terms last for multiple decades, they’re generally more predictable and long-term than NNN leases.
- Minimal Management: Ground leases are among the most passive investments, since the tenant assumes full responsibility for the structure they built.
- Land Appreciation: Since the investor owns the land, its value may increase significantly over time.
Ground Lease Cons
- Lower Yield: Leasing land doesn’t offer the same level of income as NNN leases.
- Slow Payoff: Because cash flow is steady but not high, returns are more about long-term appreciation than immediate yield.
- Complex Negotiations With Tenants: With the long-term nature of the agreement and the addition of matters like reversionary rights, negotiating ground leases is typically more complex than NNN leases. There must be detailed terms on development, financing, and lease expiration.
Which Is Better for Your Investment Goals?
Both NNN and ground leases offer long-term income and predictable cash flow. However, triple net structures are better for those who want higher yields. Meanwhile, those who own land but don’t have the capital to develop it may find ground leases the more profitable option. Investors must also keep in mind that NNN leases carry tenant credit risk, while ground leases reduce that risk but tie up capital for decades.
Wrapping Up: Comparing NNN vs. Ground Leases
Given these opportunities and pitfalls for either option, there’s no clear winner in the triple net vs ground lease debate — the deciding factor is ultimately the investor’s financial goals. If you want immediate cash flow and higher returns, then NNN leases are an ideal option. For those seeking extremely long-term security and generational asset preservation, a ground lease is a suitable choice. The best thing about these comparisons is that, if you have both existing buildings and land, then you can mix both structures to balance yield and security in your portfolio.
Sources:
https://www.investopedia.com/terms/g/ground-lease.asp
https://www.law.cornell.edu/wex/triple_net_lease
https://www.forbes.com/councils/forbesfinancecouncil/2024/10/22/triple-net-real-estate-a-safe-haven-in-a-volatile-market/