Tuesday, May 26, 2009

Absolute NNN or Ground Lease?

A majority of the single tenant NNN properties that are Ground Leases are marketed at a lower cap rate than traditional NNN leases. The (ir)rationale for this is that the tenant pays for all the improvements built upon the land and the LANDlord has no responsibilities. So, therefore, some would assume that the investment is more valuable and should therefore sell at a higher price/lower cap rate. I disagree...
What the landlord does not get in this scenario is the ability to depreciate the building - this value goes to the tenant. The shift of this financial benefit from landlord to tenant usually is very significant. And to pay a premium for this less-than situation is ridiculous. The far better alternative is the Absolute NNN lease. Whereby the tenant pays for absolutely all costs of the property and the landlord still has technical ownership of the improvements (building) so he can still depreciate the property.

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