Cap rate is the single number every NNN buyer fixates on — and for good reason. It's the most direct expression of yield relative to price in commercial real estate. But comparing a 3.5% cap McDonald's to a 7.0% cap Walgreens without understanding what's driving that spread is like comparing the interest rate on a Treasury bond to a junk bond without acknowledging the difference in risk. The cap rate reflects the market's assessment of risk, not just income.
Here's a breakdown of what actually drives cap rates in NNN single-tenant net lease investments — and how to evaluate them properly when you're making a buying decision.
The Formula First
Cap rate is simple in concept: Net Operating Income ÷ Purchase Price. In a true absolute NNN lease, the NOI equals the base rent — because the tenant pays all taxes, insurance, and maintenance. No operating expenses to net out.
Flip it and you have the pricing formula: Rent ÷ Cap Rate = Value. A property paying $200,000/year in rent at a 5.0% cap rate is worth $4,000,000. At a 5.5% cap, it's worth $3,636,000. Every basis point of cap rate expansion means price reduction. This is why cap rate movement matters so much to buyers and sellers alike.
Key insight: A lower cap rate doesn't mean a worse investment — it means the market perceives the income stream as more secure. McDonald's at 3.5% and Dollar General at 6.5% can both be excellent investments. What you're buying at 3.5% is the near-certainty of that income. What you're accepting at 6.5% is a modest amount of additional risk in exchange for more yield.
The Five Factors That Drive NNN Cap Rates
Cap Rates by Tenant Type — A Practical Reference
These are approximate cap rate ranges as of early 2026. Specific transactions will vary based on individual property attributes, lease term, and market conditions.
| Tenant / Asset Type | Typical Cap Rate Range | Key Driver |
|---|---|---|
| McDonald's Ground Lease | 3.25 – 4.25% | AAA brand, ground lease, long term |
| Chick-fil-A Ground Lease | 3.5 – 4.5% | Sales volume, brand, ground lease |
| Wawa / Buc-ee's Ground Lease | 4.5 – 5.00% | Strong unit economics, ground lease |
| 7-Eleven Corporate | 4.5 – 5.5% | Corporate guarantee, location-dependent |
| Dollar General / DG Market | 5.5 – 7.0% | Term remaining, store sales, demographics |
| Walgreens / CVS Corporate | 5.5 – 7.5% | Term remaining, store performance, credit |
| Amazon / FedEx Industrial NN | 5.0 – 6.0% | Credit, long term, industrial demand |
| Chase Bank / Bank of America | 4.5 – 5.5% | Investment grade, ground lease premium |
Ground Lease vs. Fee Simple: Why It Matters
A ground lease means the investor owns the fee simple interest in the land only — the tenant owns the building and is responsible for everything on it. A fee simple build-to-suit property means the investor owns both land and building.
Ground leases trade at lower cap rates (i.e., higher prices) for good reason: the investor has zero building exposure. No roof replacement. No HVAC. No structural repairs. Ever. The land will always be there; the building depreciates and requires capital. For investors who want absolute passivity and a clean balance sheet asset, a ground lease McDonald's or Chase Bank is as close to a bond as real estate gets.
There's a structural reason the rent — and the cap rate — runs lower on a ground lease: the tenant constructs the building entirely at their own expense. Because the landlord never built the improvements, there is no construction cost to recover through rent. The rent reflects land value only, not a developer's capital outlay being amortized over the lease term. Lower rent means lower NOI, and lower NOI produces a lower cap rate. It's not a concession — it's a direct reflection of what you're buying.
There's also a risk dynamic that gets overlooked: ground lease rents are typically at or below market. That's actually where the upside lives. Cap rates price risk, and when rent is at or below what the market will bear, the downside scenario — vacancy — still leaves you in a strong position. You can generally re-lease the pad at the same rent or higher. Less downside risk, more upside potential. The market compresses cap rates accordingly.
Fee simple build-to-suit properties work differently. There, the developer's construction costs are fully baked into the rent, often pushing it to or well above market. Starbucks is the textbook example — many locations carry rents approaching $100 per square foot. The credit is strong and the income looks attractive, but if Starbucks closes that location, finding a replacement tenant willing to pay the same rent is a genuine challenge. The rent has nowhere to go but down, and that risk is exactly what the higher cap rate is compensating for. Fee simple NNN properties are not inferior — but the lease terms must be carefully scrutinized, because the landlord bears both building risk and rent-reset risk when the tenant vacates.
The one genuine tradeoff for ground lease landlords: you cannot depreciate the building. Since you don't own the improvements, there is no cost basis to write down — and depreciation is one of the primary tax advantages of real estate ownership. Investors who rely heavily on depreciation to shelter income should factor this into their analysis.
That said, the long game on a ground lease is hard to beat. When the lease expires, the improvements revert to the landlord (in most cases). The building the tenant designed, financed, and constructed — at no cost to you — now belongs to you. You collected rent on the land for 20, 30, or 40 years, never replaced a roof or touched an HVAC unit, and you end up with a building. Most investors never model that reversion into their return analysis, but they probably should.
How Rent Bumps Affect the Real Yield
A McDonald's at 3.5% today with 10% rent bumps every 5 years yields approximately 3.85% in Year 6 and 4.23% in Year 11 on your original cost basis. The going-in cap rate understates the long-term return. This "yield-on-cost" concept is why investors paying premium prices for high-quality long-term leases often outperform buyers who chased a higher initial yield on a short-term or flat lease.
Conversely, a flat rent NNN with no bumps — even at a 6.5% cap — will see its real yield eroded by inflation over a 10–15 year hold period. Rent escalations are not optional; they're essential to preserving the purchasing power of your income stream.
Evaluating a specific NNN asset? We'll give you a straight read on whether the pricing makes sense relative to current market cap rates — at no cost to you.
Ask an Advisor →Cap Rate vs. Cash-on-Cash Return
Cap rate is an unlevered metric — it ignores financing. Cash-on-cash return is what you actually earn on your invested equity after debt service. If you borrow at 6.5% interest and buy at a 5.5% cap, your cash-on-cash return will be below your cap rate. If rates fall and you refinance, it can improve dramatically.
For 1031 exchange buyers who are often investing all-cash (rolling deferred equity), cap rate and cash-on-cash are essentially the same. For leveraged buyers, the spread between cap rate and borrowing cost — the "cap rate spread" — determines whether leverage is accretive or dilutive to yield.
In the current environment, the 10-year Treasury is elevated relative to recent history, which has compressed the traditional cap rate spread. All-cash NNN buyers actually have a structural advantage in this environment over leveraged buyers — which is another reason why 1031 exchange investors dominate the NNN buyer pool in 2026.
What Cap Rate Is Right for You?
The right cap rate depends entirely on what you're optimizing for. If you want maximum stability, minimal management, and a guaranteed income stream for the next 20 years — a 3.5–4.5% cap ground lease with a Fortune 500 tenant is a reasonable price to pay for that certainty. If you're willing to accept a modest amount of tenant or term risk in exchange for yield, there are compelling opportunities in the 5.5–7% range.
What we tell our clients: never buy a lower cap rate just because the tenant is recognizable. The quality of the lease matters as much as the quality of the tenant. A McDonald's with 2 years left on the lease is very different from a McDonald's with 20 years. Always evaluate lease term, rent structure, and absolute NNN status alongside the tenant's credit profile.
If you'd like help evaluating a specific property or want to see what's available in your target cap rate range, browse our current NNN listings or contact us directly. We're happy to walk you through the numbers on any asset you're considering.