Two NNN listings can have the same tenant, the same size lot and the same rent increases, and still be completely different investments. One is a ground lease. The other is land & building. The difference comes down to one question: who owns the building?
Here is how each structure works, why the rent and price look so different, the pros and cons of each, and how depreciation fits in.
A note on the term “fee simple”: Many listings call land-and-building deals “fee simple” and set them against ground leases. But when you buy a NNN ground lease, you own the land in fee simple too. The real difference is who owns the building. In this article we use “land & building” for what the market calls “fee simple.”
The Basic Difference
With a ground lease, you buy the land and lease it to the tenant. The tenant pays to build its own building and usually owns it for the term of the lease. The exact rights depend on the lease. Your rent is based on the value of the land.
With land & building, you buy both the land and the building, and the tenant leases the whole property from you. Your rent has to cover the land, the cost to build and, in most new deals, the developer’s profit.
| Ground Lease | Land & Building | |
|---|---|---|
| You own | The land | The land and the building |
| Building owned by | Usually the tenant, during the lease (check the lease) | You |
| Rent is based on | Land value | Land plus construction cost (and developer profit) |
| Rent level | Lower than rent on a comparable land & building property | Often at or above market on new build-to-suits |
| Usually backed by | Large corporate tenants | Franchisees and growing brands, plus some corporate tenants |
| Depreciation | None (land can’t be depreciated) | Yes, on the building |
| Cap rate | Usually lower | Usually higher |
Why Big Corporate Tenants Choose Ground Leases
Most ground leases are signed by large corporate tenants such as McDonald’s, Chick-fil-A, Wawa and banks like Chase. These companies have the cash and the borrowing power to build their own stores. Paying for the building themselves lets them build exactly what they want and keep their rent low, because they are only renting the dirt.
For you as the landowner, that is a strong position. The tenant has put its own money, often millions of dollars, into a building that sits on your land. That gives it every reason to keep the store open and keep paying rent.
Why Franchisees and Growing Brands Choose Land & Building
Most franchisees and fast-growing brands don’t have the extra cash or borrowing power to fund construction on every new store. Instead, a merchant developer buys the land, builds the store at the developer’s expense, signs the lease and then sells the finished property to an investor.
The developer gets its money back through the rent. The cost of the land, the construction and the developer’s profit are all built into the lease. That is why new build-to-suit rents can be well above what the same building would rent for on the open market.
This isn’t only a franchisee strategy. Some corporate tenants also prefer to have developers build their stores so they can keep their cash for growth.
The Starbucks example: Starbucks stores are company-operated, so the lease is corporate. But most new Starbucks drive-thrus are built by developers, with the construction cost wrapped into the rent. Starbucks pays very little to move into a new location. The result is rent that often runs $50 to $100 per square foot or more, and sale prices that commonly come in above $1,000 per square foot for a building of around 1,500 to 2,500 square feet.
Rent, Market Value and Replacement Cost
One of the most important questions on any NNN deal is: if this tenant left, could I re-lease the property at the same rent?
On a ground lease, the answer is usually yes. The rent is based on the land value. It is typically a fair rent for the land itself, but well below what a comparable land & building property would rent for. If the tenant ever leaves, you typically get the land back with a building on it that you didn’t pay for. That is a big reason ground leases are seen as lower risk.
On a land & building deal, look closely at the rent per square foot and the price per square foot. If the rent is well above what a new tenant would pay, and the price is well above what it would cost to build the store today, you are relying on the current tenant to stay. The safest land & building deals have rent near or below market and a price near or below replacement cost.
Depreciation: The Main Trade-Off
Land can’t be depreciated. Only buildings and improvements can. That creates the biggest difference between the two structures for many investors.
- Land & building: you can depreciate the building, generally over 39 years for commercial property. A cost segregation study can move parts of the property, such as parking lots, landscaping and some interior items, onto faster schedules. Under the 2025 federal tax law, those qualifying components can qualify for 100% bonus depreciation in the first year. The rest of the building stays on the 39-year schedule.
- Ground lease: you own only the land, so there is nothing to depreciate. Nearly all of your rent is taxable income.
When a ground lease ends and the building reverts to you, federal tax law generally does not treat the building as income at that point. But you also have no cost basis in it, so you can’t depreciate it either. For investors who need tax shelter, that matters. For investors who care most about safety and long-term value, it may not.
Gas Stations, Car Washes and 100% Bonus Depreciation
The 2025 federal tax law (the One Big Beautiful Bill Act) made 100% bonus depreciation permanent for qualifying property acquired after January 19, 2025. It applies to qualifying components with a recovery period of 20 years or less, such as equipment and site work, not to an entire commercial building, which is standard 39-year property. That makes some property types stand out:
- Gas stations with convenience stores, such as Circle K and 7-Eleven: the store can be treated as 15-year “retail motor fuel outlet” property if it meets any one of three tests: at least 50% of gross revenue comes from fuel sales, at least 50% of the floor space is devoted to fuel sales, or the building is 1,400 square feet or smaller. In all cases, the property must be substantially used to sell fuel at retail. This is the main exception to the 39-year rule: when the store qualifies, the building, canopy and site work are all 15-year property and may qualify for bonus depreciation in the first year. Land still can’t be depreciated.
- Car washes: a cost segregation study often moves most of the cost into 5-year equipment (tunnel systems, dryers, water reclamation) and 15-year site work, which can qualify for bonus depreciation.
These benefits only apply when you own the building. On a ground lease, the tenant owns the improvements, so there is nothing for you to depreciate. Buying with a 1031 exchange can also limit how much bonus depreciation you can take, so plan it with your CPA before you buy.
Tax disclaimer: We are commercial real estate brokers, not CPAs or tax advisors. This is general information, not tax or legal advice. Tax rules change and depend on your situation, so verify and confirm everything here with your CPA before you buy.
Why Ground Leases Have Lower Cap Rates
Ground leases usually sell at lower cap rates than land & building deals with similar tenants. Buyers pay more for rent they feel very confident about, and ground leases check most of the boxes:
- The tenant is usually a large corporate company.
- The rent is based on land value, so it is usually low and easy for the tenant to afford.
- The tenant has its own money invested in the building.
- The landlord typically has no responsibility for the roof, structure or parking lot.
- If the tenant leaves, you keep the land and usually the building.
For more on what moves cap rates, see What Determines Cap Rates in Net Lease Investments?
Pros and Cons of Each
Ground Lease
- Pro: Usually corporate-backed, with a low rent based on land value.
- Pro: The tenant paid for the building, so it is invested in the site.
- Pro: Little to no landlord responsibility.
- Pro: Strong position at the end of the lease, since the building usually reverts to you.
- Con: No depreciation, so more of the income is taxable.
- Con: Lower cap rates mean a lower starting return.
Land & Building
- Pro: Depreciation, and possibly cost segregation, can shelter much of the income.
- Pro: Usually higher cap rates, so more income for the price.
- Pro: You own the whole property from day one.
- Con: New build-to-suit rents can be above market, so re-leasing at the same rent can be hard if the tenant leaves.
- Con: Higher price per square foot, sometimes well above replacement cost.
- Con: More often backed by a franchisee, which takes more homework on the operator. See Corporate vs. Franchisee Guarantees on NNN Leases.
- Con: NN leases can leave you responsible for the roof and structure.
What About Leasehold?
A leasehold deal is the one structure that is not fee simple. You buy the tenant-side interest in a property that sits on someone else’s land, and your ownership ends when the ground lease ends. Leasehold deals are much less common in single-tenant net lease and need careful review of the underlying ground lease.
Who Usually Uses Which Structure
This is a general guide based on the NNN deals we see most often. Always confirm the structure on the actual lease.
| Usually Ground Lease | Usually Land & Building | Both Are Common |
|---|---|---|
| McDonald’s | Starbucks | Taco Bell |
| Chick-fil-A | Dollar General | Wendy’s |
| Wawa | CVS | Burger King |
| Chase | Walgreens | Dunkin’ |
| Bank of America | Chipotle | 7-Eleven |
| PNC Bank | Tractor Supply | AutoZone |
| TD Bank | Sherwin-Williams | Circle K |
For lease terms, credit and price ranges on 65 tenants, see our NNN Tenant Profiles.
Which Is Right for You?
It depends on what you need from the investment. Investors who want the most safety and the strongest long-term position often lean toward ground leases. Investors who want more income for the price, or who need depreciation to shelter income, often lean toward land & building. Many 1031 buyers own both.
Common Questions
Is a NNN ground lease fee simple?
Yes. When you buy a NNN ground lease, you own the land in fee simple. The tenant owns the building during the lease. The term “fee simple” in listings usually means you are buying both the land and the building.
What is the difference between a ground lease and a land & building NNN deal?
With a ground lease, you own the land and the tenant owns the building it paid to build. With land & building, you own both, and the rent covers the land and the cost of the building.
Why do ground leases sell at lower cap rates?
Ground leases are usually backed by large corporate tenants, the rent is usually low because it is based on land value, and the tenant has its own money invested in the building. Buyers see that as lower risk, so they accept a lower cap rate.
Can I depreciate a ground lease?
No. You only own the land, and land can’t be depreciated. With land & building, you can depreciate the building and may be able to speed that up with a cost segregation study. Ask your CPA how this applies to you.
Why are Starbucks rents so high per square foot?
Most new Starbucks stores are built by developers, and the construction cost is built into the rent. Starbucks pays very little to open the store, so rents often run $50 to $100 per square foot or more and sale prices often exceed $1,000 per square foot.
Do gas stations qualify for 100% bonus depreciation?
Often, yes. A gas station convenience store can be treated as 15-year property if at least 50% of its revenue or floor space is tied to fuel sales, or if the building is 1,400 square feet or smaller, and the property must be substantially used to sell fuel at retail. Under the 2025 tax law, 15-year property acquired after January 19, 2025 can qualify for 100% bonus depreciation. This applies to land & building deals, not ground leases. Ask your CPA how it applies to you.
What happens to the building when a ground lease ends?
In most NNN ground leases, the building becomes the landowner’s property when the lease ends. Some leases let or require the tenant to remove it, so check the lease.
What is a leasehold NNN investment?
A leasehold investment is when you buy the tenant-side interest in a property on land owned by someone else. It is not fee simple, and your ownership ends when the underlying ground lease ends.
If you are weighing a ground lease against a land & building deal, contact us. We have represented buyers on 225+ NNN transactions, and our buyer representation is always free to you.