Ground Lease vs. Fee Simple NNN: A Complete Comparison for Investors

Two Structures, One Category

When investors discuss "NNN properties," they're referring to two structurally different asset types that are often grouped together: fee simple NNN (you own the land AND building) and ground lease NNN (you own only the land). Both are triple net, both are passive, and both are popular with investors — but they have meaningfully different risk/reward characteristics.

Fee Simple NNN: You Own Everything

In a fee simple NNN transaction, you purchase both the land and the building outright. The tenant signs a triple net lease obligating them to maintain the building, pay property taxes, and carry insurance. But the building is yours.

Advantages of Fee Simple:

• Greater collateral value (land + building) supports better financing terms
• After lease expiration, you own a complete building that can be re-tenanted or redeveloped
• More straightforward valuation and lending process
• Typically more liquid — larger buyer pool for fee simple assets

Disadvantages of Fee Simple:

• Higher purchase price than equivalent ground lease
• Potentially more landlord liability exposure at lease end (building maintenance, environmental)

Ground Lease NNN: You Own the Land Only

In a ground lease arrangement, the tenant builds and owns the building on your land. You receive ground rent — a periodic payment for the right to use your land. The tenant controls the building, maintains it, and owns it for the duration of the lease.

Advantages of Ground Leases:

• Lower purchase price for equivalent rent income (same cap rate, less total dollars)
• Zero building responsibility — you literally own dirt
• At lease expiration, the building (and all improvements) revert to the landowner
• Excellent for investors seeking maximum simplicity and passivity

Disadvantages of Ground Leases:

• Financing is more complex (lenders are lending on land value only, not building)
• Fewer qualified lenders willing to finance ground leases
• If tenant goes bankrupt mid-lease, you recover the land and an empty/potentially damaged building
• Less liquid market — fewer buyers are comfortable with ground lease structures

McDonald's: The Ground Lease Benchmark

McDonald's is the most prominent ground lease tenant in the NNN market. In many cases, McDonald's (or the corporate entity behind the franchisee) builds and owns the restaurant building while leasing the underlying land from a private landlord. McDonald's ground leases typically run 20 years with multiple renewal options.

Because McDonald's is the tenant, these ground leases carry investment-grade corporate credit — making them among the safest NNN investments available despite the structural differences from fee simple ownership.

Cap Rate Differential: Ground Lease vs. Fee Simple

For equivalent tenant credit, ground leases often trade at slightly lower cap rates than fee simple — meaning they're more expensive per dollar of income. This seems counterintuitive, but reflects the perceived safety of land ownership (land never depreciates to zero) and the reversion value of the building improvements at lease end.

A McDonald's fee simple in Nashville might trade at 5.0%; a McDonald's ground lease in the same market might trade at 4.75% — slightly more expensive because of the perceived structural advantages of pure land ownership.

Which Is Right for You?

For 1031 exchange investors seeking maximum simplicity: ground leases are beautiful. You own land. Your only concern is receiving your monthly check. Reversion of the building at lease end is an added bonus.

For investors who prioritize financing flexibility and market liquidity: fee simple assets are often more practical. More lenders, more buyers, simpler transactions.

The ESS Group maintains active inventory in both fee simple and ground lease NNN properties. Contact us to discuss which structure best fits your investment goals and 1031 exchange timeline.