NNN ground lease - 1st real restate investment

Los Angeles, CA · Member since 2014 · 17 posts · 5 votes

I am looking to invest in commercial real estate for the first time. I found a 25 year ground lease for a Taco Bell and Starbucks. It is a 5% cap for Taco Bell and 5.75% for Starbucks. What are tax incentives on a ground lease since there is no depreciation? Just loan interest? I like the idea of collecting lease payments for 5 years, then when I get the 10% rent increase after 5 years, 1031 the property for a bigger NNN deal. I have considered an apartment complex investment, but really don't want the work that comes with the extra 3-5% cap. Thoughts and suggestions?

0 Reply

12 views

Most Popular Reply

Kyle J.

Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes

11y

Originally posted by @George Wendt:

I believe you can only 1031 your land into other land. That is one of the downsides of this kind of transaction.

That's incorrect. What's allowed in a 1031 "like kind" exchange is actually pretty broad. It could be raw land for an apartment complex, or an apartment complex for a strip mall (or any number of other possibilities). It doesn't have to be exactly the same type of property.

Justin, as to your questions about NNN leases, @Joel Owens is one of the resident experts on those and probably better suited to respond. This is right up his alley.

1 Reply

See this reply in the discussion

5 Replies

Jump to latestLatest

Sort by

Account Closed
OP
Los Angeles, CA · Member since 2014 · 17 posts · 5 votes
11y
Any tips? Thanks!
0 Reply
George Wendt
Wholesaler · Mount Pleasant, SC · Member since 2014 · 45 posts · 10 votes
11y
I believe you can only 1031 your land into other land. That is one of the downsides of this kind of transaction. Talk to an accountant about that, however.
Honestly, a 5.3 cap, at least where I invest, Indianapolis, isn't all that great and I'd likely pass on that kind of deal but that varies by area.
-Not your attorney or CPA
0 Reply
Kyle J.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
11y
Originally posted by @George Wendt:

I believe you can only 1031 your land into other land. That is one of the downsides of this kind of transaction.
That's incorrect. What's allowed in a 1031 "like kind" exchange is actually pretty broad. It could be raw land for an apartment complex, or an apartment complex for a strip mall (or any number of other possibilities). It doesn't have to be exactly the same type of property.
Justin, as to your questions about NNN leases, @Joel Owens is one of the resident experts on those and probably better suited to respond. This is right up his alley.
1 Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
11y
@Kyle J. That's right. In general like kind in real estate refers to use not nature. So apartments are like kind to commercial which is like kind to raw land etc. Interesting side fact is that the lease itself is probably receiving real estate treatment as like kind also. The IRS deems land leases and improvements by those leaseholders of more than 30 year duration to be like kind to other real estate held for investment.
What @Account Closed is describing is actually a fairly common scenario. In reality there are potentially two pieces of real estate being dealt with. The land itself which could be 1031ed subject to the lease in place providing income and the leasehold that owns the construction and the lease on the land (as long as that land is under lease for more than 30 years). This too can be 1031ed. Most often these are syndicated TIC or DST projects. And with these liquidity and hidden expenses are always the lurking gorillas. So make sure of your due diligence.
This process provides the framework for a product called a 1031 leasehold exchange similar to a reverse exchange except where you already own the land and want to do a 1031 and sell another piece of real estate to build on the land you already own.
Dave
The 1031 Investor5137 Reviews
Website View Page
0 Reply
Mark Creason
Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
11y
Originally posted by @Account Closed:

Any tips? Thanks!
Justin,
Are you really into coffee and tacos? I would think you would be able to find a much better return than these properties. Joel Owens is a good source. I have worked with him as a lender and he is sharp.
Mark
1 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.