Cap Rate vs 10 Year Treasury: The Live Spread by Tenant Credit, and Who It Fits

The 10 year Treasury yields 4.99% as of October 27, 2026. Across the 6,766 active net lease listings InvestmentGrade.com tracks, the median asking cap rate is 6.35%, a spread of +136 bps over the 10 year. For tenants rated A, the median sits close to the Treasury itself (live table below).

A spread that tight gets read two ways. One camp says net lease is overpriced. The other says nothing has changed. Both miss the point. The cap rate vs 10 year Treasury spread is a sorting tool, not a verdict. It tells you which investor each kind of net lease property fits right now, and which investor should pass.

The live spread board

Rates and Treasury yields, updated each business day from the Federal Reserve Bank of St. Louis:

Federal Reserve Bank of St. Louis (FRED): effective federal funds rate (DFF), Treasury constant maturity yields (DGS2, DGS10, DGS30), 10-year breakeven inflation (T10YIE), and ICE BofA US Corporate Index effective yield, latest observations as of October 27, 2026, compared with the nearest observation one year earlier. Updated each business day.

Median asking cap rate by tenant credit rating, from active listings:

Active listings InvestmentGrade.com tracks with an asking cap rate (stated, or computed from stated income and price when no rate is stated), listings last observed October 26, 2026, grouped by the rating of tenants rated in their own name; franchised brands rated only through a parent company are left out because a parent’s rating applies to a franchisee’s lease only if the parent signs or guarantees it. Asking cap rates are not closed-sale cap rates, and location, lease term, and ground lease structure move cap rates as much as the rating.

Read the two tables together. The 10 year is 4.99%. Subtract it from the median for each rating category and you have the spread by credit tier. Two things stand out. First, A and AA tenants trade within a few dozen basis points of the Treasury, and sometimes below it. Second, the ladder is not a straight line: BB and unrated tenants can trade tighter than BBB, because buyers pay for location, land and brand as much as for the rating.

Investment grade tenants vs the 10 year Treasury

Active listings InvestmentGrade.com tracks with an asking cap rate (stated in the listing, or computed from its stated income and price when no rate is stated), listings last observed October 26, 2026. Asking cap rates are not closed-sale cap rates. The middle half is the range from the 25th to the 75th percentile of listings. The 10-year Treasury yield is 4.99% as of October 27, 2026 (FRED series DGS10). Ratings are the agency ratings in our ratings database for the entity shown, which may be a parent company; the rating type (for example issuer, senior unsecured debt, long-term debt or revenue bond ratings) varies by company and is shown on each tenant page. A rating applies to a lease only if the rated entity signs or guarantees it, so confirm the tenant and any guarantor in the lease. n/a means no verified rating is on file.

Crossover, high yield and unrated tenants vs the 10 year Treasury

Active listings InvestmentGrade.com tracks with an asking cap rate (stated in the listing, or computed from its stated income and price when no rate is stated), listings last observed October 26, 2026. Asking cap rates are not closed-sale cap rates. The middle half is the range from the 25th to the 75th percentile of listings. The 10-year Treasury yield is 4.99% as of October 27, 2026 (FRED series DGS10). Ratings are the agency ratings in our ratings database for the entity shown, which may be a parent company; the rating type (for example issuer, senior unsecured debt, long-term debt or revenue bond ratings) varies by company and is shown on each tenant page. A rating applies to a lease only if the rated entity signs or guarantees it, so confirm the tenant and any guarantor in the lease. n/a means no verified rating is on file.

What the spread actually measures

A Treasury yield is the price of lending to the U.S. government for ten years. A cap rate is the first year net operating income of a property divided by its price. The spread between them is the extra current yield a buyer accepts for owning a building leased to a company instead of holding a government bond.

That spread has to pay for real differences: the tenant’s credit, the lease term, the re-leasing risk when the lease ends, the cost of buying and selling property, and the fact that a building cannot be sold in a day. It also leaves out real advantages the building has: rent growth, the land, and a tax profile no bond can match. So a thin spread does not by itself mean a property is overpriced, and a wide one does not mean it is cheap. The right question is what the buyer is being paid for, after tax, with the financing they will actually use.

Be fair to the Treasury first

A Treasury has real advantages, and any honest comparison starts there:

• No credit risk in the usual sense. It is backed by the full faith and credit of the United States.
• Liquidity. It can be sold in seconds at a quoted price. A property takes months and costs several percent to sell.
• Principal at par. Held to maturity, a Treasury bought at par returns its face value. No roof, no parking lot, no lease expiration.
• No state or local income tax. Interest on U.S. Treasury obligations is exempt from state and local income tax (31 U.S.C. 3124). In a high tax state that is worth real money, and the example below gives the Treasury full credit for it.

Net lease is not trying to beat a Treasury on those terms. It wins on different ones.

Real estate tax benefits a Treasury does not have

This is where the headline comparison breaks down. Two investors can collect the same 5% pre-tax and keep very different amounts. The rules below are federal law as of October 2026, including the changes made by Public Law 119-21, the One Big Beautiful Bill Act, signed July 4, 2025.

How Treasury interest is taxed

Treasury interest is ordinary income, taxed every year at rates up to 37%, whether you spend it or reinvest it. Higher income investors also owe the 3.8% net investment income tax on it (IRC 1411), for a top federal rate of 40.8%. There is no deduction to shelter it, no way to defer it, and no exchange to roll it into. Zero coupon Treasuries are worse on this point: the accrued discount is taxed each year even though no cash is paid. The one break is the state and local exemption above.

Depreciation

An owner of a commercial building deducts its cost over 39 years on a straight line basis (IRC 168(c); residential rental property uses 27.5 years). Land is never depreciable, so the deduction applies only to the building and improvements. A mid-month convention applies in the first year: a building placed in service in January gets 2.461% of its depreciable basis that year, and less in later months.

Depreciation is a non-cash deduction. The tenant keeps paying the full rent while the owner reports less taxable income. On a net lease property with no debt, depreciation often shelters 30% to 40% of the rent from current tax under straight line rules alone. In a DST or a fund, the sheltered part usually shows up as distributions that are partly a return of capital for tax purposes.

Cost segregation and 100% bonus depreciation

A cost segregation study is an engineering based allocation of the purchase price to the components of the property. Parts of a net lease property are not 39 year building: site improvements such as paving, curbs, lighting, signage and landscaping are generally 15 year property, and certain fixtures and equipment the owner acquires are 5 or 7 year property.

Under IRC 168(k) as amended by the One Big Beautiful Bill Act, property with a recovery period of 20 years or less that is acquired after January 19, 2025 qualifies for a permanent 100% bonus depreciation deduction in the year it is placed in service. Before that law, bonus depreciation was scheduled to fall to 40% for 2025 and 20% for 2026. Combined with a cost segregation study, that can move a large part of the depreciation into year one. The building itself (39 year property) does not qualify for bonus depreciation.

Three limits matter. A study can only reclassify what you own: on a ground lease you own only land, so there is nothing to depreciate, which is one reason ground leases often trade at the lowest cap rates. Equipment owned by the tenant is the tenant’s, not yours. And many states do not conform to federal bonus depreciation, so the state deduction can be much smaller than the federal one.

Passive activity rules: who can use the deduction

Rental income is generally passive (IRC 469(c)(2)). A loss created by depreciation can offset other passive income, such as other rental income or gains on the sale of passive investments. A loss you cannot use is not lost: it carries forward and is released in full when you sell the property in a fully taxable sale.

Two exceptions are worth knowing. Owners who actively participate can deduct up to $25,000 of rental losses against other income, phasing out between $100,000 and $150,000 of modified adjusted gross income (IRC 469(i)). And a real estate professional, someone who spends more than 750 hours a year and more than half of their working time in real property businesses in which they materially participate, can treat rental losses as non-passive (IRC 469(c)(7)). Material participation is hard to show on a passive net lease property, so many net lease owners use bonus depreciation mainly to shelter the property’s own rent and other passive income. Noncorporate owners who do qualify also face the excess business loss limit (IRC 461(l)).

The 20% qualified business income deduction

The One Big Beautiful Bill Act made the 20% qualified business income deduction under IRC 199A permanent. Rental income qualifies only if the rental rises to the level of a trade or business. The IRS safe harbor for rental real estate (Rev. Proc. 2019-38) excludes property leased under a triple net lease, so most passive NNN owners should not assume they get it. Some owners with active management and several properties may qualify under the general trade or business standard. The example below leaves it out.

Depreciation recapture: deferral, not forgiveness

Depreciation reduces your basis. On a taxable sale, the gain attributable to straight line depreciation on the building is unrecaptured Section 1250 gain, taxed at up to 25% (IRC 1(h)(1)(E)). Depreciation on 5 and 7 year components from a cost segregation study is Section 1245 recapture, taxed as ordinary income at up to 37%, and bonus depreciation on 15 year land improvements beyond straight line is generally recaptured as ordinary income too (IRC 1250(a)). The 3.8% net investment income tax can apply on top. Any remaining gain is long term capital gain at up to 20%.

Depreciation is therefore a timing benefit: you deduct at today’s rates and repay later, often at lower rates, years later, with dollars that have been working for you. Two tools can turn that deferral into something better.

1031 exchange: defer it again

A 1031 exchange defers gain, including depreciation recapture on the real property, when you sell investment real estate and buy like-kind real property (IRC 1031(a)). Since 2018 only real property qualifies. You must identify replacement property within 45 days of the sale and close within 180 days, or by the due date of your tax return for that year with extensions if earlier (IRC 1031(a)(3)). A qualified intermediary holds the proceeds. Cash or other non-like-kind property you receive is taxable boot, and to defer all the gain you generally need to buy property of equal or greater value and replace any debt you paid off, with new debt or added cash. Section 1245 recapture on cost segregated components can be triggered even inside an exchange if the replacement property has less of that kind of property (IRC 1245(b)(4)). Treasuries cannot be exchanged into or out of.

Use our 1031 deadline calculator to see your day 45 and closing deadline dates.

Step up in basis at death

When an owner dies, heirs generally receive property with a basis equal to its fair market value at death (IRC 1014). The deferred gain and the depreciation recapture from decades of ownership, and from every 1031 exchange along the way, are not income taxed. This is why many owners describe the long term plan as “exchange until you die.” A Treasury bought at par has little or no gain to step up, so its holder gets no comparable benefit.

Side by side: after tax income in year one

Here is a $2,000,000 investment at today’s numbers, same investor, same tax bracket.

Assumptions: 10 year Treasury yield of 5.00% (FRED, October 26, 2026) and a 5.25% cap rate, the median asking cap rate for A rated tenants on active listings InvestmentGrade.com tracked on October 26, 2026. No debt; closing costs, reserves and rent changes ignored. 20% of the price allocated to land. Placed in service in January (2.461% first year rate on 39 year property). Cost segregation column assumes 25% of the building basis is 5, 7 or 15 year property taking 100% bonus depreciation; actual results depend on the property and the study. Federal rate is 37% plus the 3.8% net investment income tax. State rate is 5%, Treasury interest is exempt from it, and the state is assumed not to follow federal bonus depreciation. No QBI deduction. The carried forward loss is worth about $132,000 more at 40.8% if the investor has passive income to absorb it, and is otherwise released when the property is sold in a taxable sale. Depreciation is recaptured on a taxable sale as described above. The Treasury yield needed to match is the after tax cash divided by 59.2%. Year one only; depreciation in later years is lower after a cost segregation study.

The point: at today’s prices an A rated net lease property paying 5.25% can deliver the after tax income of a 6.33% Treasury on straight line depreciation alone, and more with cost segregation, before counting rent growth or the land. The spread on a pre-tax basis understates the gap.

This section is general information about federal tax law, not tax advice. Results depend on your income, state, entity, holding period and the property. Confirm your situation with your CPA before you buy.

The other advantages of owning the building

• Rent growth. Many net leases carry rent increases, often 10% every five years or 1% to 2% a year. A 5.25% cap rate with 10% bumps every five years averages about 5.79% over fifteen years. A Treasury coupon never changes.
• Inflation and replacement cost. Land and buildings tend to hold value when the cost to build rises. A Treasury pays back the same nominal dollars at maturity.
• The land and the location. When the lease ends, the owner still has the site. On strong corners that residual is a large part of the value, which is why some properties trade below the Treasury (see the McDonald’s and Chick-fil-A rows above).
• Lease guarantees. A corporate guaranty puts the rated company’s balance sheet behind the rent for the full term. Confirm who signs: a parent’s rating applies only if the parent signs or guarantees the lease.
• Control. The owner chooses when to sell, when to refinance, and whether to exchange.

Who buys A rated net lease today

The buyers paying the tightest cap rates are mostly not comparing against a Treasury at all. They are comparing against their own alternatives:

• 1031 exchangers. They have a deferred gain and a 45 day clock. Their alternative is paying the tax, often 25% or more of the gain, so a 5% after tax deferral of that gain is worth far more than a few basis points of yield.
• All cash and low leverage buyers. Retirees, trusts and family offices who want income without management. For them the after tax table above is the comparison that matters.
• Estate planners. Owners who plan to hold for life and pass property to heirs with a stepped up basis.
• DST investors. Delaware statutory trusts that hold A rated properties for fractional 1031 buyers, usually with modest or no debt.
• Owners rotating out of management intensive property. Apartment and office owners who exchange into net lease to stop managing tenants.

Negative leverage: where the tight spread really bites

Negative leverage means the property earns less than the debt costs, so borrowing lowers your return instead of raising it. There are two tests, and buyers should run both:

• Yield test: cap rate vs the loan interest rate. If the cap rate is below the rate, the debt costs more than the property earns on that money.
• Cash flow test: cap rate vs the loan constant, the annual payment including principal as a percent of the loan. A 6.50% loan on 25 year amortization has a constant of about 8.10%. A property has to earn more than that before borrowing adds to cash flow.

Worked example

A $4,000,000 A rated property at a 5.25% cap rate, bought with 60% debt at 6.50%. The rate assumes roughly 150 basis points over a 5.00% 10 year Treasury; quotes vary by lender, tenant and term.

Illustration only, before taxes, closing costs and reserves. The amortizing loan also pays down about $39,600 of principal in year one, which raises total return to about 3.45% on equity, still below the 5.25% all cash return.

Debt on this property turns a 5.25% investment into a 1% cash yield. That is not a reason to avoid A credit. It is a reason to own it with little or no debt, and a reason levered buyers are looking elsewhere.

Where levered buyers are looking

At the same 6.50% loan, here is what the cap rate does to the borrower’s cash on cash return:

Same assumptions as the worked example. The A and BBB medians are from active listings InvestmentGrade.com tracked on October 26, 2026. Leverage starts to add to cash flow on an amortizing loan only above the 8.10% loan constant, and on an interest only loan above the 6.50% rate.

Today that pushes levered buyers toward three groups, each with a tradeoff:

• BBB tenants. Still investment grade, at higher cap rates. Dollar General trades at 7.00% median asking, CVS at 6.50% median asking. The tradeoff is a lower rating, often flat rent, and in some cases store closure risk. A BBB tenant is one or two notches from losing its investment grade rating.
• Crossover credit, BB+ and BB. One notch below investment grade. Advance Auto Parts trades at 7.25% median asking. Some lenders price these loans wider or lend less. A downgrade can widen the cap rate, and an upgrade can compress it.
• Unrated and high yield tenants. Walgreens, now privately owned and unrated, trades at 7.50% median asking; Family Dollar at 8.50% median asking. Here the real estate, the rent relative to market and the lease term carry the risk. Underwrite the location as if the tenant leaves.

Not every unrated tenant is a yield play. Chick-fil-A, a private unrated company, trades at 4.23% median asking, tighter than most A rated tenants, because buyers are paying for sales volume, the land and the brand. Credit sets a floor on pricing. Location and lease structure often set the price.

Other ways levered buyers keep leverage neutral or positive: lower the loan to value, use interest only periods, borrow against the whole portfolio rather than one asset, or buy A credit all cash and put debt only on higher yielding properties.

When the spread will change

Cap rates move slower than Treasuries. When the 10 year falls, the spread widens first and net lease prices follow later. When it rises, sellers hold out and the spread compresses until prices adjust. Watch three things: Federal Reserve policy, the 10 year yield, and corporate credit spreads (see credit spreads). The tables on this page update as listings and rates change.

Frequently asked questions

Educational content only. InvestmentGrade.com is a commercial real estate brokerage and educational publisher. Nothing on this page is investment, tax or legal advice, or a recommendation to buy or sell any property or security. Tax rules are summarized for general information as of October 2026; confirm your situation with your CPA. Live figures come from FRED and from active listings InvestmentGrade.com tracks; asking cap rates are not closed-sale cap rates.

Related

• Bonds vs NNN real estate: what the spread means
• Investment grade bonds vs NNN: the tenant by tenant spread table
• Credit spreads explained
• 100% bonus depreciation for NNN investors
• Cost segregation for NNN properties
• 1031 exchange into bonus depreciation NNN properties
• NNN cap rates in 2026
• The investment grade threshold: why BBB- matters