Raja, I think you are talking about a "Leased Fee" vs. "Fee Simple" ownership. Simply put, in a "Leased Fee" arrangement for tax purposes you would own the land but not the building. As mentioned earlier the building would revert back to you at the end of the Lease term (because they can't take it with them). You are correct that you cannot enjoy cost recovery (depreciation) under this arrangement because you do not own the building. In a Fee Simple arrangement you own both the land and the building and CAN depreciate the value of the building over a 39 year straight line depreciation period. As always the devil is in the details. With regards to the potential pricing difference - I have seen very little value given in the marketplace to the nuance of depreciation that you mention. In my experience if you had two identical deals but one was a Leased Fee and the other a Fee Simple, both would find buyers willing to pay close to identical amounts. Why? I think it is generally a lack of understanding. Once again, all things being equal, to me the Fee Simple deal would clearly be more attractive with a better after tax return. I don't think the marketplace accurately values depreciation within the cap rate. In any event, pay particular attention to the costs associated with the building, and in either form of ownership who (LL or Tenant) is responsible for what.
Either way Raja, it appears you'll do fine. You've addressed an issue that surprisingly few investors value and/or understand.
Best of Luck!
Post Script: I've attached a link to a NNN property I just listed yesterday that is a perfect example of what you are talking about. This property is a unique combination of both the depreciation benefits of Fee Simple ownership (both land and building), coupled with the hassle free maintenance of a Leased Fee property. The Lease in place with the tenant is a "Ground Lease" but the Tenant is also responsible for all maintenance of the building including roof and structure. The Landlord owns the building, gets to depreciate the building, but is not be hassled with the effort, cost or responsibility of the upkeep.
Jan 7, 2010