Zero Cash Flow Properties

Zero cash flow net lease properties are highly sought after by buyers and investors that are seeking tax, cash-flow or net-worth related advantages. It would be prudent to classify these buyers in 5 major categories:

1. Triple Net NNN buyers: buyers that favor NNN investment properties are the most obvious category. Zero cash flow ZCF triple net properties are occupied by investment-grade tenants with a credit rating of minimum BBB, and long lease terms of 15-20 years. These types of NNN properties offer ZCF buyers a long-term, steady source of passive income with no management responsibilities.
2. 1031 and 1033 Exchange buyers: zero cash flow net lease NNN deals  be used in  as a like-kind property, which means investors can use them to postpone capital gains taxes, particularly in the sale of debt-financed properties.  Note, that one of the most powerful provisions of section 1033 is the ability to replace equity in the converted property with new debt on the replacement ZCF property, a transaction strictly prohibited by section 1031. By increasing the debt, the “equal and up” replacement requirement can be accomplished with less reinvestment of the conversion proceeds. This process also creates an opportunity for a refund if the tax has already been paid. 
3. Cash Flow buyers: a NNN buyer can set up a mortgage under IRS section 467 that matches the specific debt and equity requirements for their 1031 or 1033 trade, including the option of refinancing or cashing out part of the equity after the exchange is completed via the paydown/readvance facility. Once this equity is pulled out, it can be used to purchase other assets that have significant cash flow with full depreciable basis outside of the exchange.
4. Family Offices: Family offices who don’t need the positive cash flow typically received from most triple net lease property investments. Instead, a family offices uses the loss through the depreciation and interest expense of the zero cash flow property to offset gains in other assets or investments. Importantly, the losses in the early years of the NNN zero lease may be significant, especially if the owner utilizes accelerated depreciation.  In such cases, family offices looking to build net worth for heirs comfortably use ZCF deals to take advantage of asset appreciation over long lease terms.
5. Buyers facing foreclosure: Buyers that are contemplating asset disposition and their disposition was financed nonrecourse, now face foreclosure are in a pretty pickle. If the lender exercises lien on the disposition, the owner has to pick up the gap in debt. It would be better to exchange into a Zero net lease NNN property and generate cash via the paydown/readvance to payoff any gap in financing on the asset.

Call your expert brokers at the Triple Net Investment Group for outstanding advice on the purchase or disposition of ZCF assets, today. With our extensive track record in consummating Zero, 1031 exchange and other types of complicated NNN transactions, you can be sure of reliable, repeatable success in your acquisition or disposition

A zero cash flow NNN triple net lease property is highly leveraged and backed by a long-term, bond-like lease underwritten by an investment-grade tenant. Typically, the NNN ZCF tenant is on a lease of 15-25 years. The result is that a lender monetizes the entire rent stream, under section 467, so the mortgage equals the amortized rent stream through a nonrecourse, assumable, fixed-rate mortgage. The term “zero cash flow,” or “zero” refers to all the property’s net operating income going to service the nonrecourse debt and there is no net income for distribution to the investor.

Four Major Reasons why investors purchase zero NNN net lease properties:

1. Need Cash: it might be that an investor coming out of a sale with modest debt, or even all cash, may look to a zero ZCF deal in order to take advantage of the paydown/readvance feature. In short, this paydown/readvance feature allows the purchaser to put down funds generated by the initial sale toward the purchase of the subject property, thus meeting the 1031 equity requirements. In turn, the lender will readvance funds back to the purchaser up to the amount of the loan balance on the transaction date. Note, these funds are readvanced on a tax-free basis.  Alternatively, the use of a Substitute Collateral Right allows an owner of a ZCF NNN triple net lease property to extract equity through the issuance of a new debt instrument on the property which is backed by the cash being pulled out by the investor. 

• Depreciable Basis: yet another reason a NNN investor buys into a ZCF property is the lack of interest in positive cash flow typically received from most NNN net lease property investments. Instead, the net lease investor uses the loss through the depreciation and interest expense of the ZCF net lease triple net lease property to offset gains in other assets.  Importantly, the losses in the early years of the lease may be significant, especially if the owner utilizes accelerated depreciation. 
• Low Cost Acquisition: another reason is the 1031 or 1033 exchange NNN buyer which, with the financing already in place and assumable at low cost, making a zero cash flow deal very attractive. A 1031 exchange buyer coming out of a sale with minimal cash inflow may look to a zero triple net lease to fulfill the up-leg portion given the low equity requirement of a ZCF, usually 13-18%. 

• Estate Reasons: investors might use the highly complicated Zero NNN transaction would be to enable portfolio growth for heirs, avoiding taxes on cash flows for a 15-25 year period, and instead look to the lumpsums generated by the paydown/readvance and the ultimate increase in market value of the zero at the end of the lease term.

Call your expert brokers at the Triple Net Investment Group for outstanding advice on the purchase or disposition of ZCF assets, today. With our extensive track record in consummating Zero, 1031 exchange and other types of complicated NNN transactions, you can be sure of reliable, repeatable success in your acquisition or disposition.

Zero cash flow properties have significant advantages over other net lease assets. 

One, zero cash flow ZCF triple net properties are occupied by investment-grade tenants with a credit rating of minimum BBB, and long lease terms of 15-25 years. Two, these NNN properties offer investors a steady source of passive income with no management responsibilities. Three, zero cash flow ZCF deals is their ease of use in NNN 1031 and 1033 exchanges, especially the use of the paydown/re-advance cash-out feature to buy other assets outside of the exchange.  Four, investors can buy the most highly leveraged depreciable basis in triple net lease properties and use a zero cash flow deal within a LLC or partnership to offset their current income. Five, because ZCF properties are valued by the amount of equity on top of the debt that is required to acquire the property, this results in ZCF properties serving as the most inexpensive way to acquire a NNN asset. Six, Zero cash flow NNN properties remain a viable investment vehicle for opportunity zones, despite an uncertain tax and economic environment.  Seven, Zeros are best for avoiding the financing and tax barriers provided by traditional lenders, and enable estate plans to reliably plan the growth of NNN portfolios.

Section 467 debt allows a lender to distribute the principle & interest payments in extraordinary ways while maintaining monthly rental payments.  But this also creates the first disadvantage of a ZCF zero cash flow NNN property, which is phantom income.  A zero cash flow investor needs to be prepared for phantom income or sell prior to the period where principal outweighs the interest, typically year 13. Second, NNN investors forego reliable, regular, cash flow for long lease periods of upto 20 years. Third, net lease ZCF investors within 1031 exchanges will receive their value ONLY in lumpsums at the beginning of the transaction via the paydown/readvance feature, and towards the end, when the lease term is over, and the net lease NNN property has increased in market value. Four, whilst obvious, ZCF NNN investments are highly leveraged, and investors must be prepared for debt risk.  Five, zero cash flow net lease properties are very complicated transactions and this creates additional risk for investors, along with the prospect of highly expensive advisory fees.   Six, the tax consequences of phantom income can run into hundreds of thousands of dollars, and absent proper tax planning, offer a huge downside to an NNN triple net investor.  Seven, the “seven year itch”: investors can begin to seriously question their zero cash flow investment decision, often around year seven of the lease term, which is a typical time frame for a lot of private equity and hedge fund exits. 

Call your expert brokers at the Triple Net Investment Group for outstanding advice on the purchase or disposition of ZCF assets, today. With our extensive track record in consummating Zero, 1031 exchange and other types of complicated NNN transactions, you can be sure of reliable, repeatable success in your acquisition or disposition.