Zero-cash-flow investments are properties with debt service matching the property’s net income. With all of the net income attributed to the debt service, the owner receives no cash flow until the loan matures. In lieu of cash flow, the investment provides annual passive losses which investors may use to offset income from other investments. Perhaps more importantly to prospective investors, the loans on these types of properties often contain a paydown/re-advance feature which allow the purchaser to meet the requirements of a tax-deferred exchange, while cashing out much of their equity.
These loans are typically fully-amortizing and have terms matching the length of the lease, generally 20 to 30 years. When the mortgage matures, the property is then owned free-and-clear of any debt. Properties structured as zero-cash-flow investments are typically net leased to a single tenant on a long-term basis. The leases are generally structured as absolute-net or bondable, leaving the landlord with no management or maintenance responsibilities. In most cases, the tenants hold investment-grade ratings, minimizing the risk of default.
WHY WOULD AN INVESTOR MAKE THIS INVESTMENT?
> Flexible Debt and Equity Matching for 1031 and 1033 Exchanges
The paydown/re-advance feature provides the ability to adjust debt and equity levels of the replacement property to accommodate virtually any leverage scenario, without sourcing a new loan.
> Equity from Relinquished Property Is Cashed Out:
Utilizing the paydown/re-advance feature of the loan, an investor has the ability to meet the requirements of a
tax-deferred exchange and can cash out much of their equity, before the next debt service payment on the replacement property’s loan. This equity can be reinvested or otherwise placed at the investor’s discretion.
> Acquire An Institutional Quality Investment
These investments are generally leased to an investment-grade tenant on a long-term lease, but can be purchased with minimal equity. Typically, a $5 million investment can be acquired for approximately $800,000 in cash.
> Fully Amortizing Loan
The fully amortizing, in-place loan provides the investor with free and clear ownership upon loan maturity. The investor may choose to leave the asset unleveraged for greater cash flow or refinance to extract equity for further investment.
> Highly Leveraged Properties
These investments allow an investor to place remaining capital in other investments.
> Estate Planning
The fully amortizing loans provide free and clear ownership upon loan maturity, potentially providing a source of long-term income if the tenant renews their lease.
> Annual Depreciation
Provides an annual source of depreciation and interest expenses that can be written off against income from other qualifying investments.
*Thomas Company does not represent or warrant the accuracy of the tax benefits explained herein. Any prospective purchaser should consult with their tax advisor.
PAST ZERO-CASH-FLOW TRANSACTIONS
UBS Center
Stamford, CT
$183 Million
Commonwealth Edison Corporate HQ
Oakbrook Terrace, IL
$63.7 Million
National CVS Portfolio
71 CVS Stores in 20 States
$245 Million
Hy-Vee Supermarkets
3 Stores in 3 States
$42.3 Million
