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.