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:
- 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.
- 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.
- 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.
- 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.
- 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