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:
- 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.