Why invest in a single tenant, NNN property which does not generate any income for a long period of time, and ties up capital? Because it is a highly-leveraged NNN property backed by a ironclad lease, of at least 20 years, guaranteed by an investment-grade tenant with at least BBB credit and will have a valuation balloon at the end of term. The term “Zero Cash Flow,” or “Zero” as it is called, refers to the fact that the NNN property’s entire net operating income goes to service the debt absorbed to purchase the asset.
Nearly all Zero Cash Flow NNN properties generate tax losses that can be used to offset portfolio income(invest in a single tenant). These losses can be substantial in the early years of the amortization of the debt. The owner’s use of accelerated depreciation can improve on this tax deduction. However, between 10-16 years of the loan, the property begins to generate “phantom income,” because of the reduction of loan principal and corresponding decline in interest payments, over the lease/loan period.
Zeros are very attractive to investors looking for a quick 1031 exchange. The financing is already in place, and the loan is assumable at low cost. Typically, there is also an option provided in the mortgage deed that allows the 1031 exchanger to customize the loan to match the particular debt and equity requirements of the exchange, with an option to cash out a substantial portion of equity after the exchange is completed via the “Paydown/Re-advance” clause.
Let’s review the major benefits of investing in NNN Zero Cash Flow properties:
- Used for 1031 or 1033 exchanges: these NNN property swaps allows investors to defer the capital gains taxes after the sale of a particular property by reinvesting the profits in high quality, highly leveraged Zero properties;
- Low equity stake: most zeros are purchased with equity as low as 10% – 15% of the net value;
- Assumable, low cost financing: Zero financing is assumable, non-recourse, fixed rate and fully amortizing, mostly;
- Attractive valuations: Zeros offer secure, predictable cash flow during term, and at the end of the loan term, Zeros offer lucrative residual value
Zero Cash Flow investments are least understood when compared to other commercial real estate property. Hence, it is advisable to consult with an experienced broker. Contact the Triple Net Investment Group today for navigating your 1031 exchange, using Zero Cash Flow NNN property.
