In NNN Zero Cash Flow properties, the tenant is responsible for all the expenses, property management and taxes. The rent, is paid directly to the lender to meet the tenant’s debt service obligations (since the property is financed with high leverage, typically), so that the net income on the property is effectively “Zero” – hence the term, Zero.
A 1031 Starker exchange is the most popular tax mechanism for deferring taxes which becomes very powerful when combined with Zero Cash Flow NNN Properties. A 1031 exchange buyer coming out of a high-leverage sale with minimal sale proceeds may use a Zero to fulfill the up-leg portion of the transaction A buyer coming out of a sale with more modest leverage, or even all cash, may use a Zero in order to take advantage of the paydown/readvance feature available to them via the loan agreement. 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 exchange 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. Importantly, those funds are readvanced on a tax-free basis.
Generally, insurance companies, REITs, large corporations or trust funds, own Zeros, and they invest in Zero Cash Flow NNN properties to build up wealth assets(1031 Starker exchange ). When properly structured, a Zero brings in a leveraged property (upto 90% debt) which when paid off, after a long term (20+ years typically), results in significant capital gain.
An investor will benefit greatly if the Zero Cash flow Property is in good repair, and does not require anything but very minor improvements. Moreover, the tenant would possess excellent credit ratings, preferably AAA or BBB+, to ensure rent income stability. And a long lease term of about 20 years (minimum), sets the stage for maximum capital appreciation!(benefit of Zero Flow)
If you are ready for completely amortizing Zero Cash Flow NNN properties, with non-recourse, fixed-rate and assumable financing for your 1031 exchange, make sure you understand all the pros and cons. For more information on your 1031 Zero Cash Flow property exchange, contact the Triple Net Investment Group.
