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1031 exchange
Zero Cash Flow Properties  

   Zero Cash Flow Properties

Zero cash flow properties are not for everyone but under the right circumstances can make good economic sense. Zeros are appealing to investors seeking highly leveraged properties. Zero properties are called zeros because they produce no cash flow while their debt is being paid off.

Common Reasons for Investing in Zeros:

Zeros provide the most cost effective method (least amount of cash needed) to satisfying both 1031 and 1033 exchange replacement property requirements.

The pay down re-advance facility found in many zeros allows 1031 investors to satisfy their exchange requirement for replacement property then, post-closing allows them easily and with no additional cost, take up to 92% of their cash out of the property for other uses. To use the pay down re-advance facility investors need to post a refundable deposit with the lender with non-exchange dollars.

For foreclosure and the sale of highly leveraged properties 1031 exchanges and zeros are used to defer recapture and capital gain taxes.

1033 investors wishing to maximize the amount of cash they retain after satisfying their 1033 replacement property requirement also use zeros.

Zero properties are used for long term estate building where cash flow is not currently desired. Once the debt is fully amortized these properties offer significant potential residual value and attractive secure cash flows.

1031 exchanges and zeros are used to defer recapture and capital gain taxes for foreclosure and the sale of highly leveraged properties.

1033 investors wishing to maximize the amount of cash they retain after satisfying their 1033 replacement property requirement also use zeros.

Properly constructed zero leases are like a bond that are backed by investment grade tenants (BBB- or better) with an initial lease term longer than the time required to fully amortize the debt on the property.

The leases are closely drawn with the tenant responsible for all expenses.

Debt is in place with a fixed term, fully amortized, nonrecourse and has a pay down re-advance facility that is available on a one time basis to the investor. This facility allows the investor to pay down the in place debt prior to closing then re-advance or take out the money post-closing.

Zeros are offered as leaseholds (building only) and fee simple (building and land).

Leaseholds often offer higher leverage than do fee simple properties. Typically the cash required for a newer leasehold is 10% while fee simple is 15%.

This translates to a 50% higher cash requirement for fee simple ownership making leaseholds an attractive alternative looking to minimize cash out of pocket to satisfy a 1031 or 1033 exchange requirement.

Zeros produce phantom income when the principal being paid down on the debt exceeds the deductions for depreciation and interest. This typically starts in years 15-16 and is paid for with inflation adjusted dollars (historically $.58 on the dollar). For exchange investors to accurately calculate the amount of phantom income the basis and deprecation from the relinquished property must be accounted for.

Leaseholds qualify as like kind property to fee real estate for 1031 and 1033 exchanges providing the primary term plus options for the lease are 30 years or greater (options must be controlled by the tenant).

Because leaseholds can be 100% depreciated they have less potential phantom income when the loan principal pay down starts to exceed the interest and depreciation deductions.

Transaction costs vary by state because of the differences in local transfer tax impacting the cash required to close. There are also several lender required legal opinions related to the transfer of the debt to a new owner.

TM 1031 Exchange provides a turnkey solution for investors needing the benefits of zero cash flow properties with debt in place for both fee simple and leasehold investments.

Close times can be as short as ten days, further making zero properties appealing for time sensitive situations.

Call 877 486 1031 for more details and an "all in" cost quote including needed legal opinions and other closing cost.

The above information is for general information purposes. Potential investors should consult their accounting and legal advisors for situation specific professional details.


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For assistance call 877 486 1031 or 310 264 0497.

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