Zero Cash Flow Acquisitions
We have acquired 32 zero cash flow assets over the past thirty-six months. We are experts in underwriting and acquiring these complicated assets. See below for what you need to know to understand your zero cash flow property and call us if you're interested in monetizing your locked equity in this asset type.
Zero Cash Flow Asset
A Zero Cash Flow investment property is a highly leveraged asset (up to 90% debt) backed by a long-term lease from an investment grade credit tenant. CVS Health is an example of a tenant who has been signing zero cash flow leases with Section 467 debt structure for the past three decades.
In these structures, the monthly lease payment is set to equal the monthly debt service payment - resulting in an investment that produces no net cash flow to the property owner over the term of the lease. For this reason, these properties trade at heavy discounts versus comparable traditional net lease assets.
Principal & Interest Complications
Section 467 debt allows the lender to distribute the principal & interest payments in unordinary ways while allowing the monthly rental payment to remain the same. Using CVS as an example, if CVS owes $200K in annual rent to a Landlord - it is common to see an interest write off of $190K while paying down $10K in principal during the first several years of the loan.
Phantom Income
Entering the second half of the loan, the principal begins to outweigh the interest. The IRS views principal exceeding interest as 'income' even though the investor never actually receives cash flow. This perceived 'income' is a phenomenon known as Phantom Income, income that cannot be seen but is taxable.
Advantages & Harms
Acquiring a Section 467 debt structure asset carries with it many advantages and harms. The price point and interest write offs are attractive during the first decade of the loan. However, without proper planning it can cost an investor hundreds of thousands of dollars in phantom income.
When leveraging our expertise, we can help determine the right time to exit and the most effective strategies for monetizing your equity.