Zero Cash Flow Assets | Best Buys Today?
Zero cash flow assets, "Zeros" can be attractive to several investor types, with the largest pool of zero buyers being 1031'ers.
This article was written using a post from GlobeSt. I found it incredibly resourceful and wanted to share it with you all.
Due to COVID-19, tenants are seeking rent relief, investors are taking capital off the table, and lenders are tightening up their loan restrictions. More and more experts are chiming in trying to predict the direction the economy will swing, but I've yet to see anyone put their money where their mouth is. Point being, the future of the US economy is at best, uncertain.
So, where do zero cash flow (ZCF) assets fit in this volatile marketplace?
A zero cash flow property, or a “Zero,” is a leveraged asset with an in-place, fixed-rate, long-term financing (typically 15-25 years) backed by a bond-style, absolute net lease guaranteed by an investment-grade credit. The entirety of the asset's NOI goes straight back into servicing the debt, maintaining the property, and as you can guess, provide zero cash flow to the owner.
When would you consider buying a Zero?
A zero is attractive to 1031-Exchange buyers who have little or no equity, seeking to fulfill their trade need by replacing a significant amount of debt with as little equity as possible.
An exchange buyer with a larger amount of equity may seek a zero in order to use the paydown/readvance feature provided in the loan, allowing the buyer to right-size the debt and equity requirements of the trade and extract a significant amount of tax-free equity once the exchange is completed.
A non-exchange buyer may be looking to purchase an asset that will produce net tax losses, off-setting income elsewhere in the owner’s portfolio.
How are Zeros performing under the COVID pandemic?
With the market’s outlook being uncertain, the superior investment-grade quality in zero cash flow assets strengthens the appeal to buyers in today’s economy. Because Zeros require such little equity, they are the most economical way to purchase a net lease asset, obtain a long-term lease, and defer your tax burden.
Zeros can also be a great alternative for 1031 exchange needs a way out from deed-in-lieu or foreclosure scenarios. Both are considered by the IRS to be a sale of the asset to the lender, resulting in possible gains that can be deferred.
Best of all, because zeros are acquired with an in-place loan, the investor isn’t restricted by the severe lack of financing options currently available.
How Large is the market for ZCFs?
the ZCF market sees over $2 billion a year in transactional volume. As long as properties are being sold and resulting in 1031 exchanges that need to be fulfilled, there will always be a market for zero cash flow assets.