{"id":1004609723,"date":"2022-11-02T06:46:27","date_gmt":"2022-11-02T14:46:27","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004609723"},"modified":"2023-01-18T13:28:30","modified_gmt":"2023-01-18T21:28:30","slug":"the-pros-and-cons-of-zero-cash-flow-transactions","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/","title":{"rendered":"The Pros and Cons of Zero Cash-Flow Deals"},"content":{"rendered":"
\"\"<\/a>

Jonathan Hipp<\/p><\/div>\n

Can you imagine ever investing in a property that produces no cash flow? Believe it or not, there are actually times when such deals can be advantageous, but they come with a warning label. While zero cash-flow assets do have a place\u2013especially when it comes to single-tenant net leased properties, they\u2019re certainly not for everyone. Hence, enter such opportunities with a trusted real estate adviser as well as your tax and legal counsel.<\/p>\n

What is a zero? It\u2019s just a property with a loan whose debt service is equal to the NOI. To make one, typically you need a credit tenant on a long-term lease. This makes it possible to get the highest possible leverage. So high that the debt service coverage ratio equals one. There\u2019s no handy way to convert that to an LTV because each deal is different, but historically it\u2019s been close to 80 percent LTV.<\/p>\n

So why do that? Isn\u2019t cash flow the whole point of investing in real estate? It is, except for when it isn\u2019t. One situation immediately comes to mind.<\/p>\n

First, let\u2019s say you find yourself in the unfortunate situation where you need to hand the keys back to a lender. If that happens, you\u2019ve triggered a sale (for tax purposes). The sales price is the balance on the loan, and your basis is whatever it is. It\u2019s not uncommon for a longstanding owner of a property (who therefore likely has low basis) to have refinanced out some equity from time to time during their ownership. What happens when you sell that property, by your choice or otherwise, and are left at the closing table with little to no cash with which to 1031 and defer your built-in gain?<\/p>\n

If you can\u2019t find a suitable replacement property with which you can obtain enough leverage to cover your gain, or come up with additional cash to do so, you\u2019re getting a tax bill.<\/p>\n

Enter the zero<\/h2>\n

Due to the zero being so highly levered and, therefore, requiring the lowest possible amount of equity to close the deal, these properties make a great option for \u201cliving to fight another day\u201d without triggering your gain. You\u2019ll be forgoing cashflow, but in this situation, you likely weren\u2019t getting any to begin with. We\u2019ll call this: the least worst option.<\/p>\n

It should be noted, however, that while you\u2019ve effectively deferred your gain if you pursue this strategy, and you are therefore guaranteed no cash flow, you\u2019ll still likely have taxable income generated by the zero. We\u2019d refer to this as phantom income. That is to say: income on which you\u2019ll be taxed, but no cashflow with which to pay it.<\/p>\n

The source of this is twofold. First, if you had low basis going in, your depreciation deductions are limited to what you were getting on the deal you gave back.<\/p>\n

Secondly, the loan on the zero is going to amortize like any other loan and, over time, the interest deductions will diminish.<\/p>\n

All of this is true for any property with debt that is owned long enough. So, it\u2019s not unique to zeros. It\u2019s just more obvious because of the lack of any cash flow at all.<\/p>\n

There are creative ways to help mitigate this, but, in the long run, you\u2019ll need to be prepared.<\/p>\n

Pulling this all together, a zero may be a viable strategy for some owners, particularly considering some of what is taking place in the capital markets these days. There are many factors to consider and, as we said at the outset, having a solid team of experienced advisors is essential to successfully navigating the world of zeros.<\/p>\n

Jonathan Hipp is head of the U.S. Net Lease Group at\u00a0Avison Young<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Jonathan Hipp of Avison Young on a predicament that many owners could be facing.<\/p>\n","protected":false},"author":1126,"featured_media":1004327456,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21684],"tags":[33022],"class_list":["post-1004609723","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-viewpoint","tag-avison-young"],"acf":[],"yoast_head":"\nThe Pros and Cons of Zero Cash-Flow Deals - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Pros and Cons of Zero Cash-Flow Deals\" \/>\n<meta property=\"og:description\" content=\"Jonathan Hipp of Avison Young on a predicament that many owners could be facing.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2022-11-02T14:46:27+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-01-18T21:28:30+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2019\/05\/Hipp-Jon-2016.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"800\" \/>\n\t<meta property=\"og:image:height\" content=\"620\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Jonathan Hipp\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/\",\"name\":\"The Pros and Cons of Zero Cash-Flow Deals - Commercial Property Executive\",\"isPartOf\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2019\/05\/Hipp-Jon-2016.jpg\",\"datePublished\":\"2022-11-02T14:46:27+00:00\",\"dateModified\":\"2023-01-18T21:28:30+00:00\",\"author\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/25d998ea8b694fdb939fbcbfc1c426d5\"},\"breadcrumb\":{\"@id\":\"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/\"]}]},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/#primaryimage\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2019\/05\/Hipp-Jon-2016.jpg\",\"contentUrl\":\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2019\/05\/Hipp-Jon-2016.jpg\",\"width\":800,\"height\":620,\"caption\":\"Jonathan Hipp, Principal & Head of U.S. Net Lease Group, Avison Young. Image courtesy of Avison Young\"},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.commercialsearch.com\/news\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"The Pros and Cons of Zero Cash-Flow Deals\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#website\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/\",\"name\":\"Commercial Property Executive\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.commercialsearch.com\/news\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/25d998ea8b694fdb939fbcbfc1c426d5\",\"name\":\"Jonathan Hipp\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/353e1e4cce879e9b825fd43344d794c50f466757381e9fa57176a29e7b33ca42?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/353e1e4cce879e9b825fd43344d794c50f466757381e9fa57176a29e7b33ca42?s=96&d=mm&r=g\",\"caption\":\"Jonathan Hipp\"},\"url\":\"https:\/\/www.commercialsearch.com\/news\/author\/jonathanhipp\/\"}]}<\/script>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"The Pros and Cons of Zero Cash-Flow Deals - Commercial Property Executive","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/","og_locale":"en_US","og_type":"article","og_title":"The Pros and Cons of Zero Cash-Flow Deals","og_description":"Jonathan Hipp of Avison Young on a predicament that many owners could be facing.","og_url":"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/","og_site_name":"Commercial Property Executive","article_publisher":"https:\/\/www.facebook.com\/CPExecutive","article_published_time":"2022-11-02T14:46:27+00:00","article_modified_time":"2023-01-18T21:28:30+00:00","og_image":[{"width":800,"height":620,"url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2019\/05\/Hipp-Jon-2016.jpg","type":"image\/jpeg"}],"author":"Jonathan Hipp","twitter_card":"summary_large_image","twitter_creator":"@cpexecutive","twitter_site":"@cpexecutive","schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/","url":"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/","name":"The Pros and Cons of Zero Cash-Flow Deals - Commercial Property Executive","isPartOf":{"@id":"https:\/\/www.commercialsearch.com\/news\/#website"},"primaryImageOfPage":{"@id":"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/#primaryimage"},"image":{"@id":"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/#primaryimage"},"thumbnailUrl":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2019\/05\/Hipp-Jon-2016.jpg","datePublished":"2022-11-02T14:46:27+00:00","dateModified":"2023-01-18T21:28:30+00:00","author":{"@id":"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/25d998ea8b694fdb939fbcbfc1c426d5"},"breadcrumb":{"@id":"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/"]}]},{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/#primaryimage","url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2019\/05\/Hipp-Jon-2016.jpg","contentUrl":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2019\/05\/Hipp-Jon-2016.jpg","width":800,"height":620,"caption":"Jonathan Hipp, Principal & Head of U.S. Net Lease Group, Avison Young. Image courtesy of Avison Young"},{"@type":"BreadcrumbList","@id":"https:\/\/www.commercialsearch.com\/news\/the-pros-and-cons-of-zero-cash-flow-transactions\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.commercialsearch.com\/news\/"},{"@type":"ListItem","position":2,"name":"The Pros and Cons of Zero Cash-Flow Deals"}]},{"@type":"WebSite","@id":"https:\/\/www.commercialsearch.com\/news\/#website","url":"https:\/\/www.commercialsearch.com\/news\/","name":"Commercial Property Executive","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.commercialsearch.com\/news\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/25d998ea8b694fdb939fbcbfc1c426d5","name":"Jonathan Hipp","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.commercialsearch.com\/news\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/353e1e4cce879e9b825fd43344d794c50f466757381e9fa57176a29e7b33ca42?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/353e1e4cce879e9b825fd43344d794c50f466757381e9fa57176a29e7b33ca42?s=96&d=mm&r=g","caption":"Jonathan Hipp"},"url":"https:\/\/www.commercialsearch.com\/news\/author\/jonathanhipp\/"}]}},"jetpack_featured_media_url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2019\/05\/Hipp-Jon-2016.jpg","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts\/1004609723","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/users\/1126"}],"replies":[{"embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/comments?post=1004609723"}],"version-history":[{"count":9,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts\/1004609723\/revisions"}],"predecessor-version":[{"id":1004640171,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/posts\/1004609723\/revisions\/1004640171"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/media\/1004327456"}],"wp:attachment":[{"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/media?parent=1004609723"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/categories?post=1004609723"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.commercialsearch.com\/news\/wp-json\/wp\/v2\/tags?post=1004609723"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}