Example Of A Zero Cash Flow DST
Investors that want to do a 1031 exchange using a property with high debt must ensure the replacement property also has at least the same level of debt. If the investor takes proceeds from the sale of the relinquished property and pays off its debt, the investor will realize a gain and will have to pay gains taxes. To avoid gains taxes, the investor can structure finances on the replacement property so that gains are not realized. A zero cash flow DST can help with this scenario.
A zero cash flow investment might sound like an odd or even undesirable investment. However, they definitely have a purpose. When used with DSTs, the zero cash flow structure is to acquire one property using a high amount of leverage, typically with a loan to value of roughly 70-90%, and pay for it with projected cash flows from the property. The net cash flow is basically zero. But the end result, with time, is the acquisition of another property. Triple-net leases in a DST , with long lease terms and hold periods of typically 15-25 years, are a common method for utilizing zero cash flow investments.
Zero cash flow DSTs utilize high credit clients. While no cash flow is guaranteed, high credit clients (rated by BBB- or above by S&P) are the most reliable lease clients available. These include clients such as Walgreens, Amazon, and similar large, well-established companies that can weather economic downturns. These investment-grade tenants allow the sponsoring company to get a much higher LTV for an asset than is typically given for non-investment grade tenants.
Let’s look at an example of how a zero cash flow investment might work. An investor owns a highly leveraged property. It has a LTV (loan-to-value ) of 70%. The investor sells the property, using the proceeds to pay off the loan. One problem is that this will generate a taxable event.
Instead, the investor can utilize a 1031 exchange to defer 100% of their taxes. Continue reading “Example Of A Zero Cash Flow DST”