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We are currently marketing a number of single tenant, bond net leased zero cash flow investment
properties which you may want to be aware of. These properties can be very valuable to those in a
1031 or 1033 Tax-Deferred Exchange. These properties are fully leveraged and generate zero cash
flow over the entire primary term of the lease.
These zero cash flow properties tend to move quickly. Available zero cash flow properties are
subject to prior sale or withdrawal at any time.
Zero Cash Flows are popular choices for estate planning, trusts and pensions who enjoy the income
generated after the debt is paid off. This remainder income is then left to heirs. Zero cash flow
tax planning benefits include satisfying exchange requirements with very little equity plus
interest and depreciation deductions.
Recent examples include:
(1) Sold a zero cash flow store to buyer with $10 million in cash and $12 million in debt to
replace from a
prrior 1031 sale. The buyer closed with the full $10 million dollars and
subsequently refinanced the property to pull out $8 million. In the end, the Buyer sheltered gain
on a $22 million sale, pulled out $8
million cash tax deferred, and owns the $22 million store on a bond net
lease for $2.2 million in cash.
(2) Large Apartment and Commercial Office Building owner accepted an offer and closed on one of
their properties, a $65 million Commercial Office Building. With the 45-day clock ticking down,
they were not finding any suitable replacement properties and were in a serious tax bind. Of the
$65 million, $45 million was cash and $20 million was debt. The buyer closed on a $65 million zero
cash flow portfolio and within 2-3 weeks, pulled out $40 million in cash. With $40 million in hand
tax-free, they could now take their time in negotiating a purchase of a replacement property
without the gun to their head. Alternatively, they could place this cash in whatever other
investment they want, even the stock market if they want. In the mean time, they not only
sheltered their gain, but immediately enjoyed lots of tax benefits in the way of interest and
depreciation expense on the zero cash flow portfolio.
What is a 1031 exchange & why should I do one? We specialize
in assisting tax exchange buyers locate appropriate replacement
properties and complete a
tax deferred exchange. Recently, close to $1 Billion in
sales of properties to tax oriented Section 1031 and 1033 purchasers have been completed.
Tax Issues: Any sale of business or investment property is a potentially
taxable event, and the
two areas of tax liability that can be triggered are capital gains and
the recapture of
depreciation. The Internal Revenue Code Section 1031 allows for 100%
deferment of
capital gains tax and depreciation recapture if the property is exchanged
for like-kind
property.
Determining Gain or Loss: The realized gain from the sale or
other
disposition of property is the excess amount realized over the adjusted
basis. The adjusted
basis is the initial basis plus any capital improvements less depreciation. Example: JP
Development builds a shopping center for a total cost of $10.0 million
(the initial basis) comprised of $3.0 million in equity and $7.0 million in debt. Some years
later JP
Development sells the center for $14.0 million. Assuming 20% depreciation
and no
capital improvements, the adjusted basis of sale is $8 million resulting
in a $6 million
taxable gain. At the current 28% capital gains tax rate, the tax
liability on this gain would
be $1.68 million.
Replacement Property: The property sold is referred to as the
"Relinquished Property"
and the newly acquired exchange is called the "Replacement Property".
JP Development
would need to find a Replacement Property of $14.0 million, the total
sales price, or
greater. The property would need to be purchased with a minimum of $7.0
million in
equity (the equity created from the sale). Currently, like-kind real
property by definition is
any real property, other than your domicile, so JP Development could
exchange the
shopping center for a hotel, office building, industrial warehouse,
etc.
Net-Leased Properties: Net-leased properties offer the security and
limited
responsibility/management that are ideal for most 1031 Exchange Buyers.
The lease
structure allows for passive management with a consistent income stream
from a credit
tenant.
Timing: Exchange buyers have 45 days following the close of
their sale to
identify up to three potential Replacement Properties. The acquisition
of one of those
properties must occur no later than 180 days after the original sale.
The money from the
sale is typically held by an accommodator or title company which
specializes in 1031
Exchanges.
Why buy
zero cash flow properties?
Merits of these properties...
Very High
Leverage (typically 85%
to 90%);These are a vehicle to cover large debt requirements with very low equity
(typically for 1031 trades)These provide the ability to cover large condemnation proceeds
with relatively low equity (for 1033 situations) These properties can close in as quick as
seven to ten days if needed and the due diligence is typically very simple. The potential for
above market returns when calculated over extended periods of time (see
below). Example of Internal Rate of Return Calculation on a "Zero"Assumptions: Buy
a property at 12% equity over an assumed debt of $5 million ($600,000); Buyer will get
0% cash flow on this equity for the primary term of 22 years; Residual Value at the end of
the twenty second year is assumed to be the purchase price escalated at 2% annually over
the term (8,657,486); Internal Rate of Return would be 12.90% under the above scenario.
(This does not take any positive tax issues into consideration)
NNN Bond Lease Summary: The "bond" lease structure is the most secure form of real estate lease
for an
owner/landlord. Overall the tenant assumes virtually all risks and responsibility of
ownership over the lease term. Following are the basic terms of a "bond" lease:Lease
Term: 20 - 25 years
Exposures: Tenant is responsible for all costs including
operating expenses (CAM, real estate taxes and insurance), maintenance, repairs and
replacement.
Landlord
Responsibilities: None Assignment/Sublet: Tenant has the right to
assign/sublet the lease although the guaranty shall remain in full force and
effect.
Casualty/Condemnation:Tenant assumes risk of casualty and
condemnation.
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