Elements of a Zero in 2014
A “Zero” investment is a real estate investment that provides a relatively inexpensive source of depreciation and interest expense to offset passive income from other real estate investments. By purchasing a Zero, a buyer is “purchasing” the tax benefits from interest expense deduction on the asset’s loan and the depreciation from the asset’s tax basis. Typically, the asset’s depreciable life for a commercial property is 39 years; however depreciation in the initial years can be increased following a cost segmentation study.
- Here are some typical elements of a Zero Transaction:
- Real estate investment subject to high leverage (approx. 80-85%), non-recourse, long-term loan based primarily on the creditworthiness of the tenant.
- Absolute NNN leased, single tenant property, no landlord responsibilities High credit, - investment grade rated tenant of a retail, commercial, medical or industrial property.
- Long term lease (20+ years)
- Rent structured to equal debt service (DSCR = 1.0). Loans are self liquidating.
- Required equity is priced as a percentage of the debt