Zero Cash Flow ZCF Exit strategy and/or ZCF DST Funds

[Isaac S.]

I was recently exposed to the use of Zero Cash Flow DST offerings for the same reason you would invest in an individual ZCF asset....

for me, I first considered them for the depreciation that would help shelter cash flow on another asset that is fully depreciated. But i was soon discouraged as I found out that prepayment or refinance was heavily penalized, so when the deal started to generate phantom income(year 10-12), that is taxable, you would be on the hook for even more taxes and not have an easy exit. At least that's my understanding. Am i wrong?

my other questions: how do the DST sponsors exit out of the ZCF Properties or do they at all? Is there any chance of appreciation? Will you get your initial investment back out at exit?

I like the idea of using some part of my portfolio as a highly leveraged path to enough depreciation to shelter my income and give me a higher cash flow, but, I am not sure if i am missing something.

[Chris Kane]

@Isaac SInger

The ‘play’ for ZCF investments is locking away bad basis until a person dies and the basis is stepped up. If you had a big liquidity event and want to play the waiting game between Uncle Sam and Father Time, it’s a good option and you can get some really nice institutional quality real estate for pennies on the dollar.

In ZCF or ‘zeros’, you can structure a pay down readvance feature that unlocks some basis, and with the right debt product and structure, you can actually break out your bad basis in the form of a loan and be net positive for your anticipated tax (phantom income / income tax) carry for the next several years. But, seeing as though you are looking to buy-in and not originate, this feature is likely off the table with the deals you are looking at.

As for the exit... all good things come to an end and the debt encumbrance that creates a zero, eventually gets paid off in full (generally the case) or requires a balloon to retire (less common). At this stage, you have either died or you wrote checks for all those years of carry. In this case, you have a fully paid for property and its a good day. Of course, it is likely that your credit tenant (or structured credit via something way more exotic) is long gone and you will need to re-tenant and improve the property for your next big play.

As said earlier... you are just deferring not eliminating with a zero. Personally, I’d stay away from them unless you have huge bad basis problems and/or you are getting towards the end of your actuarial lifespan and are using the zero as an estate planning device. If you are looking to originate zeros, that is an interesting play... but that is not for the faint of heart or those with out several tens of millions on their balance sheet ready to dive in head first.

Happy hunting! -CK