This unconventional approach can bring immediate cash to investors or rescue them from a hefty tax bill, according to Jonathan Hipp of Avison Young.
Conventional real estate investment strategy is built on a straightforward formula. You invest in a property, possibly make some capital improvements, and reap the ongoing returns until your hold strategy dictates a disposition.
There are, however, other nonconventional strategies. One that isn’t touted too often, that can provide an alternative for some investors-especially 1031 investors-is a zero cash flow investment. We should say upfront that this is essentially a tax play, and it is not for everyone. Rather, it is a producer of immediate cash for investors in specific situations, or it is a saving grace for some who may be facing a tax bill they couldn’t otherwise afford.
First, let’s take a look at how a zero cash flow investment works. At its core, it is exactly what the name states. While the property you would invest in will produce revenue, that revenue is tied to the acquisition loan. The debt service has been engineered to equal the property’s rent payments over the life of the lease.
Let’s take the case of pharmacy giant CVS. Among the truckload of stores they open every year, there are some that they build on their own account. As a retailer, and not wanting to have capital tied up in real estate, CVS can bundle these properties for sale and lease back, with the loan and lease terms-typically 25 years-baked into a single package. The loans are also structured in such a way as to provide for something called paydown re-advance, which we’ll explain in a moment.
Now let’s apply this to a sample scenario. An investor, we’ll call her Betty, has owned an apartment property, currently valued at $5 million, for a long time.