A “Zero” is a triple net leased property that employs high-leverage, usually in the 80%-90% range. The only way a sponsor is able to achieve this level of debt is by securing a very highcredit, investment grade tenant with a long-term lease. These properties produce a return on the funds invested, however they do not include a current distribution to the client, hence the term “Zero”. All cash flow from operations go towards servicing the debt and amortizing the loan. Investor proceeds are dispersed upon disposition of the asset.
An investor can utilize a Zero in several unique ways:
Furthermore, the debt obtained through the Zero is non-recourse, meaning the only investor capital at risk is what is left in the property, not the leveraged amount
Our investor was performing an exchange at an LTV of approximately 60%. He was an older investor and his investment goals of preservation of capital and reliable income were more suited to properties that had low to no leverage associated with them.
We placed approximately 15% of his proceeds into a Zero and solved his debt requirements with a relatively small amount of capital. This allowed him to invest the remaining principle in several other properties that had no debt, increasing his cash flow and lowering the risk profile dramatically. He now enjoys more income than he previously had and has no financing or foreclosure risk.
We had an investor that found herself in a tight spot after the interest rate spike during 2022-2024. She was very real estate rich and cash poor, and got in over her head on a development play. She over-levered the project and was now in a situation servicing debt payments that had ballooned to over double of what was originally budgeted. She did not have access to capital to remedy the situation since a majority of her wealth was tied up in real estate and paying taxes on her holdings was not palatable.
We discovered that by exchanging two of her other properties into a Zero and doing a cash-out refinance, she could pay off the debt on her development project and save it from becoming a loss. She did exactly that and was able to complete the property and sell it after 18 months. She even ended up having a slight gain after it was all said and done, with zero tax liability.
A married client of ours that owned a property in Texas made the great decision to sell their property during the post-pandemic run up in 2021. They received a grant offer and had a significant capital gain, so an exchange was the obvious path forward. However, they estimated that all the replacement properties that they were considering were also artificially inflated and were in a sell-high/buy-high market that they couldn’t avoid.
The clients performed the exchange compliant to IRS requirements and placed the funds into a Zero. After 30 days they refinanced 86% of the proceeds and placed them into a money market account earning 5% at the time. They waited a full two years until they found a property that they felt was a good deal and the market had normalized. Since their debt was already solved with the Zero, they were also able to purchase that property without getting a bank involved and tying up a mortgage with a high rate.
* The scenarios provided herein are meant only to demonstrate principals. There can be no guarantee of performance or that any investment will achieve its stated objectives.
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All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future performance. There can be no guarantee that any investment or strategy will achieve its stated objectives. Speak to your tax and/or financial professional prior to investing. Securities and advisory services through Emerson Equity LLC, member FINRA and SIPC and a registered investment adviser. Emerson is not affiliated with any other entity identified herein.
There is no guarantee that any strategy will be successful or achieve investment objectives; Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments; Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities; Potential for foreclosure – All fnanced real estate investments have potential for foreclosure; Illiquidity –These assets are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments;Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions; Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefts. Stated tax benefts – Any stated tax benefts are not guaranteed and are subject to changes in the tax code. Speak to your tax professional prior to investing.
Investing in opportunity zones is speculative. Opportunity zones are newly formed entities with no operating history. There is no assurance of investment return, property appreciation, or profits. The ability to resell the fund’s underlying investment properties or businesses is not guaranteed. Investing in opportunity zone funds may involve a higher level of risk than investing in other established real estate offerings. Long-term investment. Opportunity zone funds have illiquid underlying investments that may not be easy to sell and the return of capital and realization of gains, if any, from an investment will generally occur only upon the partial or complete disposition or refinancing of such investments. Limited secondary market for redemption. Although secondary markets may provide a liquidity option in limited circumstances, the amount you will receive typically is discounted to current valuations. Difficult valuation assessment. The portfolio holdings in opportunity zone funds may be difficult to value because financial markets or exchanges do not usually quote or trade the holdings. As such, market prices for most of a fund’s holdings will not be readily available. Capital call default consequences. Meeting capital calls to provide managers with the pledged capital is a contractual obligation of each investor. Failure to meet this requirement in a timely manner could elicit significant adverse consequences, including, without limitation, the forfeiture of your interest in the fund. Leverage. Opportunity zone funds may use leverage in connection with certain investments or participate in investments with highly leveraged capital structures. Leverage involves a high degree of financial risk and may increase the exposure of such investments to factors such as rising interest rates, downturns in the economy or deterioration in the condition of the assets underlying such investments. Unregistered investment. As with other unregistered investments, the regulatory protections of the Investment Company Act of 1940 are not available with unregistered securities. Regulation. It is possible, due to tax, regulatory, or investment decisions, that a fund, or its investors, are unable realize any tax benefits. You should evaluate the merits of the underlying investment and not solely invest in an opportunity zone fund for any potential tax advantage.
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