Does it pencil?Drop 001Capital markets
Zero cash flow deal
A hotel portfolio sells for $85M and the seller wants to exchange into a zero cash flow, single-tenant net lease industrial building. Replacing the $45M of debt does not complete an $85M exchange.
Illustrative scenario
1031 into single-tenant net lease industrial
- Credit tenant
- 20-year lease
- Zero cash flow: rent equals debt service
Why buy something that pays you nothing?
Because cash distributions and economic return are different calculations.
The tenant’s rent services the loan. Principal amortization builds equity. A properly structured exchange can defer the gain.
Where the pencil gets sharp
Replacing $45M of debt alone does not complete an $85M exchange. The $40M of equity has to go somewhere too.
Zero cash flow structures run at high leverage. High leverage needs very little equity. So the question is not whether the debt can be replaced. It is whether the replacement is large enough to absorb the equity.
Zero cash flow can still mean taxable income. As the loan amortizes, more of each rent payment goes to principal, and principal is not deductible. The owner can owe tax in a year with no distribution.
Change the replacement price and the leverage. The check shows how much of the $40M the deal absorbs.
| Sale equity to place | $40.0M |
|---|---|
| New debt at 90% loan-to-value | $76.5M |
| Equity this deal requires | $8.5M |
| Value test: price at least $85.0M | MET |
| Equity test: all sale equity placed | UNPLACED $31.5M |
| Price that absorbs all equity at this leverage | $400.0M |
Simplified, before closing costs, fees and taxes. This is arithmetic on the numbers you enter. It is not tax, legal or investment advice. A qualified intermediary and tax counsel decide whether an exchange works.
Show me
| The question | What it decides |
|---|---|
| Where does the $40M of equity go? | Whether the exchange defers all of the gain or only part of it |
| What is the replacement purchase price? | The value test, and the basis going forward |
| How much debt amortizes over the lease? | How much equity exists at lease expiration |
| Who guarantees the lease? | Whether "credit tenant" means the parent or a subsidiary |
| What taxes arise without cash distributions? | How much outside cash the owner needs each year |
| What is the building worth when the lease expires? | The residual, which is most of the return |
Does it pencil?
A 20-year lease is an input. The structure is the deal.