The short answer
The tenants in the zero cash flow DSTs we place are investment-grade companies on long-term triple-net leases, where the tenant pays the property's taxes, insurance and upkeep and the rent goes straight to the lender. Credit quality is the point of the structure: the loan runs at 80 to 90% of value, so the lender needs a rent stream it can treat almost like a bond payment. That also means the investment is, in practice, a bet on one company paying one lease, because under Rev. Rul. 2004-86 the trustee may replace a tenant only in bankruptcy or insolvency. Read the tenant, the guarantor and the lease term before anything else in the offering.
At a glance
| Tenant type | Investment-grade credit, single tenant, on a long-term lease |
|---|---|
| Lease form | Triple-net: the tenant pays taxes, insurance and maintenance |
| Why credit matters | All rent services an 80 to 90% non-recourse loan |
| Re-leasing | Allowed only on the tenant's bankruptcy or insolvency |
| Bankruptcy cap | Landlord's damage claim limited to the greater of 1 year or 15% of remaining rent, up to 3 years |
| Rejection deadline | A bankrupt tenant must assume or reject within 120 days, extendable once by 90 |
| Foreclosure | Taxed as a sale, with the nonrecourse balance in your amount realized |
A zero is built around one creditworthy tenant whose rent pays the whole loan
Our cash out DST page describes the structure plainly: triple-net leased properties backed by investment-grade tenants and long-term leases, with all operating income going to service and amortize the debt. Investors receive no current distributions.
Net leasing is what makes that arithmetic possible. In the facts of Rev. Rul. 2004-86, the tenant "is to pay all taxes, assessments, fees, or other charges imposed" on the property and "all insurance, maintenance, ordinary repairs, and utilities," so the landlord's only job is to collect rent and pay the lender.
When there are almost no landlord expenses, the full rent can be committed to debt service. That is why the asset types that fit a zero are the ones single companies lease for long terms, as our page on net lease DSTs shows by sector.
Investment-grade credit is what lets a lender lend 80 to 90%
The 80 to 90% leverage on our cash out DSTs only works if the lender is confident the rent will arrive for the life of the loan. A tenant with an investment-grade rating, meaning one in the upper tiers of the rating scales used by the major credit rating agencies, is the closest a property gets to a bond-like payment stream.
Two details in the lease decide how much of that credit you actually get. The first is who signed it: a parent company, an operating subsidiary, or a subsidiary with a parent guarantee are three different credits. The second is how the lease term compares with the loan term, because rent that stops before the loan is repaid leaves a gap no one has agreed to fill.
Ratings also move. A tenant that is investment grade at closing can be downgraded during the hold, and nothing in the trust lets the trustee demand more security or renegotiate the lease in response.
If the tenant fails, the trust has few moves and the tax still arrives
Bankruptcy is the one event that lets a DST trustee re-lease. In a bankruptcy case, 11 U.S.C. section 365(d)(4) treats a nonresidential lease as rejected if the tenant does not assume or reject it within 120 days of the order for relief, extendable for 90 days for cause.
If the lease is rejected, 11 U.S.C. section 502(b)(6) caps the landlord's claim for future rent at "the greater of one year, or 15 percent, not to exceed three years, of the remaining term," and the claim is only worth what the bankrupt tenant's estate can pay. With most of the property's value owed to the lender, a long vacancy can end in foreclosure.
Foreclosure is not a tax-free exit. Reg. section 1.1001-2 includes the discharged nonrecourse debt in your amount realized, so you can owe tax on a large gain while receiving nothing. The sponsor and master tenant bankruptcy page covers the trust-level mechanics.
Hypothetical: what a tenant default would do to a $150,000 slice
Round numbers, hypothetical. You place $150,000 in a zero at 85% leverage, buying a share of about $1,000,000 of property carrying about $850,000 of debt. Your share of annual rent is $70,000, every dollar of it going to the lender.
In year five the tenant files for bankruptcy and rejects the lease. Your share of the loan is now about $700,000 and the empty building would sell for $600,000. The lender forecloses. You lose the $150,000 of equity, and your amount realized for tax includes the $700,000 of discharged debt, so if your adjusted basis in the position is $400,000 you report a $300,000 gain with no cash to pay the tax.
That outcome is why tenant credit belongs at the top of your due diligence, not the bottom. Run your own numbers with your CPA.
Questions to ask about the tenant before you subscribe
The private placement memorandum discloses the tenant, the lease and the loan; these are the lines to find. Our page on tenant credit analysis explains how to read the answers.
- Who is the tenant entity on the lease, and is there a parent guarantee?
- What is the tenant's current credit rating, and has it changed in the past few years?
- When does the primary lease term end compared with the loan's final payment?
- Does the tenant have early termination, go-dark or purchase options?
- Does the loan require the lease to stay in place, and what happens to the loan on a rejection?
- How large is this one position in your total exchange, and what else holds your other proceeds?
Related questions
Are zero cash flow DST tenants always retailers?
No. The common thread is a single creditworthy tenant on a long net lease, not a sector. The asset can be retail, industrial, medical or office, as long as one tenant carries the expenses and the rent can be pledged to the loan.
Does investment grade mean the rent is guaranteed?
No. A rating is an opinion about default risk at a point in time, and it can be lowered. The lease is only as good as the entity that signed it and any guarantor standing behind it.
Can the trustee replace a weak tenant before it defaults?
No. Under Rev. Rul. 2004-86 the trustee may not renegotiate the lease or sign leases with other tenants except in the tenant's bankruptcy or insolvency. The full list of limits is in the seven deadly sins of a DST.
Is one tenant more risky than a portfolio?
Concentration is higher, which is why most exchangers use a zero only for the slice that replaces debt. Compare the trade-offs in single-tenant vs portfolio DSTs.
Is my personal credit at risk if the tenant fails?
No. The loans on our cash out DSTs are non-recourse, so only your invested equity is at risk. The tax cost of a foreclosure is separate and can still be significant.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.