THE POWER OF A BUILD-TO-SUIT EXCHANGE

Section 1031 Exchanges can be done in a forward format, where the old property is sold and then the new property is acquired or they can be done using the proceeds of sale to acquire property to be constructed or improved. A Build-to-Suit Exchange is exactly what it sounds like; an opportunity to acquire a new property, improve it to individual specifications, using exchange proceeds from the sale of existing property. The trick is not to own both the new property and the old property at the same point in time. A parking entity is used to facilitate the acquisition until the new property is ready for use.

A Qualified Intermediary (QI) is engaged to handle the transaction as a Build-to-Suit Exchange. The QI creates an Exchange Agreement and a parking entity referred to as an Exchange Accommodation Titleholder (EAT), usually a corporation or limited liability company. This new entity is then positioned with funds directly from financing and/or the sale of the old or Relinquished Property to immediately acquire the new or Replacement Property. This can be raw land ready for a new structure to be constructed or an existing structure in need or improvements. The EAT will be the temporary titleholder/owner of the new property. If a lender is involved, the lender will require the EAT to be the borrower. This can be a stumbling block for some lenders, however, the credibility of the taxpayer/exchangor will be required to endorse or guarantee the loan.

The EAT will begin construction as soon as title has been received for the new land. The construction or improvements are directed by the taxpayer in the same manner as any other construction project. Once the taxpayer issues the OK to pay on invoices presented by the material men, the project funding flows from the EAT for the materials or services.

Build-to-Suit Exchanges must adhere to the same time constraints as forward exchanges. The Replacement Property must be identified, including improvement to be made, within 45 days of the commencement of the exchange. This provision allows the taxpayer the opportunity to finalize the exact specifications after the old property has been sold. The identification rules provide for up to three properties to be listed or more as long as the value in the second case does not exceed twice the value of the old property. The exchange can be derived from the sale of more than one property if the values between the old and new properties must be further equalized. The goal is to go even or up in value from the old property to the new property.

The new acquisition and construction are constrained by a strict deadline; the Replacement Property must be acquired within 180 days from the date of the sale of the old property. Once the exchange proceeds have been exhausted and the value has been met from the Relinquished Property to the Replacement Property, the Replacement Property can be conveyed to the taxpayer to complete the exchange. The receipt of the target property is the last event to occur to complete the exchange. A powerful tool for real estate investors who know what they want!