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Build To Suit Exchanges

Build to Suit Exchange involves the acquisition and construction of property within the Exchange period. Many times, the client will wish to build real estate improvements such as a building, rather than purchasing an existing property. This might include a specialized building that may not already exist, or it may be constructed less expensively than if purchased outright.

The Build-To-Suit Exchange, also referred to as a construction or improvement exchange, gives the Exchanger the opportunity to use all or part of the exchange funds for construction (or improvement) of the Replacement Property and still accomplish a tax deferred exchange. In the most common type of Build-To-Suit Exchange (Delayed Improvement Exchange) the Exchanger sells the Relinquished Property in a delayed exchange and then acquires the Replacement Property after it has been improved with the exchange funds from the Relinquished Property. It is important to note that any improvements made to the Replacement Property after the Exchanger takes title are considered to be “goods and services” (are not like-kind to the Relinquished Property) and will result in taxable boot. For this reason, escrow hold back accounts, prepaying for construction services or for building materials, etc. do not work for Build-To-Suit Exchanges. Instead, the transaction is structured using the “safe harbor” guidelines provided by Revenue Procedure 2000-37 wherein the Build-To-Suit Exchange is accomplished using an EAT to hold title to the Replacement Property while the improvements are made.

The structure of a delayed improvement exchange is the same as a delayed exchange except the Qualified Intermediary (through the EAT) uses the exchange funds and/or loan funds to purchase the Replacement Property to be improved; and the EAT enters into a construction contact with a general contractor and a construction management agreement and disbursement agreement with the Exchanger. As the construction is completed, the QI pays the invoices with exchange funds and on or before the 180th day (or tax filing deadline) the EAT transfers the improved property to the Exchanger. Another difference relates to the identification statement. During the 45-day Identification Period, the Exchanger must submit to the QI an unambiguous description of the land (or existing property) and the improvements to be constructed. The 1031regulations require that the improvements be described “in as much detail as is practicable at the time of the identification.”

When would I need a Build to Suit Exchange?

You may defer income taxes on gains from the sale of property. You can build and receive exactly what they want in the exchange. Lenders are increasingly familiar with build-to-suit exchanges and are open to treating a construction project as an exchange, specifically since they know you will have more cash due to reduced taxes. You will work closely with the Intermediary and the contractor to make sure that the construction deadlines are met.

What You Want to Know

One main reason why exchanges fail in the first 45 days is that the client is not satisfied with the kind of property that is available. Many clients would continue with an exchange if they could build exactly what they want, even if it is built on their own property. Usually, if improvements are constructed on property already owned by the taxpayer, the transaction is unlikely to be treated as a 1031 Exchange. However, new rulings have opened the possibility. You should clarify with your tax advisor.

A build to suit Exchange is right for those who wish to build improvements to real estate during the Exchange period and reduce or eliminate income taxes on the gain from their sales of similar properties. This may be used to build a unique building to simply obtain more value for your exchange proceeds.

*Rodeo 1031 is a qualified intermediary. Rodeo 1031 Exchange does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of your exchange transaction. Property owners must consult their tax and/or legal advisors for this information. Our role is limited to serving as qualified intermediary to facilitate your exchange.