1031 Exchange Specialists,

A National Qualified Intermediary

Inc.  [1031 ESI]


Corporate Headquarters:
1155 Asbury Avenue
Ocean City
New Jersey 08226

Ocean City, NJ: 609-398-1031

Naples, FL: 877-513-1031

   Fax: 609-398-0500

Web: www.1031esi.com
Email: info@1031esi.com

Business Hours:
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Build-to-Suit (Improvement) Exchange


IMPROVEMENTS TO REPLACEMENT PROPERTY AFTER ACQUISITION: Improvements made to replacement property after acquisition add to the property's basis and are depreciable, but are NOT "Like-Kind" for the purpose of a 1031 EXCHANGE.


IMPROVEMENTS COMPLETED PRIOR TO ACQUISITION: When purchasing a property of lesser value in a 1031 EXCHANGE, improvements completed prior to the passing of title can be included in the exchange value to minimize taxes. Often this is accomplished by the taxpayer when leasing a property prior to acquisition or through a "Build-to-Suit" exchange.


BUILD TO SUIT EXCHANGE:  A "Build To Suit" 1031 EXCHANGE is beneficial to the taxpayer when the cost of improvements are needed to bring the value of the replacement property closer to the value of the relinquished property.


BUILD TO SUIT STRUCTURING: A Build-To-Suit or Improvement Exchange can be structured as a forward deferred 1031 EXCHANGE utilizing the proceeds from the relinquished property to fund the acquisition and improvement of the replacement property and 3rd party or taxpayer funding for shortfalls, or as a reverse 1031 EXCHANGE utilizing 3rd party or taxpayer funding to acquire and improve the replacement property.


BUILD-TO-SUIT FUNDING: In a Build-To-Suit 1031 Exchange (where improvements to the replacement property are made during the exchange process), funding of the property acquisition and improvements can be loaned to the EAT (temporary titleholder) by the Qualified Intermediary (QI) from the relinquished property sale, a 3rd party lender with the Taxpayer (T/P) as guarantor of the loan, and/or from the T/P directly.  These funding arrangements are evidenced with a Note and secured with a Mortgage and/or Pledge of Membership Interest.


IMPROVEMENTS TO PROPERTY OWNED BY TAXPAYER: Rev. Proc. 2004-51 was issued to hinder a 1031 "EXCHANGE of real estate owned by a taxpayer for improvements on land owned by the same taxpayer".  The IRS uses a 6-month look-back period for this safe harbor.


BUILD TO SUIT CONSTRUCTION & MANAGEMENT AGREEMENT: In a "Build-To-Suit" 1031 EXCHANGE, the Exchange Accommodation Titleholder (EAT), as "owner" of the property, enters into a construction contract with a Contractor for the improvements and a Project Management Agreement with the taxpayer to oversee the construction as the Owner's agent.


TAXPAYER AS CONTRACTOR IN BUILD TO SUIT: In a deferred "build-to-suit" 1031 EXCHANGE, the taxpayer or related party may act as contractor but should avoid payments from the 1031 funds during the construction phase as this may create "constructive receipt" issues. The taxpayer may receive payments from a 3rd party lender or the QI can pay the non-related vendors directly.


TRANSFER TAX IMPLICATIONS: In a BUILD-TO-SUIT 1031 EXCHANGE using an Exchange Accommodation Titleholder (EAT), the EAT has to acquire the full benefits and burdens of the relinquished or replacement property, resulting in a second ownership transfer, and potentially a second real estate transfer tax upon final transfer depending on the State and the method of ownership transfer.  We customarily use a special-purpose single-owner disregarded LLC for each property held in a build-to-suit exchange.  This methodology isolates the target property from liability concerns of other properties held and allows for the transfer of 100% of the membership interest of the special-purpose LLC at the completion of the exchange.


BUILD-TO-SUIT 45 DAY IDENTIFICATION: In a Build-To-Suit 1031 EXCHANGE, the 45 Day identification of the replacement property being improved must include construction plans and the percentage of completion at the time of transfer to the taxpayer. The IRS will disallow the identification if the property identified with improvements is materially different from the property received.


BUILD-TO-SUIT CONSTRUCTION INCOMPLETE: In a Build-to-Suit 1031 EXCHANGE, the property being constructed does not have to be completed by the 180th day in order to complete the exchange. However, the IRS will only give the taxpayer credit for materials installed in the property and not for materials laying on the ground or prepayments to the contractor. The property received by the taxpayer should also not be materially different as to completion than the property identified on the 45th day. The 45 day identification can provide for varying percentages of completion using the 3 property rule.



For FREE information on "Build-to-Suit (Improvement) Exchanges" or discuss how exchanges relate to your real estate investments, please contact us.