Build-to-Suit 1031 Exchange

Build-to-Suit 1031 Exchange

Build-to-Suit 1031 Exchange

By: Shannon Kinnard

A build-to-suit exchange, also known as a construction exchange or improvement exchange, offers an exchanger the opportunity to use exchange funds for construction and improvements/renovations to the property they’re acquiring. In a build-to-suit exchange, like in a reverse exchange, an Exchange Accommodation Titleholder (“EAT”), which is typically a limited liability company owned by a Qualified Intermediary or QI affiliate, temporarily holds title to the replacement property. There are two types of build-to-suit exchanges—a deferred build-to-suit exchange and a reverse build-to-suit exchange—which we explore below:

  1. Deferred Build-to-Suit Exchange
    • An investor sells a property and the sale proceeds go to the Qualified Intermediary (“QI”).
    • The investor must identify the replacement property within 45 days of the sale closing.
    • The EAT acquires the replacement property using a portion of the exchange funds. The balance of exchange funds remains with the QI to be used for the improvement expenses.
    • The investor supervises the construction and/or improvements and sends the invoices to the EAT to pay them using the exchange funds.
    • The replacement property is then transferred from the EAT to the investor on the earlier of:
      • The end of the 180-day exchange period
      • When the improvements are complete
      • When sufficient value is added to the replacement property for full tax deferral
  2. Reverse Build-to-Suit Exchange

Note: this structure is typically used if the replacement property must close quickly, such as in a competitive market or if the seller will be doing their own 1031 exchange and has a replacement property lined up to close.

    • The replacement property is acquired by the EAT first, using funds from the investor or a lender.
    • The investor must identify the relinquished property within 45 days of the purchase closing.
    • The investor supervises the construction and/or improvements and sends the vendors’ invoices to the EAT to pay them using the exchange funds.
    • During the 180-day exchange period, the relinquished property is sold and the proceeds are sent to the QI.
    • The replacement property is then transferred from the EAT to the investor on the earlier of:
      • The end of the 180-day exchange period
      • When the improvements are complete
      • When sufficient value is added to the replacement property for full tax deferral

Overall, a build-to-suit exchange offers investors the ability to tailor the property to suit their needs—they can customize the design or offer amenities and finishes which can increase their market value or attract specific tenants. A few factors to consider with a build-to-suit exchange include that the construction/improvements must be completed within the 180-day exchange period, it can be more costly than a standard 1031 exchange, and in a reverse build-to-suit structure, the investor or their lender must front the funds necessary to acquire the replacement property. The 1031 exchange process can be complex, but strategic planning with your tax advisor and our team of experts at Genesis Bank Exchange can help maximize the potential of your investments.

If you’re interested in learning more about the 1031 exchange process and how it may benefit you, connect with the Genesis Bank Exchange team by calling 800.797.1031, or explore further details on our website: https://www.mygenesisbank.com/1031Exchange.

The materials and content provided on this email/website are for general informational purposes only. These materials and content do not, and are not intended to, constitute legal, tax, or financial advice.