BUILD-TO-SUIT EXCHANGE



BUILD-TO-SUIT EXCHANGE

Meeting and Exceeding

Your Acquisition Goals in a Tight Market | |

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|The tax-deferred exchange |  |NAVIGATE THE REQUIREMENT |  |However, the exchange |  |Next, the investor must |

|under Section 1031 of the | |A build-to-suit exchange, | |value of the replacement | |locate a builder who has a |

|Internal Revenue Code is | |also referred to as a | |property can include only | |good track record for |

|one of the last great,  | |construction or | |the improvements that were| |meeting essential permit and|

|investment opportunities | |improvement exchange, has | |completed by the time the | |building deadlines. The |

|to save taxes on the sale | |a few important basic | |property is transferred to| |builder must be willing to |

|of investment property. | |requirements that must be | |the exchanger. Any | |be an integral part of the |

|It's true that Section | |followed. | |construction after receipt| |team and cooperate with the |

|1031 is specific about the| |First, the replacement | |of the property by the | |QI to perform in a timely |

|requirements for | |property to be acquired to| |exchanger is receipt of | |manner and comply with the |

|completing a successful | |complete the exchange must| |services and not receipt | |build-to-suit financial |

|exchange. To defer the | |be properly identified | |of like-kind real | |disbursement requirements. |

|capital gain tax, the | |during the 45-day | |property.  (If the | |The QI will either assign |

|exchanger needs to: buy | |identification period. It | |replacement property | |into the building contract |

|qualifying like-kind | |must also contain the | |improvements are not | |between the investor and the|

|replacement property, use | |legal description of the | |completed on or before the| |developer, or enter into |

|all of the proceeds from | |land and a separate | |time the exchanger | |such a contract directly |

|the sale and obtain equal | |description of the | |receives the property, the| |with the builder. During the|

|or greater debt on the | |improvements in as mush | |property received will be | |construction phase, the |

|replacement property. | |detail as is practicable. | |considered to be | |builder, with prior approval|

|Adding cash to the | |It's not clear what is | |substantially the same | |from the exchanger, will |

|exchange can offset the | |considered a "detailed" | |property as identified | |invoice the QI for |

|debt requirement. | |description of the | |only if, had the | |construction funds drawn |

|But there's another | |improvements. Most likely | |improvements been | |from the exchange account |

|vehicle for deferring | |it will include the floor | |completed at the time the | |held by the QI. |

|capital gain taxes - a | |plans, architectural | |exchanger received the | |Often the exchanger must |

|build-to-suit exchange. | |specifications or | |property, the property | |either add personal funds or|

|This variation of the more| |blueprints for the | |received would have been | |obtain a loan to acquire the|

|typical delayed exchange | |improvements. Second, the | |considered to be | |replacement property or pay |

|is used by investors when | |replacement property must | |substantially the same | |for the improvement costs |

|they need to make | |be constructed or | |property as identified.) | |that exceed the cash |

|substantial improvements | |otherwise improved during | |Moreover, the property | |available in the exchange |

|on their investment | |the 180-day exchange | |received must constitute | |account. However, it's not |

|property, or the value of | |period before it is | |real property under the | |easy to find a lender who |

|the replacement property | |transferred to complete | |applicable state law. | |understands the |

|isn't enough without the | |the transaction. And, as | |During the exchange | |build-to-suit exchange |

|improvements to defer all | |in all exchanges, the | |period, pending the | |process. The lender must be |

|their capital gain. So, in| |exchanger must receive | |completion of the | |willing to amend its normal |

|this type of exchange, the| |substantially the same | |improvements, either the | |underwriting guidelines to |

|proceeds are used to a | |property as identified. | |seller or some entity | |allow the QI to be the |

|sufficient value before | |If substantial changes are| |other than the exchanger | |borrower and record owner of|

|transferring it to the | |made to the type of | |must hold title to to the | |the property during the |

|investor to complete the | |improvements originally | |replacement property. | |construction period. For |

|exchange. | |described in the property | |Selecting this holding | |security and peace of mind, |

|IMPROVE YOUR ODDS | |identification, the | |entity must be done | |the lender will usually |

|Investors who fear they | |property acquired may not | |carefully to avoid | |require the loan to be |

|are letting the market | |be considered the same | |violating the related or | |guaranteed by the exchanger.|

|slip away may want to | |property that was | |disqualified party | |Usually, the QI will require|

|include on their short | |identified, thereby | |exchange rules, | |that the loan be nonrecourse|

|list of possible | |causing the exchange to | |potentially jeopardizing | |to the QI while they hold |

|acquisition properties | |fail. | |the entire exchange. It's | |title, and assumable by the |

|those that can be | |Advance planning is | |prudent for the | |exchanger if it cannot be |

|improved, converted or | |essential in a | |replacement property to be| |paid off when the property |

|retrofitted to suit the | |build-to-suit exchange for| |held by a secure corporate| |is transferred to the |

|investor's needs or the | |the investor to comply | |or other similar entity, | |exchanger. |

|requirements of a | |with these strict time | |rather than an individual,| |Finally, a prudent exchanger|

|prospective tenant. | |deadlines. While it's rare| |to avoid problems, such as| |will insist that the QI |

|Accordingly, for those | |that new property can be | |death or bankruptcy, which| |offer the following measures|

|exchange investors who are| |completed in the 180-day | |could result in a failed | |of security: exchange |

|bucking the | |period, retrofits and | |exchange. | |accounts that are covered by|

|inventory-depleted | |significant improvements | |BEGIN THE PROCESS | |a third-party written |

|marketplace, the trend | |to the property can | |Once it's determined that | |guarantee; fidelity bond |

|today is to use the | |normally be made without | |the build-to-suit exchange| |coverage of at least $10 |

|build-to-suit exchange. | |serious risk of missing | |is appropriate, the | |million; sufficient |

|Desirable inventory is | |deadlines. Naturally, | |investor should seek the | |professional liability |

|scare in many regions of | |weather, local government | |services of a professional| |insurance; and corporate |

|the United States. As a | |permits and approval | |exchange accommodator, | |information systems that are|

|result, real estate | |process, construction | |also known as a qualified | |Y2K compliant. |

|investors who want | |delays, labor problems and| |intermediary (QI), who has| |For those investors who |

|specific shopping center | |financing issues can limit| |substantial experience in | |recognize the advantage of |

|product may not consider | |the amount of improvements| |this specialized area of | |preserving their equity by |

|using a tax-deferred | |that can be completed | |exchanges. The QI also can| |deferring capital gain taxes|

|exchange because the | |within the allotted time | |assist the investor's | |in a 1031 exchange, but who |

|strict exchange time | |period. | |lawyer s and accountants | |fear they will not find |

|limits may preclude then | |All of the improvements | |with the investment | |replacement property within |

|from acquiring suitable | |are not required to be | |construction strategy so | |the 45/180-day time limit, |

|replacement property. This| |complete before the end of| |that it fits the | |the build-to-suit exchange |

|can be an unnecessary and | |exchange period. | |investor's portfolio | |offers an attractive |

|costly mistake, since this| | | |requirements and meets the| |solution. |

|type of investors is often| | | |procedural and regulatory | | |

|an ideal candidate for a | | | |exchange constraints. | | |

|build-to-suit exchange. | | | | | | |

|  |

|Jill Mozer, Esq. is vice president and manager of Fidelity National |

|1031 Exchange Services Inc.'s build-to-suit and reverse exchange division. |

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