BUILD-TO-SUIT EXCHANGE
BUILD-TO-SUIT EXCHANGE
Meeting and Exceeding
Your Acquisition Goals in a Tight Market | |
| | | | | | | |
|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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