Guides

Improvement and Build-to-Suit Exchange

An improvement exchange, sometimes called a construction or build-to-suit exchange, allows an investor to use exchange proceeds not just to purchase replacement real estate but to fund improvements to that property before the exchange concludes. This structure is useful when the ideal replacement asset is not a finished, stabilized property but raw land that needs a building constructed on it, or an existing structure that needs substantial renovation to match the value of the relinquished property being sold. Because a taxpayer cannot simply take title to replacement property and then use exchange funds to improve an asset they already own without running into constructive receipt problems, improvement exchanges rely on the same Exchange Accommodation Titleholder safe harbor used in reverse exchanges. The EAT takes and holds title to the replacement property while construction or renovation proceeds, using exchange funds released by the qualified intermediary to pay contractors and cover project costs, and title transfers to the taxpayer only once the improvements are complete or the exchange period runs out, whichever comes first. This creates the defining constraint of an improvement exchange: every dollar of value you want credited toward your replacement property, including the value of improvements, must be in place by the time title transfers, which in practice must happen within the one hundred eighty day exchange period. Improvements promised for a future date, or construction that is only partially complete when the parking period ends, do not count toward the exchange value; only what has actually been built and is part of the real property at the time of transfer is recognized. This makes timeline discipline critical, since most substantial construction projects take considerably longer than one hundred eighty days to complete from a standing start, so successful improvement exchanges typically involve properties where construction can realistically be substantially finished within that window, or where site work and initial phases were already planned before the exchange began. For Seattle, WA investors considering ground-up construction or major renovation as a replacement strategy, we help evaluate whether a project's realistic construction timeline fits within the one hundred eighty day constraint before recommending this structure over a simpler forward exchange. Site work that begins before the exchange formally starts, such as permitting, grading, or utility work completed under separate ownership, can shorten the amount of construction that still needs to happen inside the one hundred eighty day window, which is one reason experienced sponsors sometimes begin preliminary site preparation on a parcel they intend to acquire through an improvement exchange well before the relinquished property has even gone to market.