Improvement Exchange
The Improvement, Construction or Build to Suit Exchange
occurs when the Exchanger uses exchange proceeds to improve (i.e. make capital
improvements) existing property or to improve or develop new replacement
property. The improvement exchange can occur in the context of a delayed
or reverse exchange. In the context of the delayed exchange - the Exchanger
first sells the relinquished property using a Qualified Intermediary. Once
the sale of the relinquished property is complete, the Exchanger has 45
days to identify the replacement property. *Thereafter,
the Exchanger enters into a purchase and sale contract for the replacement
property and enters into a written Qualified Exchange Accommodation Agreement
("QEAA") with the QI's Exchange Accommodation Titleholder ("EAT"). The
Exchanger then assigns the rights to the purchase and sale agreement to
the EAT who uses the exchange proceeds to acquire title to the replacement
property and complete the identified improvements. Upon completion of the improvements, or at the end of the
180th day, whichever is earlier, the EAT will transfer title to the newly
improved replacement property to the Exchanger. If - in addition to the
exchange proceeds - construction financing is required to complete the improvements,
the EAT will become the borrower under a non-recourse note and deed of trust.
When the EAT transfers the property to the Exchanger, the Exchanger is substituted
as the borrower and assumes the construction financing.
*The same time frames apply to the improvement
exchange in that the replacement property and its improvements must be
identified within 45 calendar days. If the replacement property is to
be produced, the identification requirement is satisfied if a legal description
is provided for the underlying land and as much detail is provided regarding
construction of the improvements as is practical when the identification
is made. It is critical that the Exchanger receive improvements/replacement
property that are/is substantially the same as the improvements/replacement
property identified. Likewise, the improvements must be completed and
title conveyed by the EAT to the Exchanger within the earlier of 180 calendar
days from the close of the relinquished property or the tax filing date
for the Exchanger - assuming no automatic extension has been applied for.
