Chapter § 55.10 IMPROVEMENT (BUILD-TO-SUIT) EXCHANGES

• Jurisdiction: Oregon

§ 55.10 IMPROVEMENT (BUILD-TO-SUIT) EXCHANGES

§ 55.10-1 Defined

An improvement exchange is an exchange in which the accommodator (who could be a professional corporate accommodator, seller, contractor, or developer) improves the replacement property before it is conveyed to the exchanger. See generally Bradley T. Borden, The Whole Truth About Using Partial Real Estate Interests in Section 1031 Exchanges, 31 Real Est Tax'n 19 (4th Quarter 2003). The three basic types of improvement exchanges are discussed in § 55.10-1(a) to § 55.10-1(c).

§ 55.10-1(a) Deferred Exchange

In a forward-deferred exchange, the accommodator acquires the replacement property and constructs improvements on it during the 180-day exchange period.

§ 55.10-1(b) Reverse Exchange: Parking Replacement Property

In a reverse exchange in which the land is parked, the accommodator can take whatever time is necessary to construct improvements on the land. When the improvements are completed, the exchanger can continue to park the land and improvements (i.e., the replacement property) with the accommodator while the exchanger finds a purchaser for the relinquished property, or the replacement property can be exchanged for the relinquished property, which is parked while the exchanger locates a purchaser for the relinquished property.

§ 55.10-1(c) Seller Completes Improvements

A very simple form of improvement exchange is to arrange for the seller to complete improvements to the exchange property before it is transferred to the exchanger. This approach is ideal because an accommodator need not be used in the transaction. The purchase price is simply increased by the cost of the repairs or improvements. The seller is often concerned that if the transaction does not close, the seller will be stuck with the cost of the improvements. This problem can be solved by increasing the amount of the earnest money to cover the cost of repairs, but the exchanger may be nervous about increasing the earnest money without assurances that the transaction will close. For large improvement transactions, unless the seller is motivated, it is quite difficult to arrange the financial risks in the transaction so that both the seller and the exchanger will be willing to consummate the transaction.

§ 55.10-2 Benefits of an Improvement Exchange

An improvement exchange allows the exchanger to use tax-free dollars to build or repair replacement property. There are substantially higher transaction costs associated with...