The front-end straw man and the build-to-suit exchange.

• Author: Ehr, Dan

Businesses are always expanding and changing the way they do business, which often means they need a different space in which to operate. Many times, the best option is to construct a new facility or to purchase an existing facility and make upfront renovations. Another option is to do a like-kind exchange under Sec. 1031. A combination of the two possibilities is to use a build-to-suit like-kind exchange. This type of exchange usually requires a great deal of planning and may take some time. Generally, construction or renovations take time, and like-kind exchanges have specific time requirements and ownership rules that must be met to qualify.

Build-to-Suit Exchange

The build-to-suit exchange or improvement exchange allows a taxpayer (the exchanger) to use all or a part of the proceeds from the sale of an existing property (the relinquished property) for construction of or improvements to a new facility (the replacement property) while deferring all or a part of the tax on the gain. This tax deferral helps to finance the acquisition of the replacement property.

Delayed Exchange

Rev. Proc. 2000-37 provides a structure for a build-to-suit exchange using an exchange accommodation titleholder (EAT) and a delayed exchange. With this structure, the exchanger sells the relinquished property through a qualified intermediary (QI). The exchanger then deals with an EAT, which is often set up and owned by the QI, to acquire the replacement property and construct the desired facility or make the requested renovations. The replacement property is then acquired from the EAT after it has been improved, using the exchange funds from the relinquished property the QI holds.

Under the delayed exchange structure:

* Improvements to the property must occur before the exchanger takes tide;

* All Sec. 1031 rules apply, including time limitations;

* The time limitations require the completion of the exchange on the earlier of the end of a 180-day exchange period or completion of construction on the replacement property; and

* Any improvements made to the replacement property after the exchanger takes tide may be considered "goods and services" and are potentially taxable as boot.

Enter the Straw Man

Another potential structure is to insert a "straw man" on the front end to own and construct the property. For example, an exchanger could locate a builder who will act as the straw man and acquire land or a building to be renovated and construct the desired facility or...