Improvement and Build to Suit Exchange

An improvement exchange, sometimes called a build to suit exchange, allows an investor to use exchange funds to construct improvements on the replacement property before taking title, in addition to the purchase price. This structure is useful for San Francisco, CA investors who cannot find replacement property of equal or greater value without also funding renovation, expansion, or new construction, since raw improvement work generally cannot be paid for with exchange funds after the investor already holds title.

Why Title Must Be Held by an Accommodation Titleholder

Because exchange funds can only be used for like kind real property while it is held within the exchange structure, an exchange accommodation titleholder takes and holds title to the replacement property during the improvement period, similar to the parking structure used in a reverse exchange. The qualified intermediary directs funds to pay contractors and cover construction costs while the exchange accommodation titleholder holds title. Only once the investor takes title, generally at or before day one hundred eighty, do the completed improvements become part of the exchange value that was acquired using the relinquished property's sale proceeds.

This creates a demanding construction timeline. All construction that is meant to count toward the exchange value must be completed, and the improved property conveyed to the investor, within the same one hundred eighty day period that applies to any exchange. In San Francisco, CA, where permitting timelines with the Department of Building Inspection can be lengthy and unpredictable, this construction window is often the single greatest risk factor in an improvement exchange. We recommend investors confirm permitting status and contractor availability before committing exchange funds to a build to suit structure.

Managing the One Hundred Eighty Day Construction Window

Because any improvements not completed by the closing deadline do not count toward the exchange value, and the investor generally cannot complete construction after taking title and still have it treated as part of the exchange, we help investors sequence construction milestones against the one hundred eighty day deadline from the start of the transaction. This includes coordinating with the exchange accommodation titleholder on draw schedules, confirming contractor timelines against permitting realities, and building contingency into the schedule for weather, material delays, or inspection scheduling.

Improvement exchanges also carry the same boot and value matching rules as any other exchange. If the finished replacement property, including completed improvements, is worth less than the relinquished San Francisco, CA property at the time title transfers to the investor, the shortfall may be treated as taxable boot. We coordinate between the qualified intermediary, the exchange accommodation titleholder, the general contractor, and the investor's lender to track both construction progress and exchange value throughout the one hundred eighty day period.