Leveraging a 1031 in a Hot Market:
Reverse Exchanges

We often receive phone calls from long-time real estate investors who are selling property, or are thinking about it, curious if we have Exchangers who may have an interest in their property. In point of fact, in a lot of our markets, the investment/commercial market is pretty aggressive right now, and investors with good properties are being contacted out of the blue with offers from willing buyers. The big question is always, "Fine, I have a buyer, but what will I do with the proceeds from the sale?"

For some, the answer might be a "structured sale"; for others, especially those with their eye trained on the market, it might be the use of "reverse exchanges" to tie up good replacement properties while waiting for a suitable buyer for their relinquished property, or for the closing process to come to completion.

A typical reverse exchange, pursuant to a "safe harbor" under Revenue Procedure 2000-37, as amended, allows an investor to acquire property before the closing of the sale of their relinquished property. Provided the investor has access to the necessary funds, the accommodator company can set up a "parking entity" – also known as an “Exchange Accommodation Titleholder” (EAT). Borrowing funds from the investor or a third party lender, the EAT will acquire the property to be parked.  Later – within 180 days from the acquisition, and when the relinquished property is sold, the exchange is completed when the EAT transfers the parked property (or the LLC interest) to the investor.

It is also possible to "park" the relinquished property, but in many jurisdictions it creates extra expense – duplicate state transfer taxes or stamps, title insurance and closing fees – and additional complications. Contact us for further information.

Historically, some investors regularly utilized reverse exchanges. They always seemed to have a property or two they wished to buy, but weren’t sure which relinquished property or properties would make the most sense, have the best offer, or be ready to close in time. We would set up an EAT, park the property using funds from the Exchanger, then complete it when the "right" sale closed. It gave a certain flexibility to the investor, and in many cases helped them to get the best deal, both for their sale and for their purchase.  It was a way to both manage the 1031 time restrictions and maintain some leverage in the deal-making process, since the offer of purchase would not be predicated on the limits of the exchange period – which some sellers try to use to their advantage.

Reverse exchanges can also be combined with "build to suit", or construction exchanges, when acquisition of the target property and the commencement of construction needs to start prior to the sale of the relinquished property. Contact the 1031 CORP. Exchange Team for more creative ideas to utilize this tool.