| Reverse exchanges that require more than 180 days
There are two common situations in which the 180-day completion period for a safe-harbor reverse exchange may not be enough. The first is a reverse exchange in which it is known at the outset that more than 180 days will be required to complete the exchange. The most common form of this type of exchange is a “build-to-suit” or “improvement” exchange in which improvements that require more than 180 days to complete are made to real estate. The second form of extended reverse involves a normal safe-harbor reverse exchange which is in danger of failing because the Old Property cannot be sold within the 180-day period.
ES Group offers solutions for both situations. In each case, ES Group forms a special LLC (called an “Exchange Cooperation Titleholder” or ECT) for managing the assets involved in the exchange and makes a direct investment of capital in the “project” to satisfy the IRS’ burdens and benefits of ownership test. ES Group brings the funds to bear through a series of relationships with sophisticated money sources that we have proactively educated about the structure, risks and rewards of these transactions. Contributing equity is one of the steps toward passing the burdens and benefits test. There are numerous other steps reflected in our non-safe-harbor processes.
The Non-Safe-Harbor Build-to-Suit reverse exchange is similar to the safe-harbor build-to-suit exchange but has the following differences;
- Significant modifications to the QEA agreement which include provisions for winding up the project in various scenarios
- Significant modifications to the Lease Agreement which include rent provisions that change with the various phases of the exchange.
- Various provisions dealing with the contribution of equity by the Accommodator to enable the extension beyond 180 days.
In general, the obligations and responsibilities of the Accommodator are significantly greater and more complex than in other forms of reverse exchange and, accordingly, the cost and effort to conduct a NSHBTS will limit its applicability to relatively large projects. Please contact us to discuss the feasibility and economic implications of a NSHBTS if this type of process fits your particular situation.
The Safe-Harbor to Out-of-Safe Harbor reverse exchange is essentially a “white knight” process for safe-harbor reverse exchanges that are about to fail due to the inability to meet the 180-day deadline for completion of the exchange. Our solution to this type of problem involves the creation of a specific LLC to acquire the Old Property from the LLC currently holding it prior to expiration of the original 180-day deadline. The new LLC acquires the Old Property using notes from the Exchangor and, perhaps, a lender in combination with an equity contribution directly from the Accommodator. This equity contribution, along with several other significant deal characteristics and execution requirements, generally satisfies the IRS’ burdens and benefits of ownership requirements and thereby allows the new LLC to legitimately complete the original reverse exchange by acquiring the Old Property in the required timeframe.
This process also is one which is unlikely to make economic sense for exchanges in which the potential tax deferral is small or moderate in relation to the cost and complexity of the exchange. The corresponding cost should be carefully considered before going forward. |
