Guides

Improvement and Build to Suit Exchange Explained

An improvement exchange, sometimes called a construction exchange or build to suit exchange, allows an investor to direct a portion of exchange proceeds toward improvements on the replacement property rather than only toward its purchase price. This structure is often used when the ideal replacement property in Dallas, TX does not exist in finished form, or when a property needs substantial renovation, expansion, or a ground up build to match the investor's operational needs. Because an investor generally cannot make improvements to property they already own using exchange funds without disqualifying the exchange, the mechanism relies on the same exchange accommodation titleholder structure used in reverse exchanges. The EAT takes title to the replacement property and holds it while construction proceeds, using exchange funds to pay contractors, and the investor acquires the improved property from the EAT once construction reaches an agreed point. The critical constraint is that all improvements intended to count toward the exchange must generally be completed, or at minimum the value must be placed in service, before the same one hundred eighty day deadline that governs every exchange. This means an improvement exchange requires unusually tight coordination between the investor, the general contractor, the lender if one is involved, and the exchange accommodation titleholder from the very first day. Permitting timelines across Dallas, Plano, and surrounding North Texas jurisdictions vary, and permitting delays do not extend the statutory deadline. Investors considering an improvement exchange for industrial, flex, or retail build to suit projects typically build in significant schedule contingency, because a construction delay that pushes completion past day one hundred eighty generally means the unfinished value cannot be counted toward the exchange, potentially creating boot. This page offers a general overview of improvement exchange mechanics and is not a substitute for coordination with a qualified intermediary, exchange accommodation titleholder, and construction counsel for a specific project. Lien releases, inspection reports, and draw documentation generally need to be archived carefully throughout construction, because the placed in service record becomes part of the exchange file that supports the deferral claimed on the eventual tax return. Investors typically ask their general contractor for photo logged progress reports at regular intervals so the exchange accommodation titleholder and the qualified intermediary both have a clear, dated record of completed work as the deadline approaches.