Residential Build-to-Suit Exchange from Commercial in WA State

[Rich Gabrio]

I am planning to 1031 Exchange a small retail commercial building here in Western Washington this year, and am interested in exploring a construction exchange on the back end to build a new SFR or Duplex rental with the idea of gaining instant equity upon completion. Although the residential market here in the Seattle area is very strong, my concern is that the timing of sale for my commercial building will be less predictable, thereby creating a risk of not being able to meet exchange deadlines given the additional complexities of new development, including permitting which can take some time here. Therefore, it appears through my research that the best structure for me would be to locate a builder who will act as a front end "straw man" and acquire land or a building to be renovated and perform the construction or improvements to what will be the replacement property prior to my building selling. This means that the exchange process, and 180-day exchange period has not started. When the project is permitted, and construction is underway, my relinquished property is listed and the exchange can be completed upon sale and within the 180 days, with all relinquished property funds being dispersed to the builder. I expect to also be contributing cash to the project outside of the exchange.

I would welcome any guidance from anyone in the community that has experience executing a similar scenario in the Western Washington area.

Thanks in advance to the community. ~Rich

[Rich Gabrio]

Hi Dave, and thanks for your reply.  I should have clarified, my intent would be to still use an intermediary in this process, if possible, whereas the intermediary would receive and hold the funds from my relinquished property, and disperse funds to the builder until the funds are spent, thereby completing the exchange, and then I would then fund any remaining development. My agreement with the builder would be entered into prior to the sale of my property, and not include any ownership interest to myself.   Once my relinquished property sells, the proceeds held by the intermediary would fund additional improvements until all funds are spent, at which time the exchange is completed, and the remainder of the construction would then be funded outside the exchange. This all assuming that as part of my agreement with the builder, they agree to have my intermediary through an EAT, purchase the partially developed property from them on my behalf and subject to the sale of my relinquished property.  I am not sure if am thinking about this procedurally in the correct way, but feel like this would not be an uncommon approach and would, if done correctly meet safe harbor guidelines.