Reverse Exchange

A Reverse Exchange results when the replacement property is acquired prior to the sale of the relinquished property. The IRS formally acknowledged reverse exchanges effective September 15, 2000. (See, Rev. Proc. 2000-37.) The Exchanger utilizes the Qualified Intermediary ("QI") to purchase the replacement property and hold title while the Exchanger markets the relinquished property. As with delayed exchanges, the reverse exchange must be completed within 180 days. In order to accomplish this scheme, the Exchanger retains the services of an exchange accommodation titleholder ("EAT"). Many QI's - through various title holding entities - perform this service.

TWO METHODS FOR REVERSE EXCHANGES:

1). Exchange Last aka PARK TITLE TO REPLACEMENT PROPERTY: Title to the replacement property is parked with the EAT. In that case, the Exchanger enters into a written agreement with the EAT - who acquires title to the replacement property and holds it until a buyer is found for the relinquished property. Once the relinquished property is ready to close, the EAT enters into a simultaneous exchange with the Exchanger, transferring title to the replacement property to the Exchanger in exchange for causing the transfer of the relinquished property to a third party buyer.

2). Exchange First aka PARK TITLE TO RELINQUISHED PROPERTY: The Qualified Intermediary acquires the right to purchase the replacement property and causes it to be deeded directly from the seller to the Exchanger in exchange for the Exchanger's transfer of the relinquished property to the EAT. The relinquished property is held by the EAT until a buyer is found. Once the buyer is found, the relinquished property is sold to the third party buyer by the EAT.

In either scenario, the EAT will enter into a management agreement or master lease with the Exchanger to allow the Exchanger management responsibilities over the property for the duration of the parking period. And, in a transaction involving financing, the EAT may become the borrower under a non-recourse note and deed of trust. Upon the expiration of the exchange period or the sale of the relinquished property and transfer of the replacement property to the Exchanger, the Exchanger assumes the loan. Likewise, the EAT will require hazard and liability insurance during the holding period.

Timeline: No later than five business days after the EAT acquires its ownership interest in the parked property, the EAT and the Exchanger must enter into a written agreement. The Exchanger then has 45 days to identify one or more relinquished properties. Written identification of the relinquished properties must be delivered to the EAT or to another party to the exchange. The exchange must be completed within 180 days (i.e. relinquished property must be conveyed to third party buyer and replacement property must be conveyed to the Exchanger).