Our philosophy regarding fees is easily summarized:
Our standard practice is to discuss circumstances and objectives, collect relevant data, formulate a strategy and then produce a document (we call it a “pro forma”) that describes the form and mechanics of the process, the specific assets involved, the specific steps that we propose to take and the roles and responsibilities of each party. The proposal will also include a formal quotation for our fees and our best assessment of other costs that may be incurred.
Although the following are not quotations, they are very typical:
These “ballpark” estimates do not include LLC fees or other applicable ancillary fees.
Many potential Exchangors are puzzled by the large relative difference between fees for reverse exchanges and delayed exchanges. Some insight into the Qualified Intermediary industry and its standard practices quickly answers the question.
In a delayed exchange, the QI holds the cash proceeds of the sale of the Relinquished Property for a period of up to 180 days. The QI will deposit these funds in a bank with which it has formed a relationship that allows it to earn interest based on the QIs total deposits and to satisfy other regulatory requirements. The interest earned on the funds held by the QI is, with very few exceptions, the QI’s primary means of generating profits.
For example, suppose the sale of the Relinquished Property in an exchange will generate $1million in proceeds. Suppose further that the close of the Replacement Property is 120 days out. The cash is placed in a bank account “owned” by the QI and generates 1.00% interest. During the exchange period, the funds earn $3,333. If the QI also charges a fee of $1,000, then its total earnings for the exchange would be $4,333.
The Exchangor, in this case, sees a $1,000 fee going to the QI and sees its $1million in capital going to the QI for 4 months. If the QI shares some of the interest – and most do not – the Exchangor’s Return on Investment (“ROI”) may or may not be slightly greater than zero. In few cases, if any, does the Exchangor get the majority of the ROI.
By comparison, in a reverse exchange, there is no cash being held by the Accommodator. Its profit is derived entirely from the fees it earns. More importantly, there usually are economic benefits for the Exchangor that can be derived from using a reverse that are not available in a deferred exchange. These benefits are seldom mentioned and virtually never analyzed in detail by a typical QI. In both the Exchange First and Exchange Last forms, the Exchangor has access to both properties during the exchange period. If, for example, the properties are income-producing, then the Exchangor enjoys two sources of rental income. Also, the asset may be one for which the Exchangor wants to maximize utilization during the exchange, such as a manufacturing or distribution facility. The Exchangor can also depreciate the property it owns. These benefits are not available during a deferred exchange.
If the property in the example above were exchanged in a reverse Exchange Last, the fee to the Accommodator would be $4,500 – about the same income to the QI. However, the Exchangor would see the rental income from the Replacement Property plus the rental income from Relinquished Property until it is sold. If the properties involved have greater values, with increased income, then the economic benefit to the Exchangor of using a reverse can be drastically better because the reverse exchange fee will remain small and fixed while the income from the properties is likely to be much higher. Using a delayed exchange for properties with more capital simply increases the income to the QI without increasing the benefit to the Exchangor at all.
Optimizing ROI for a particular exchange strategy then becomes a matter of comparing various economic factors: fees, income during the exchange period, interest on purchase money for the Replacement Property, depreciation benefits and tax rates. In many, many cases, the overall economic benefit of a reverse exchange is superior to that of a comparable delayed exchange due to the presence of two income streams. A calculator for developing an analysis of the relative exchange economics is available here