Our philosophy regarding fees is easily summarized:
Additional complexity derives from a variety of requirements: multiple properties, third-party loans, improvements, customization and so on.
Our standard practice is to discuss circumstances and objectives, formulate a strategy and then produce a document (we call it a "pro forma") that describes the form and mechanics of the exchange, 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.
We believe that our processes and security devices are both state-of-the-art and second to none. We will not willingly lose an opportunity to a competing Accommodator because they offer a lower fee. Our guarantee is that we will offer a fee that is the same or lower for an equivalent reverse exchange and offer a superior process — for example, one with better responsiveness, better asset security and more thorough documentation. In order to match a competing price, we will ask for a written quote or proposal from the competing Accommodator that addresses the relevant issues. Once we have it and confirm the process it contains, we’ll beat the price shown on it.
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 Old 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 its 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 Old Property in an exchange will generate $1million in proceeds. Suppose further that the close of the New Property is 120 days out. The cash is placed in a bank account "owned" by the QI and generates 0.50% interest. During the exchange period, the funds earn $1,667. If the QI also charges a fee of $1,000, then its total earnings for the exchange would be $2,667.
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 with rates at their current levels — 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 the 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 producing rents, 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 an airplane of a piece of construction equipment. 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, assume that the fee paid to the Accommodator would be $4,500. However, the Exchangor would see the rental income from the New Property plus the rental income from Old 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 New 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 template for developing an analysis of the relative exchange economics is available here.