Choosing an Accommodator

Now more than ever, it is important to choose an Accommodator for a reverse exchange carefully. ExStra recommends that potential Exchangors evaluate Accommodators using the following criteria:

Expertise and track record

Expertise with delayed exchanges does not translate to expertise with reverse exchanges. It is critical to determine whether a potential Accommodator has real expertise and experience with reverses and can therefore ensure that maximum tax deferral is available and that there is no risk of transaction failure. If an Accommodator that you are considering describes reverse exchanges as “very complex” or “risky” or “expensive”, then you may be dealing with an Accommodator that has an antiquated view of reverse exchanges and execution capabilities to match.

A reverse exchange requires more than just a set of documents. Continual investments are required to ensure that the following aspects of each reverse exchange are delivered to each and every Exchangor:

• Compliance, independently maintained in real time, with all applicable federal and state 1031 regulations, statutes and other formal guidance
• Responsiveness measured in minutes and hours, not in days
• Flexibility to accommodate a wide variety of exceptions, variations and unusual circumstances in a reverse exchange without significant delay or additional cost; examples are environmental issues, unusual purchase/sale agreements, non-standard entity structures for parking title, holding title directly if needed to achieve parallel tax efficiencies, inclusion of various forms of financing, etc.
• A focus on optimizing the exchange process for the Exchangor in terms of 1) managing deadlines according to market dynamics to increase control and deferment success, 2) maximizing deferment potential with advanced strategies for improvements, hybrid exchanges and non-safe-harbor arrangements when needed and 3) optimize the Exchangor’s economic benefit by basing the choice of exchange strategy on ROI, asset utilization and, for many asset categories other than real estate, the ability to achieve parallel tax efficiencies in sales and use taxes.
• Problem solving and innovation capabilities that result in being able to find ways to solve problems for Exchangors that cannot be addressed by the simplest reverse exchange forms
• State-of-the-Art asset security devices that ensure both the return of the asset involved in a reverse exchange and the completion of the exchange even in the very unlikely event that the Accommodator becomes unavailable to finish the reverse as intended at the outset.

In general, fees for delayed exchanges have risen in the last several years due to the ongoing interest rate climate. QIs earn interest on the cash exchange proceeds they hold and the interest is often a significant component of their revenue. So, the QI’s income from a delayed exchange is not simply the fee but a combination of the fee and the interest earned from the cash that really belongs to the Exchangor. As an Exchangor, if you absolutely must have the cash from the sale of your Relinquished Property available to acquire the Replacement Property, then you are likely forced to use a delayed exchange and face the prospect of the QI holding your cash receiving most of the financial benefit (however small it may be given current interest rates) from your investment capital.

If your circumstances dictate that you must acquire the Replacement Property before selling the Relinquished Property, then a reverse exchange is required. If you are forced into one strategy or the other, then a comparison of fees in somewhat irrelevant and you should simply try to find the best Accommodator with a reasonable fee. “Reasonable” should mean not too high but not too low either. A rock-bottom price is indicative of an Accommodator that is either desperate or one that will do the absolute minimum, resulting in additional risk for the Exchangor in terms of increased likelihood that a reverse will be disqualified by the IRS and/or the relevant state tax authorities and/or increased taxes or cost from other sources. A very high price is indicative of a QI that does not really want reverse exchange business and will only do it – perhaps reluctantly – if they can charge more than the market should bear. Our advice is to compare the processes and the fees (not just one or the other) of potential Accommodators and determine who does the best job for the least fee. Our strong advice is to ensure that no future, unanticipated problems will occur as the result of an Accommodator who does not look into the future on your behalf and make sure it comes out the way you want it to.

If your circumstances suggest that you can choose which strategy to use based on what is optimal, then you should consider the following when including fees in your analysis. In a reverse exchange, there is generally no cash held by a QI for a significant amount of time because the cash has been “put to work” buying the Replacement Property. The Exchangor, in this case, has the benefit of more than one investment asset during the exchange period. In those cases where the assets are incoming-producing, the Exchangor has both the benefits and obligations that come with two sources of rental income during a period of up to 180 days. In many cases, the overlapping rent stream and ongoing depreciation deductions created by a reverse exchange far surpass the increasingly narrow gap between the fees for a delayed exchange and a reverse exchange. Many Exchangors will leave money “on the table” if decisions are made on the basis of “encouragement” from QIs who promote delayed exchanges (because of the business model of the QI) rather than on analysis of the factors that determine ROI during an exchange. Click here for more on tools that we provide to support this type of analysis.