An improvement exchange, sometimes called a build-to-suit exchange, lets an investor use exchange proceeds to fund construction or renovation on the replacement property rather than simply purchasing it as-is. This structure solves a real limitation of a standard exchange: sometimes the ideal replacement property does not exist yet in finished form, and an investor wants to direct exchange dollars toward building it rather than settling for a completed property that fits less well.
Why a Standard Exchange Cannot Fund Construction Directly
In an ordinary forward exchange, the qualified intermediary disburses funds to acquire an already-existing property, and any improvements made after the investor takes title are the investor's own project, unrelated to the exchange. Using exchange proceeds to pay for construction after closing does not work, because once the investor holds title, any additional funds spent on the property are treated as a separate transaction rather than part of the like-kind exchange. An improvement exchange gets around this by keeping title with an exchange accommodation titleholder while construction happens, so the improvements are completed before the investor formally receives title.
How the Structure Actually Works
The mechanics closely resemble a reverse exchange. An EAT takes and holds title to the replacement property, uses exchange funds, and sometimes additional investor or lender funds, to complete construction or renovation, and only transfers title to the investor once the work is finished or the parking period is ending. Because the entire structure has to be completed and title transferred within the same 180-day exchange window that governs a standard exchange, this arrangement generally works best for renovation, tenant improvements, or smaller-scope construction rather than a project with a long, uncertain build timeline.
Why the 180-Day Window Is the Real Constraint
The improvement has to be substantially complete, and title has to transfer to the investor, before the 180 days run out, which means the construction timeline is the limiting factor far more often than the underlying real estate deal itself. Michigan investors evaluating this structure should think through a few practical constraints before committing:
- permitting timelines in the relevant Michigan municipality, which can vary significantly between a fast-moving suburban jurisdiction and a smaller township
- weather-related construction delays, particularly relevant for exterior work scheduled into a Michigan winter
- contractor availability and lead times for materials on the specific scope of work
- whether the improvements need to be complete, or only substantially complete, for the value to count toward the exchange
What Counts Toward Exchange Value in an Improvement Exchange
Only improvements actually completed, and reflected in the property's value, by the time title transfers count as like-kind property received in the exchange. Materials purchased but not yet installed, or work only partially finished, generally do not count toward the exchange value, which is why an improvement exchange requires closer coordination between the EAT, the contractor, and the investor's tax advisor than a standard purchase does. Michigan investors pursuing this structure for a build-to-suit industrial or retail project should build a construction schedule with real contingency time before locking in the exchange timeline, since a missed 180-day deadline unwinds the tax deferral entirely, not just the improvement portion.
When an Improvement Exchange Is Worth the Added Complexity
This structure tends to make the most sense for a Michigan investor who has found land or an underbuilt property in a strong location, such as a well-positioned outparcel near a growing Grand Rapids retail corridor or a smaller industrial site along a Detroit-area freight route, where the land value alone does not come close to replacing what was sold, but the finished project would. Rather than searching indefinitely for a fully built replacement that may not exist in the target submarket, the investor directs a portion of the exchange proceeds toward turning a raw or underimproved site into something that matches the value of what was relinquished. It is generally a poorer fit for an investor who is uncertain about scope, has not yet lined up a contractor, or is choosing between multiple possible projects, since the fixed 180-day window leaves little room for a construction plan that is still being decided while the clock is already running.
Common 1031 Exchange Questions
Can I use exchange funds to renovate a property after I already own it?
No. Once the investor holds title, additional funds spent on the property are treated as a separate transaction, not part of the exchange, which is why an improvement exchange keeps title with an accommodation titleholder during construction.
How long do I have to complete construction in an improvement exchange?
The same 180-day window that governs a standard exchange applies, so improvements have to be substantially complete and title transferred to the investor before that deadline, not a separate or extended construction timeline.
Does partially completed construction count toward the exchange value?
Generally no. Only improvements actually completed and reflected in the property's value by the time title transfers count as like-kind property received, so materials purchased but not installed typically do not count.
Is an improvement exchange more complex than a standard forward exchange?
Yes, it generally involves an exchange accommodation titleholder, closer coordination with a contractor and tax advisor, and additional cost, similar in structure and complexity to a reverse exchange.
What kind of projects are best suited to an improvement exchange?
Renovation, tenant improvements, and smaller-scope construction tend to fit well, since they can realistically be completed within the 180-day window, while ground-up construction with a long or uncertain timeline is riskier under this structure.
