Question on how to structure a complicated 1031 exchange deal
I am currently in the negotiations phase of a "pre\-construction" hotel deal, where the sale would happen similar to a pre\-construction condo sale \(i.e. 10&amp;#37; down at contract, and increasing percentage payments as the building is built and then title is transferred at completion\). The problem that we are currently having is that the buyer needs to do a 1031 exchange for this property and it would take 2 years to build and therefore transfer title. Unfortunately, for a 1031 exchange, the closing needs to happen within 180 days of the sale of the buyer's property. The only solution that I have been able to come up with is for the buyer to buy the land, but pay the full price of the building for it and have an addendum in the contract that the seller must completely develop the building, However, this would leave the buyer with extremely high property taxes on a piece of land that is still being built on for 2 years and not producing any income.

Does anybody have any ideas on how something like this could be structured?
[{"id": "dxlephz", "text": "You should be very cautious paying full price for a piece of dirt unless you have complete confidence in the financial standing of the seller to stand behind a completion guarantee (you'd want some personal guarantees too). ", "replies": [{"id": "dxlg1na", "text": "Seller is a very large development company. This is not a small project. ", "replies": [{"id": "dxlgklv", "text": "whats the layout?  Can you split off the out parcels etc and sell buildings upon completion to step it up?", "replies": [], "depth": 3}, {"id": "dxlix97", "text": "The buyer should be using a 1031 exchange accommodator for advice on this. Most of them have special departments for complicated exchanges like this. Not sure where you are, but I know of a great one in CA, if you wanna DM me for contact info. ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dxlgimz", "text": "who are you in this?  a broker or the builder?  Do you have other lots in inventory?  Let him buy them with an option to sell them back.  1031 into them then 1031 out of them into the developed parcel.  \n\nJust an idea, am sure there are complications there.  You could have him 1031 into some stnl or something liquid too to pull off the same thing.  \n\nHonestly though I'm going to bed there is a good way to do this that avoids all that.  Whats your lawyers say?  ", "replies": [], "depth": 1}, {"id": "dxlluka", "text": "First of all, just get a lawyer to help with this?\n\nSecond, is there a way for buyer to 1031 into the undeveloped property and then have that be an in kind contribution to a JV with the builder?", "replies": [], "depth": 1}, {"id": "dxmcjz9", "text": "I'm not an attorney, but he simple solution is to pay a 10% escrow payment with increasing hard money escrow payments then close at completion. That would protect you against a failure of completion and the capital gain the seller is trying to exchange would be had at once at closing (and completion) that could be exchanged. ", "replies": [{"id": "dxmda51", "text": "Yes, but the sales price would still reflect the price of a completed project and not that of a piece of land, hence the property taxes will still be very expensive for the two year construction period.", "replies": [{"id": "dxme1ib", "text": "I'm in Texas and property taxes processes are very different state to state, but it shouldn't be hard to contest a tax increase since a piece of land with active construction isn't more useful or more valuable than the dirt. Considering the building wouldn't be permitted I doubt they'd tax it as an improvement. ", "replies": [{"id": "dxme463", "text": "Interesting, this might be something to follow up on by calling the tax office. ", "replies": [{"id": "dxmffwo", "text": "My thought here is that the deal doesn't change based on who owns it. By shifting the actual sale date you're just moving liabilities around between the parties based on the timing, so the details can just be negotiated. In theory you could do a reverse exchange but that would be far more complicated and expensive if you could even find someone to take on a development deal like this. ", "replies": [{"id": "dxmhywr", "text": "I am a broker; I have already connected the seller and the buyer who both want to move forward on this deal. The buyer is the one who just sold his property and wants to buy this for the 1031 exchange. A reverse exchange wouldn\u2019t apply here. ", "replies": [{"id": "dxmkkrw", "text": "Ah, okay. Makes more sense. Then it's easy: close the deal and escrow the money to be released at the appropriate times. ", "replies": [{"id": "dxml4km", "text": "That definitely helps and haven\u2019t thought about that thank you. Unfortunately that doesn\u2019t change the fact that the sales price will reflect the full price of the project and the taxes will be very high from day 1. To give you a little more information:\n\nThe sales price for the full hotel will be $18MM, the land is worth maybe $3.5MM today. The buyer sold his other hotel for $17MM. Buyer needs to 1031 the full $17MM so he needs to acquire something for $17MM+. Unfortunately if we buy the preconstruction project up front at $18MM we will have huge taxes on a property worth $3.5MM for 2 years on something that isn\u2019t producing income...", "replies": [{"id": "dxmnt58", "text": "Texas is a non-disclosure state, so this isn't an issue we run in to. How much cash is in the exchange? Does the seller have debt on the land or for construction? Depending on how much cash your buyer has in the exchange, I would propose purchasing the 'land' at the amount the seller has to exchange, minus closing costs then take a construction loan for the construction amount to build on his land he just bought. The purchase price would be the value of the purchased land equal to the cash the buyer is exchanging, and the taxes should readjust until the hotel is complete. The buyer would just become financially responsible for completion but the seller would maintain the responsibility of the construction. If the buyer is exchanging $17MM of cash then the only thing I can think of is reach out to the tax office and let you know what you're trying to do and try to negotiate abated rent for the construction period, however I've never done that and they don't have any real incentive to do that unless you can convince them that land is going to stay vacant long term if they don't.", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "dxme9cr", "text": "In addition the risk of lack of completion would be shifted back to the seller along with the carrying costs including the tax burden, but it would aid in cleaning up the 1031 process, so I'm sure something could be negotiated. Alternatively, if the seller has his eye on his upleg then the buyer could buy the sellers upleg with an agreement to do an actual trade after the hotel is completed. Never done something like that but it would work in theory. ", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]