An improvement exchange, sometimes called a build-to-suit exchange, lets an investor use exchange proceeds not just to buy a replacement property but to fund construction or renovation on it before the exchange closes. It exists for the investor who finds a Memphis-area building with the right bones, the right freight access, the right location, but not enough finished square footage or improvements to absorb the full amount of exchange proceeds on its own.
Why Buy-And-Improve Beats Buy-Then-Improve
Without this structure, an investor who bought a replacement property below the full exchange value and then improved it afterward, using their own separate funds, would have boot exposure on the value gap and would get no exchange treatment on the improvement dollars at all. An improvement exchange folds the construction cost into the exchange itself, so the finished, improved property is what actually completes the trade, not the raw building purchased on day one.
The Exchange Accommodation Titleholder Holds The Property During Construction
Because the investor cannot hold title to the replacement property while exchange funds are still being spent on it, an exchange accommodation titleholder takes title to the property and holds it as construction proceeds, similar to the parking structure used in a reverse exchange. The EAT manages disbursements against the exchange funds as work is completed, and title transfers to the investor once the property, now improved, is ready to close out the exchange.
The 180-Day Clock Does Not Slow Down For Construction
The entire improvement, permitting, and construction process has to fit inside the same 180-day exchange window that governs every other 1031 exchange, and construction timelines are notoriously bad at respecting fixed deadlines. A tenant improvement package or light renovation on an existing Memphis building can realistically finish inside 180 days with an experienced contractor and a permitting process that does not stall, but a ground-up build almost never can. Investors considering this structure should scope the improvement work conservatively and get a contractor's realistic timeline, not an optimistic one, before committing exchange funds to construction.
Only Completed Improvements Count Toward The Exchange Value
Only work that is actually completed and in place by the end of the 180-day period counts toward the exchange value of the replacement property. Materials purchased but not yet installed, or a renovation that is 80 percent finished on day 180, generally do not count as part of the like-kind property received, which can leave the investor with unexpected boot exposure if construction runs behind. This is the single most common reason improvement exchanges underperform expectations, the improvement plan looked fine on paper but the construction schedule did not respect the exchange deadline.
Scoping Realistic Projects For A Memphis Timeline
The improvement exchanges most likely to actually finish inside 180 days tend to involve existing structures, tenant improvements, roofing and mechanical upgrades, or an interior buildout on a Cordova or airport-adjacent flex building rather than new ground-up construction. Permitting turnaround with local jurisdictions and material lead times both factor into whether a scoped project is realistic, and an investor should get contractor bids and a permitting estimate before committing to the improvement structure, not after the relinquished property has already closed and the clock has started. A modest, well-scoped improvement plan that actually finishes on time delivers real exchange value, while an ambitious plan that stalls at 80 percent complete on day 180 delivers boot exposure instead.
Common 1031 Exchange Questions
Can I use exchange funds to build a new structure from the ground up?
Yes, as long as construction is far enough along to be considered part of the property received by the end of the 180-day exchange period. Ground-up construction rarely finishes that quickly, which limits its practicality.
Who holds title to the property while construction is happening?
An exchange accommodation titleholder holds title during construction, similar to the parking structure used in a reverse exchange, and transfers title to the investor once the improved property is ready to close the exchange.
What happens if construction is not finished by day 180?
Only the improvements actually completed by that point count toward the exchange value. Unfinished work is generally excluded, which can create boot if the property's finished value falls short of what was required.
Is an improvement exchange more expensive to set up?
Yes. It requires forming and managing an exchange accommodation titleholder and coordinating construction draws against exchange funds, which adds cost and complexity compared to a standard forward exchange.
Can I renovate a property I already own using this structure?
No. The property being improved has to be the replacement property in an active exchange, not a property the investor already holds outside the exchange.
