An improvement exchange, also called a build-to-suit or construction exchange, lets an investor use exchange funds to pay for construction or renovation on the replacement property, not just its purchase price. This matters when the ideal replacement property does not exist yet in finished form, whether that means adding square footage to a Nashville industrial building or completing a ground-up net-lease pad before it can serve the investor's needs. The structure has real value, but it comes with a strict constraint that trips up investors who assume construction timelines will simply be flexible. Treating the 180-day deadline as negotiable, the way a normal construction schedule sometimes is, is the single biggest misconception investors bring into this type of exchange.
Why Improvements Have To Route Through A Parking Entity
An investor cannot take direct title to the replacement property while improvements are being made and still have the construction costs count as part of the exchange value; doing so would mean spending exchange proceeds on property the investor already owns, which does not qualify. Instead, the same exchange accommodation titleholder structure used in reverse exchanges holds title to the replacement property while improvements are made, using exchange funds released by the qualified intermediary to pay contractors and cover construction draws. That single requirement, that title stay with the parking entity until construction is finished, is what makes this exchange type meaningfully more complex than a standard purchase-only exchange.
The 180-Day Deadline Does Not Bend For Construction
This is the constraint that catches investors off guard: every improvement paid for with exchange funds has to be complete, and the property has to be in the condition the investor is acquiring it, by day 180. A half-finished building transferred to the investor on day 180 only counts as like-kind property to the extent of work actually completed and paid for by that date; unfinished construction value does not carry forward. Middle Tennessee's active construction market, with labor and material timelines that can slip on even straightforward projects, makes this deadline one of the more common failure points in this exchange type.
- All improvements funded by exchange proceeds must be complete by day 180
- Only the value of completed, paid-for work counts toward the exchange
- The EAT holds title throughout the construction period
- Construction draws are managed through the qualified intermediary, not the investor directly
What Realistically Fits Inside The Window
Because 180 days includes permitting, site work, and any weather or supply delays, improvement exchanges tend to work best for smaller renovation projects, tenant buildouts, or additions to an existing structure rather than ground-up construction. An investor targeting a Rutherford County or Wilson County site for new construction should have permitting largely resolved and a realistic, padded construction schedule before relying on an improvement exchange structure, since a permitting delay alone can consume weeks of the available window. Building in a buffer for inspections and final sign-off, rather than assuming the last day of construction is also the day title transfers cleanly, avoids a last-minute scramble.
Coordinating Contractors, Draws, And The Intermediary
Every construction draw has to pass through the qualified intermediary rather than going directly from the investor to the contractor, which adds a layer of process that general contractors are not always used to on a typical project. Setting expectations with the contractor and lender early, including how draw requests get approved and funded through the exchange structure, keeps the construction schedule from stalling on paperwork rather than actual work. We coordinate this directly with the QI and the general contractor's draw schedule before the parking arrangement is finalized.
Land value adds another wrinkle worth planning around. If the replacement property includes raw land that is not itself being improved, the value of that land already counts toward the exchange on day one, separate from whatever construction value gets added later. Separating land value from anticipated construction value early in the planning keeps the overall exchange math honest instead of assuming the full projected finished value will automatically count.
Common Questions
Can construction started after day 180 still count toward the exchange?
No. Only improvements completed and paid for with exchange funds by day 180 count toward the exchange value; work finished afterward does not carry forward.
Who holds title to the property while it is being improved?
An exchange accommodation titleholder, the same parking entity structure used in reverse exchanges, holds title throughout the construction period until the improvement work is complete.
Can exchange funds pay contractors directly?
No. Construction draws are managed through the qualified intermediary rather than paid directly by the investor to the contractor, to keep exchange funds properly segregated.
Is an improvement exchange a good fit for ground-up construction?
It can be, but the tight 180-day window makes it more reliable for smaller renovation projects or additions where permitting is already resolved, rather than full ground-up builds.
What happens to unfinished construction value at day 180?
It simply does not count as exchange value. The investor still receives the property, but only the completed portion is treated as like-kind replacement property.
Does raw land included in the deal count toward the exchange right away?
Yes. Land value counts toward the exchange from day one, separate from any construction value that gets added to the property during the parking period.