The Front-End Straw Man and the Build-to-Suit Exchange

By Dan Ehr, CPA, Appleton, Wis.

Editor: Mark Heroux, J.D.

Businesses are always expanding and changing the way they do business, which often means they need a different space in which to operate. Many times, the best option is to construct a new facility or to purchase an existing facility and make upfront renovations. Another option is to do a like-kind exchange under Sec. 1031. A combination of the two possibilities is to use a build-to-suit like-kind exchange. This type of exchange usually requires a great deal of planning and may take some time. Generally, construction or renovations take time, and like-kind exchanges have specific time requirements and ownership rules that must be met to qualify.

Build-to-Suit Exchange

The build-to-suit exchange or improvement exchange allows a taxpayer (the exchanger) to use all or a part of the proceeds from the sale of an existing property (the relinquished property) for construction of or improvements to a new facility (the replacement property) while deferring all or a part of the tax on the gain. This tax deferral helps to finance the acquisition of the replacement property.

Delayed Exchange

Rev. Proc. 2000-37 provides a structure for a build-to-suit exchange using an exchange accommodation titleholder (EAT) and a delayed exchange. With this structure, the exchanger sells the relinquished property through a qualified intermediary (QI). The exchanger then deals with an EAT, which is often set up and owned by the QI, to acquire the replacement property and construct the desired facility or make the requested renovations. The replacement property is then acquired from the EAT after it has been improved, using the exchange funds from the relinquished property the QI holds.

Under the delayed exchange structure:

  • Improvements to the property must occur before the exchanger takes title;
  • All Sec. 1031 rules apply, including time limitations;
  • The time limitations require the completion of the exchange on the earlier of the end of a 180-day exchange period or completion of construction on the replacement property; and
  • Any improvements made to the replacement property after the exchanger takes title may be considered "goods and services" and are potentially taxable as boot.
Enter the Straw Man

Another potential structure is to insert a "straw man" on the front end to own and construct the property. For example, an exchanger could locate a builder who will act as the straw man and acquire land or a building to be renovated and construct the desired facility or make the requested renovations to what will be the replacement property. In this example, the builder is the owner of the project while the construction is taking place. This means that the exchange process has not started and, more importantly, that the 180-day exchange period has not started, so any construction delays are not potentially disqualifying. When the replacement property is ready, the exchange can be executed using a standard forward exchange.

Under the straw man exchange structure:

  • An unrelated party acts as a straw man to own the project while construction or renovation is taking place;
  • The actual exchange does not happen until the relinquished property is sold and the replacement property is ready for use;
  • A standard forward exchange can be executed;
  • Construction or renovation can begin before the sale of the relinquished property; and
  • The exchange can be further delayed if a buyer for the relinquished property is not identified until after the replacement property is available.

When one is dealing with the sale of an existing building or construction of a new facility, the time requirements are often unknown or out of the taxpayer's control. For this reason alone, the typical delayed exchange under Rev. Proc. 2000-37 provides too much uncertainty for taxpayers. This is where the front-end straw man can provide the solution. Because an unrelated third party acquires the desired replacement property, the exchange time limitation does not pose a potential obstacle, providing much more flexibility to the exchanger. This allows for a lengthy construction process that often includes site location and acquisition, permitting and zoning requirements, design approval, regulatory signoffs, and construction delays. It also potentially allows for additional time for the exchanger to sell the relinquished property. In certain cases, the exchanger may rent the replacement property for a period before executing the exchange.


The Sec. 1031 exchange is often a significant planning opportunity for taxpayers. Ensuring that the exchange is qualified is important to make certain that tax deferral is achieved. Any deal structure should protect the interests of all parties without disqualifying the transaction. Factors to consider are who is selling the relinquished property, how the replacement property will be held, and who owns the property at each stage of the transaction. Other tax considerations such as the rental and lease rules, tax depreciation, credits, and other incentives are often associated with the construction or improvement of real property. At times, the insertion of a straw man can be a valuable part of the strategy, but this must be done correctly to ensure that the exchange transaction is structured effectively.


Mark Heroux is a principal with the Tax Services Group at Baker Tilly Virchow Krause LLP in Chicago.

For additional information about these items, contact Mr. Heroux at 312-729-8005 or

Unless otherwise noted, contributors are members of or associated with Baker Tilly Virchow Krause LLP.

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