Improvement Exchange Planning

An improvement exchange only works if the construction is done, titled, and paid for before day 180. Only completed improvements count toward exchange value; a signed contract for future work or a half-finished tenant buildout does not close the value gap, no matter how firm the budget looks on paper or how confident the contractor sounds on the phone.

Running the Value Math on a Real Budget

A START EXCHANGE REVIEW nets $3.6M. A replacement industrial shell in the Columbia Corridor is available at $2.9M, leaving a $700K gap to close through improvements. At a rough $180 to $220 per square foot for tenant buildout and dock upgrades on a 15,000-square-foot bay, that gap absorbs roughly 3,000 to 3,900 square feet of finished improvement work, tight but achievable if construction starts within the first 60 days rather than the last 60.

The Titleholder Structure That Makes This Legal

Improvements built after the investor takes direct title generally don't count as exchange value, since the exchange requires acquiring like-kind property, not upgrading property already owned. An exchange accommodation titleholder holds the replacement property during construction, allowing the improved value to flow into the exchange when title finally transfers to the investor, which is why this structure has to be set up before, not after, the purchase closes.

Draw Schedules That Match the Exchange, Not the Contractor

A standard construction draw schedule releases funds monthly against completed percentage of work, which is fine for a typical build-out but creates friction inside an exchange, since the titleholder and often the lender both need to sign off before funds move, adding a review cycle a direct owner wouldn't face. Structuring the draw schedule with shorter intervals, every two weeks rather than monthly, in the final 45 days before the target completion date keeps small delays from compounding into a completion date that slips past day 180 by a week or more.

On a $700K improvement budget, front-loading site work and long-lead items, dock levelers, HVAC units, electrical gear, in the first draw cycle reduces the risk that a supply delay on a single component becomes the reason the whole project misses its completion window.

Where Construction Timelines Blow Past Day 180

• Permit review on code upgrades or seismic retrofit work in older industrial buildings can run 30 to 60 days before a shovel moves.
• Contractor availability in a tight labor market can push mobilization weeks past the target start date.
• Draw schedules tied to lender or titleholder approval add review cycles between completed work and released funds.
• Utility and dock upgrades on rail-served or bow-truss buildings often require longer lead times than standard tilt-up construction.
• Punch-list items completed after day 180 generally do not count toward exchange value, even if substantially finished before then.

Sizing the Reserve Before Signing the Purchase Contract

Because permit and construction timelines run long relative to the exchange clock, a workable improvement exchange budgets construction to substantially complete by day 150 to 160, not day 179, leaving a buffer for inspection, final draw approval, and the titleholder's transfer of title to the investor. A $700K improvement budget with no contingency and a day-175 completion target is a plan built to fail on timing even if the contractor never misses a deadline. Building in a 10 to 15 percent cost contingency alongside the schedule buffer covers the more common scenario where a change order, not a delay, is what threatens the numbers, since discovered site conditions on older industrial parcels can add cost even when the calendar holds.

Common 1031 Exchange Questions

Do planned but unfinished improvements count toward exchange value?

No. Only improvements actually completed and reflected in the property's value before the exchange closes count; a signed construction contract or partially finished work does not satisfy the value requirement.

Why does an improvement exchange need a special titleholder structure?

Because improvements built on property the investor already directly owns generally don't create exchange value; an exchange accommodation titleholder holds the property during construction so the improved value can be acquired as part of the exchange itself, and this structure must be arranged before the purchase closes, not after.

How much time should I budget for construction inside a 180-day exchange?

Substantially all work should target completion by roughly day 150 to 160, leaving a buffer for inspection, draw approval, and title transfer, rather than scheduling to the day-180 deadline itself.

What kinds of improvements are common in Portland-area exchanges?

Tenant buildouts, dock and loading upgrades, and code or seismic retrofit work on older industrial buildings are common, since close-in industrial stock in the Columbia Corridor and NW industrial belt often needs work to match a buyer's use before it reaches target value, and Washington County flex shells sometimes need similar buildout to match a specific tenant's requirements.

What happens if construction isn't finished by day 180?

Only the value completed by day 180 counts, and any shortfall between planned and actual completed value can create boot or, in a severe shortfall, jeopardize the exchange, which is why realistic scheduling matters more than an optimistic contractor bid. Building in a 10 to 15 percent cost contingency alongside the schedule buffer helps, since discovered site conditions on older industrial parcels can add cost even when the calendar holds, and a budget with no cushion tends to force a choice between finishing late or finishing incomplete.

Ready to organize the exchange file?