An improvement exchange, sometimes called a build-to-suit exchange, lets an investor use exchange funds to construct new improvements on a replacement property, or renovate an existing one, rather than simply buying it as-is. This is useful when the ideal replacement property does not exist yet in finished form, or when raw land or a dated building can be improved into something worth substantially more than the purchase price alone.
Why the Same Title-Holding Problem Applies Here
Improvements made with exchange funds only count toward the exchange if they are completed before the exchanger takes title to the property. If the exchanger owns the property outright while construction happens, any work done afterward is not part of the exchange and does not add to the property's exchange value. This creates the same structural issue as a reverse exchange: an accommodation titleholder holds the property while improvements are made, using exchange funds directed by the qualified intermediary to pay contractors and cover construction costs, and the exchanger takes title only once the improvement work that will count is finished.
The 180-Day Deadline Does Not Bend for Construction Timelines
This is the part of an improvement exchange that trips up the most investors. Construction, permitting, and inspections all have to fit inside the same 180-day window that governs every other exchange, with no extension available because a contractor ran behind schedule or a permit took longer than expected. Any improvement value added after the exchanger takes title, even if it was already under contract, does not count toward the exchange.
Because of this, improvement exchanges work best when the scope is realistic for a 180-day build cycle, such as tenant improvements, a partial renovation, or site work on a property that is already largely usable, rather than ground-up construction that would normally take a year or more to complete.
Structuring the Work to Maximize What Counts
Because only completed improvements count toward the exchange value, sequencing matters. Structural and site work that adds clearly documented value, such as roof replacement, parking lot repaving, or a completed building shell, tends to be prioritized over cosmetic finishes that could be completed later outside the exchange if time runs short. Investors working with a qualified intermediary and accommodation titleholder generally build a construction schedule backward from day 180, rather than forward from the closing date, to make sure the most valuable work is finished first.
Draw requests, contractor invoices, and lien waivers typically flow through the qualified intermediary rather than directly from the exchanger, which keeps the funds properly held outside the exchanger's control throughout the construction period.
Where This Comes Up in Tennessee Exchanges
Improvement exchanges are common among Tennessee investors moving out of a fully depreciated older building and into a site that needs work before it functions as a comparable income property, particularly in industrial and retail redevelopment around Nashville, Chattanooga, and the Tri-Cities area. A build-to-suit structure also comes up when an investor has identified land for a single-tenant net lease building being constructed to a specific tenant's specifications, since the building often is not complete at the time it would otherwise close.
In both cases, the construction budget, contractor timeline, and permitting process typically get scoped out before the 45-day identification deadline, not after, since the feasibility of finishing on time inside 180 days is part of deciding whether the property belongs on the identification list at all.
Local permitting speed varies enough across Tennessee to affect this feasibility call directly. A jurisdiction with a fast plan review process can shave weeks off a construction schedule compared to a county still working through a backlog, so investors comparing two otherwise similar improvement opportunities often treat permitting turnaround as a real factor in the identification decision rather than an afterthought once the property is already on the list.
Common 1031 Exchange Questions
Do improvements made after the exchanger takes title count toward the exchange?
No. Only improvements completed while the accommodation titleholder holds the property, before the exchanger takes title, count as exchange value.
Does the construction timeline get extra time beyond 180 days?
No. Construction has to fit inside the same 180-day deadline as every other part of the exchange, regardless of permitting or contractor delays.
What kind of projects work best for an improvement exchange?
Projects with a realistic 180-day timeline, such as tenant improvements, partial renovations, or site work on a mostly usable property, rather than ground-up construction.
Who pays contractors during an improvement exchange?
Funds typically flow through the qualified intermediary to the accommodation titleholder, which pays contractor draws, rather than the exchanger paying directly.
Can a build-to-suit net lease property work as a 1031 replacement?
Yes, as long as construction can realistically finish inside the 180-day window, since only completed work at the time title transfers counts toward the exchange.
