For many years, the 1031 accommodator community has, for the most part, downplayed the attractiveness of reverse exchanges relative to that of delayed exchanges. This emphasis has primarily been motivated by profitability. Many advisors have attended CLE courses or other presentations on 1031 subjects in which reverses have been described as something to avoid at all cost because they were both expensive and risky.
Today, neither is true. In the eighteen years since the issuance of the reverse exchange safe-harbor Rev. Proc., there have been tens (perhaps hundreds?) of thousands of successful reverse exchanges and the processes are very well vetted. All the situations that may have generated risk in the past have been addressed and included in standard reverse processes so that there is really zero transaction risk if an Accommodator is used whose processes are current and reasonably maintained.
As for the real cost of a particular strategy, including money potentially left "on the table", see Return on Investments or Fees for a way of analyzing cost that is vastly superior to simply comparing the fees. Determining real economic benefit is part of optimizing a particular strategy for a Client. As we describe in detail in our section on Optimization Criteria, the usefulness of reverse exchanges for those Clients trying to get the most out of a particular strategy applied to a specific set of facts and circumstances is worth evaluating closely and is a worthy endeavor for professional advisors. As you can see, factors such as tax deferment potential, return on capital, asset utilization and productive use of cash or credit are factors that are, in general, more favorable for the Client in the context of a reverse exchange.
Regarding asset security, it is the delayed exchange that has historically been far more risky. Asset security for delayed exchanges means having the cash proceeds of a delayed exchange held in a custodial structure that is 1) not vulnerable to theft and/or investment mistakes and 2) not subject to consolidation into a bankruptcy estate if the QI seeks protection from its creditors, voluntarily or otherwise (i.e. "bankruptcy remote"). Bank QIs and a very small number of independent QIs are considered both safe and bankruptcy remote when it comes to delayed exchanges.
For reverse exchanges, the question of theft or misuse of the parked assets is fundamentally different because the assets are tangible and do not have the tempting portability of cash. Even so, there are security devices in place to ensure that the Client’s interests are perfected during a reverse exchange.
In addition, ensuring that a reverse exchange is genuinely bankruptcy remote is far more important. The failure in 2009 of the 1031 subsidiary of a large, publicly-traded title company illustrates vividly the potential for a Client engaged in a reverse exchange to have the assets held in an EAT to be consolidated, even for a "brief" period of time, into the estate of a QI that has failed because of issues with cash and not issues related to reverse exchanges. Indications are that assets held in EATs were eventually returned to the owners of the respective equitable interests but that the disposition took more than 180 days. The Clients were therefore not able to successfully complete their exchanges. Being "bankruptcy remote" therefore must mean that an EAT cannot be consolidated and that the bankruptcy court cannot delay the transfer of assets as intended by the parties to the parking arrangement. We believe that our approach to security devices can ensure the timely return of assets and the timely completion of an exchange even the most unlikely and dire events befall our Firm. We look forward to hearing from you if asset security is critical to your Clients.