Choosing a Reverse Exchange Accommodator

Now more than ever, it is important to choose an Accommodator for a reverse exchange carefully.  ExStra recommends that potential Exchangers evaluate potential Accommodators using the following criteria:

    1. Expertise, experience and commitment
    2. Processes that deliver results within the Exchanger’s urgency requirements and with the least risk to the Exchanger
    3. Financial condition and risk of business failure 
    4. Reasonable fees
  1. Expertise, experience and commitment. Few QI firms encourage their clients to do reverses and discussions of optimal exchange strategy are rare. However, many QIs can do reverse exchanges – they have a set of documents and some idea of how to proceed. These firms typically describe reverse exchanges as complex, risky and expensive. In addition, few of these firms invest in reverse exchange processes that are result in simplicity, security and predicable cost for clients.  Accordingly, Exchangers are advised to ensure that the QI has a clear understanding of every phase of the reverse process, has documents that reflect all current guidance and industry best practices (as determined by an independent authority) and charges fixed fees that are based on the execution of a process as opposed to the way lawyers charge
  2. Processes that are responsive and reduce risk. A reverse exchange requires more than just a set of documents; careful and informed effort is required at each step in a process to maximize the deferment potential and minimize the risk of a failure in a timely fashion. At ExStra, we use both a formal Standard of Care (ensuring thorough execution) and a Service Level Commitment (ensuring proactive and timely response) to guide how we perform and how quickly we perform. We don’t expect other Accommodators to have the exact same terminology as ExStra but there should be phases of the reverse process roughly equivalent to 1) determining feasibility, form and deferment potential, 2) determining exit strategy, 3) EAT formation, 4) documentation, 5) management, 6) settlement, 7) EAT resolution and 8) reporting. Without the right content and execution at each step, the Exchanger can be in jeopardy of a failed exchange or unanticipated expense. In addition, there are requirements for both Exchanger and Accommodator to act quickly at certain stages of the process. Is the Accommodator you are considering up to the task and up to it when you need them to be?
  3. Is there potential for the QI to fail while involved in my reverse exchange? With the exception of ExStra, every reverse exchange Accommodator in the industry also performs delayed exchanges. There is a big difference in the profit models for reverse and delayed exchanges, with one being driven strictly by fees and the other driven by earnings on exchange proceeds. Unless the reverse and delayed businesses are adequately separated, stress or failure of the delayed exchange business (the QI) could result in the assets held by the EAT(s) coming under the control of a bankruptcy court. In this case, you’d almost certainly get your property back eventually but the likelihood of this entanglement being resolved prior to your exchange deadline (180 days or fewer) is virtually zero. Exchangers should therefore ensure the following: 1) that the QI is financially sound and not in danger of failure due to declining business, too much debt, etc., and 2) that the EAT structure provides adequate separation from the affairs of the QI, i.e. that the EATs are not disregarded entities to the QI and yet are properly structured for the required federal and state tax filings.
  4. Are the QIs fees reasonable? “Reasonable” should mean not too high but not too low either. A rock-bottom price is indicative of an Accommodator that will do the minimum, resulting in additional risk for the Exchangor as corner-cutting only increases the likelihood that a reverse will be disqualified by the IRS and/or the relevant state tax authorities.  A very high price is indicative of a QI that does not really want reverse exchange business and will only do it – perhaps reluctantly – if they can charge more than the market should bear. Our advice is to compare the processes and the fees (not just one or the other) of potential Accommodators and determine who does the best job for the least fee. Our strong advice is to ensure that no future, unanticipated problems will occur as the result of an Accommodator who does not look into the future on your behalf and make sure it comes out the way you want it to.