Build to Suit Question
I have an opportunity to invest in a buy-and-hold project with a contractor whose work and track record I know well. I'm closing on the sale of one of my investment properties and I'm trying to figure out if there's a way to make a build-to-suit 1031 work. Usually the way the builder works with his regular partner is that the partner fronts the cost of the purchase, the contractor does the rehab, and they split the proceeds on the flip accordingly. I want to see if there's a way to work a slightly different scenario where the improvements that the contractor makes are rolled into a 1031 exchange and we keep the property as a rental.
Let's say for rough numbers I'm selling an investment property for $1.5m (proceeds of $1m and paying off $500k debt). And the new property is a $1m purchase price and it needs $500k capital improvements. So a pretty straightforward build to suit 1031. Now let's say that the contractor and I agree that I'll front the purchase price and he will be responsible for the labor/materials for the improvements. If we meet the build to suit reqt's - the improvements are completed within the 180 days, we hold title to the property in the same way I held my previous investment, we keep the property as a rental for at least 2yrs, etc. - does that satisfy my $1.5m purchase requirement? Does the contractor act in the same way that any conventional lender would in this scenario? Or does the QI have to actually have all $1.5m from the beginning and disburse the cost of the improvements along the way? Do I have to have a formal $500k debt relationship with the contractor, and what would that look like? Can we simply agree to a 2/3-1/3 split of the rent and eventual sale proceeds?
Anybody done anything like this before? Or have any other strategies to share capital investment with a contractor-partner on a buy-and-rehab-and-hold that will satisfy the rules of a 1031 exchange?
(I'm also curious how, in the scenario I'm proposing, the "labor" provided by the contractor actual gets valued by the 1031 "improvements" rules, when I'm not paying for it and he's not really billing it to anyone because it's part of his "capital" contribution to the project. Seems like an obvious way to fudge the numbers on what the improvements could be worth and a reason I would imagine the IRS would have difficulty with this plan...)
I've done one other build-to-suit 1031 but it was 10 years ago and the QI I used then is no longer around. I'd love some input from some of you experienced QIs and CPAs about strategies here! Thanks for any help.