1031 Exchange Qualified Intermediaries Are Not Created Equal

Investors generally think 1031 Exchange Qualified Intermediaries are all the same – but Qualified Intermediaries are absolutely not created equal – and the differences can be significant and critical. Did you know there is no government oversight of Qualified Intermediaries.  Less than 1% are actually licensed, regulated, audited and maintain any kind of minimum equity capital requirements?  No one talks about this, but it is very scary when you consider the amount of money Qualified Intermediaries hold on behalf of investors’ 1031 Exchange transactions.

There have been numerous 1031 Exchange Qualified Intermediaries that have failed.  The vast majority of these 1031 Exchange Qualified Intermediary failures could have been prevented with government oversight.

1031 Exchange Qualified Intermediaries are an important part of any successful 1031 Exchanges transaction and have three very important responsibilities. They prepare the necessary documents to properly structure the investor’s 1031 Exchange, work with the investor and their legal, tax and financial advisors to ensure a successful and compliant 1031 Exchange transaction and – arguably – the most important responsibility – receive, hold and safeguard the investors’ 1031 Exchange funds throughout the 1031 Exchange.

Real estate investors must be careful and diligent when evaluating and selecting the 1031 Exchange Qualified Intermediary that will administer their 1031 Exchange transaction since Qualified Intermediaries hold significant amounts of 1031 Exchange funds on behalf of thousands of investors’ 1031 Exchange transactions.

Regulatory Oversight Ensures Safety, Soundness and Security

Government oversight and audit by a regulatory agency, such as a State Division of Banking (“DOB”), State Department of Financial Institutions (“DFI”), Office of the Comptroller of the Currency (“OCC”), Office of Thrift Supervision (“OTS”), Federal Deposit Insurance Corporation (“FDIC”) or the Federal Reserve Board (“FRB”), is crucial in order to ensure that the 1031 Exchange Qualified Intermediary is operating in a safe, sound and secure manner.

The importance of government oversight and an independent audit cannot be emphasized enough since 1031 Exchange Qualified Intermediaries have such tremendous fiduciary duties and responsibilities. Government oversight and an independent audit provides third-party verification that the 1031 Exchange Qualified Intermediary is operating in a safe, sound and secure manner.  The vast majority of 1031 Exchange Qualified Intermediary failures could have been prevented with proper government oversight and independent audits.

The team at Exeter 1031 Exchange Services, LLC takes its fiduciary duties and responsibilities in the administration of clients’ 1031 Exchange transactions extremely seriousl This is why Exeter 1031 Exchange Services, LLC chose to be in the top 1% of 1031 Exchange Qualified Intermediaries by proactively applying for regulatory approval to form and launch Exeter Trust Company in order to better protect its clients’ 1031 Exchange funds. Exeter Trust Company is licensed, regulated and audited by the Wyoming Division of Banking. This makes Exeter 1031 Exchange Services, LLC one of the safest and most secure 1031 Exchange Qualified Intermediaries in the industry today.

Bonding, Insurance and Equity Capital Provide Financial Strength and Stability

1031 Exchange Qualified Intermediaries’ should carry significant fidelity bond and errors and omissions insurance coverage to protect their investors from risk of theft or loss of clients' 1031 Exchange funds. 1031 Exchange Qualified Intermediaries should also maintain substantial equity capital as an added and essential safety net against errors or losses that may occur in a 1031 Exchange transaction due to administrative errors.  Clients have the right to expect their 1031 Exchange Qualified Intermediary to be around for a long time. 

The Exeter Group of Companies, including Exeter 1031 Exchange Services, LLC and Exeter Trust Company, maintain $10.0 million in fidelity bond coverage, $5.0 million in errors & omissions insurance, general fiduciary insurance coverage and over $4.0 million in equity capital to protect clients’ 1031 Exchange funds.

103 Exchange Qualified Trust Accounts Protect Investors’ Funds

1031 Exchange Qualified Intermediaries should always deposit, hold and protect their clients’ 1031 Exchange funds in separate, segregated dual-signature Qualified Trust Accounts or Qualified Escrow Accounts in order to protect their clients’ 1031 Exchange funds.

The bankruptcy court ruled in the LandAmerica 1031 Exchange bankruptcy case that clients’ 1031 Exchange funds were corporate funds and not client trust funds and were therefore the clients' 1031 Exchange funds were subject to the general creditor claims in the bankruptcy filing since the 1031 Exchange funds were not held in Qualified Trust Accounts or Qualified Escrow Accounts as permitted and authorized under the Department of the Treasury Regulations.

1031 Exchange Qualified Trust Accounts or Qualified Escrow Accounts are crucial in order to clearly classify clients’ 1031 Exchange funds as client trust funds and not corporate funds in the event the Qualified Intermediary files for voluntary or involuntary bankruptcy protection for any reason.

Exeter 1031 Exchange Services, LLC always deposits, holds and safeguards clients’ 1031 Exchange funds in separate, segregated dual-signature Qualified Trust Accounts through Exeter Trust Company.

Internal Controls and Processes Provide Additional Safety

Investors should investigate the methods, structures and processes used by the 1031 Exchange Qualified Intermediary to track, monitor, reconcile and protect their clients’ 1031 Exchange funds through internal controls, checks and balances. Internal controls, checks and balances are crucial and should always be an integral part of any fiduciary operation.

Exeter Trust Company utilizes a sophisticated trust accounting system that allows it to quickly and accurately track, monitor and account for its clients’ 1031 Exchange funds in real time. Exeter Trust Company reconciles its entire 1031 Exchange funds position down to the penny daily, and has implemented stringent internal controls, checks and balances to ensure the safety of its clients’ 1031 Exchange funds.

It takes four (4) separate team members within The Exeter Group of Companies to request, authorize, process and make any transfer or disbursement of its clients’ 1031 Exchange funds?  Exeter 1031 Exchange Services, LLC implemented these additional internal controls to better protect its clients.

There’s NO Substitute for Experience

Investors deserve more than just a transaction processor. Investors should be able to turn to a 1031 Exchange Qualified Intermediary for guidance on best practices in structuring and administering their 1031 Exchange in conjunction with the investors' advisors. Investors should interview prospective 1031 Exchange Qualified Intermediaries to ensure they have the technical depth, experience and expertise necessary due to the highly complex and technical nature of 1031 Exchange transactions. Investors need and deserve knowledgeable support, so the 1031 Exchange Qualified Intermediary should be advisory and consultative in nature and be willing and able to work with investors and their legal, tax and financial advisors to ensure a successful and compliant 1031 Exchange. Exeter 1031 Exchange Services, LLC delivers advisory and consultative services to its clients and their professional advisors.

Exercising Diligence Affords Protection

It is not the size of the Qualified Intermediary that matters, but how they manage the clients’ 1031 Exchange funds and control risks through internal controls. It is critical to understand the importance of regulatory oversight, equity capitalization, bonding, insurance, experience, expertise, internal controls and processes, and quality control measures. Bring this knowledge to bear to successfully execute a 1031 Exchange transaction. Everyone will rest easier knowing the investors’ goals have been safely achieved.