Real Estate Journal — 1031 Exchange — March 15 - 28, 2019 — 11A
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M id A tlantic
1031 E xchange
By William L. Exeter, Exeter 1031 Exchange Services, LLC Qualified Intermediaries are not created equal
I
nvestors generally think 1031 Exchange Quali- fied Intermediaries are
corporate funds in the event the Qualified Intermediary files for bankruptcy.
internal controls, checks and balances. There’s NO Substitute for Experience Investors need more than just a transaction processor. They should be able to turn to a Qualified Intermediary for advice and guidance on best practices in structuring and administering a 1031 Ex- change. Interview prospective Qualified Intermediaries to ensure they have the techni- cal depth, experience and expertise necessary due to the highly complex and techni- cal nature of 1031 Exchange transactions. Investors need
support, so the Qualified In- termediary should be advisory and consultative in nature and be willing to work with the investors and their advisors to ensure a successful and com- pliant 1031 Exchange. Exercising Diligence Affords Protection It is not the size of the Quali- fied Intermediary that matters, but how they manage and control risk and protect the investors’ 1031 Exchange. It is critical to understand the importance of regulatory over- sight, experience, expertise, internal controls and processes, continued on page 13A
Protect Investors’ Funds Qualified Intermediaries should deposit, hold and safe- guard investors’ 1031 Ex- change funds in separate, segregated Qualified Trust Accounts or Qualified Escrow Accounts. The court ruled in the LandAmerica 1031 Ex- change bankruptcy case that the 1031 Exchange funds were corporate funds and subject to creditor claims since the funds were not held in a Qualified Trust Account as permitted by the Treasury Regulations. Qualified Trust Accounts clas- sify 1031 Exchange funds as fiduciary (client) funds and not
the same – but they’re ab s o l u t e l y not created equal – and the di f f er - ences can be s igni f i cant a n d c r i t i - cal. Did you
Bonding, Insurance and Equity Capital Provide Financial
Strength and Stability Qualified Intermediaries’ should carry significant fidel- ity bond and errors and omis- sions Insurance coverage and maintain substantial equity capital as an added and essen- tial safety net against errors or losses in a 1031 Exchange. In- vestigate the methods, struc- tures and processes used to track, monitor and protect 1031 Exchange funds through
William L. Exeter
know there is no regulatory or governmental oversight of Qualified Intermediaries; that only about 1% are licensed, regulated, audited and have minimum equity capital re- quirements? Scary, when you consider how much money they are holding for investors’ 1031 Exchanges. I have seen numerous Quali- fied Intermediaries fail over my thirty-five-year career in the 1031 Exchange industry, and most of these failures could have been prevented had there been regulatory or governmental oversight and audit of the Qualified Inter- mediaries. Qualified Intermediaries are a crucial part of success- ful 1031 Exchanges and have three very important respon- sibilities. They prepare the documents to properly struc- ture the investor’s 1031 Ex- change, work with the investor and their advisors to ensure a successful and compliant 1031 Exchange transaction and – arguably – the most im- portant responsibility – hold and safeguard investor’s 1031 Exchange funds. Investors should be diligent when evaluating and selecting a Qualified Intermediary since they hold significant amounts of 1031 Exchange funds. Regulatory Oversight Ensures Safety & Sound- ness Oversight by a regulatory agency or governmental body, such as a State Division of Banking or Department of Financial Institutions, Office of the Comptroller of the Cur- rency or the Federal Reserve Board, ensures that the Quali- fied Intermediary is operating in a safe, sound and secure manner, which is important since they have such tremen- dous fiduciary duties and re- sponsibilities. Most Qualified Intermediary failures could have been prevented through proper oversight and audit. Qualified Trust Accounts
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