AAOA Blog

Tell Me About My Money…

That The Intermediary Holds During an Exchange

by Ken Tharp, Iowa Equity Exchange

As a Qualified Intermediary, Iowa Equity Exchange has the very specific role of guiding the investor through a §1031 exchange. We inform the investor of exchange requirements, produce the necessary exchange documents, provide the critical time monitoring procedures required, and manage the investor’s funds while in our possession.

First let’s discuss the earnings that your account generates while it is in the care of the intermediary.

Did you know that many intermediary services earn the majority of their income from the interest that your account generates for them while they hold it!?

By paying their clients little or no interest on their funds, they pocket the lion’s share of the earnings from your money.

We do not believe that is fair or reasonable. 

We have negotiated a special arrangement with our partner banks that allows us to offer 1.5% (as of today, July 24, 2008, and subject to change) on all accounts under $1,000,000. (Higher rates are paid on accounts over $1 million.) Earnings start on day one that the account is opened.

We are aware of all sorts of arrangements at other companies: some intermediaries pay no interest to the client if the account is open less than 30 days. Some pay as little as .25%; one-sixth of what your money earns at Iowa Equity Exchange!

Even though your money may only be in the exchange account for a relatively short period of time, don’t you want it to bring you the highest return it can? In many cases, the interest earned on funds we hold for our clients more than compensates for our exchange fee of $695.

Now, what actually takes place when an exchange is opened?

We establish a bank account for each exchange that is segregated from other exchange accounts. We never commingle or pool one exchanger’s funds with funds of another exchanger, nor with our own funds. In our opinion, this is critical.Safety is obviously another critical aspect of our business. With recent bank failures in the news, it is on everyone’s mind.

You also need to feel secure with the choice of an intermediary. At Iowa Equity Exchange, we address both concerns. Some intermediary companies offer up a bond that they have purchased to guarantee their performance and the availability of your funds.

We do not provide a bond because we believe we have a better solution. If you have ever had difficulty collecting on an insurance claim, you will understand the shortcomings of a bond. By the time your exchange period is over, you will very likely not be able to collect on a bond if it is needed. Providing a bond is a marketing gimmick, in my opinion, and nothing more.

We provide you with the option of a dual-signature account that requires your signature and authorization before any money can be moved by us. This assures you that we will not abscond with your exchange funds because you would have to sign off on it!

We believe that this option fully addresses any issue you might have with our authority over your funds. But what about the bank itself?

As you know, accounts are insured through the FDIC to a limit of $100,000. Exchange accounts routinely exceed that figure, though. If your account is in excess of $100,000 and the bank holding the funds fails, your money could be tied up for a long time.

We offer three solutions:

First, we choose our banks carefully, seeking strong, well-diversified banks.

Second, we offer the opportunity with one of our banks to purchase bonded insurance in $50,000 increments over and above the $100,000 FDIC limit. This bonding is similar to the bond that other intermediary services offer in that it may take too long to pay off to save your exchange, but at least your money is protected.

Third is a relatlively new arrangement called CDARS, which stands for Certificate of Deposit Account Registry Service. Using a CDARS account, your funds are deposited with one of our banks, which then purchases short-term (four-week) Certificates of Deposit in $100,000 or less increments from various banks. Interest earned is paid through our bank only, but your money is held by enough other banks to ensure that none of them has more than $100,000 of your funds.

This arrangement must be carefully managed, however, so as not to have your exchange funds tied up in a four-week CD when you need those funds to close on your replacement property.

In conclusion, we believe that we have established a set of operational procedures and exchange account options that provide our clients with the best combination of low exchange fees, high return on funds held, and safety of funds held available in the exchange industry today. We welcome your comments and questions.

For more on 1031 Exchange,  click here.

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