Build to Suit (BTS) is an option for services that wish to occupy purpose-built residential or commercial property without owning it. In this article, we cover:
- What is a Build-to-Suit Lease?
- How Do BTS Leases Work?
- New Build to Suit Accounting Rules (2016 )
- Pros and Cons
- How to Arrange Financing
- Frequently Asked Questions
- Recent News & Related Articles
What Does Build to Suit Mean?
Build to fit is an arrangement in which a proprietor constructs a building for a sole occupant. The resulting free-standing building fulfills the particular requirements of the occupant.
Typically, organizations of all sizes arrange BTS real estate arrangements to efficiently get and control customized facilities. In fact, lots of industrial buildings and retail residential or commercial properties are BTS, although any kind of industrial real estate is possible.
How Do Build to Suit Leases Work?
A build to match lease is a long-term dedication between a landlord and a tenant.
How To Start a BTS Real Estate Project
The BTS process can begin in a few methods. For instance, these consist of:
- A prospective occupant can look for out a proprietor to build a building according to the occupant's requirements. Thereafter, the renter participates in a long-lasting lease with the property manager.
- A landowner may promote land that it will construct out to support a BTS lease. An interested company can call the landowner to arrange a build to suit lease arrangement.
- In a reverse BTS, the potential renter constructs the building. Typically, the landlord finances the job, but the occupant runs the project. Then, the tenant takes occupancy of the structure as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes sense when the tenant has specific construction know-how in the kind of center it desires.
Typically, the property owner owns the land or has a ground lease on it. Upon lease expiration, the construct to suit contract allows the property owner to re-let the residential or commercial property to a various occupant.
Components of a Build to Suit Lease Arrangement
Essentially, a BTS arrangement consists of two parts:
Development Agreement: The developer accepts construct or get and redevelop a building on behalf of the tenant. The arrangement arises from the renter issuing an ask for proposal (RFP) to several designers. The development contract specifies the relationship in between the landlord and the tenant. That is, the contract specifies the design of the residential or commercial property, who will build it and who will fund it. Typically, the occupant will take sole occupancy of the residential or commercial property, but in some cases other occupants will share the building. The building and construction component is the chief and most complex issue in a BTS contract.
Lease Agreement: The BTS lease defines the regards to occupancy once the designer finishes construction. Sometimes, the lease itself will define the building arrangements directly or through an accompanying work letter.
The Roles of BTS Participants
A construct to suit lease is a major undertaking for the proprietor and renter. Clearly, they will be dealing with each other over an extended period. Therefore, the BTS plan need to thoroughly think about each participant's obligations:
Landlord: The proprietor should evaluate the renter's credit reliability. Also, it should comprehend the requirements of the renter as a guide to design and building and construction. Frequently, the proprietor requires an assurance and money security from the renter. The property manager should specify whether it or the renter will lead the building and construction job. Furthermore, the property owner will desire a long-enough lease term so that it can recoup its investment.
Tenant: The tenant establishes the RFP. It needs to evaluate whether the proprietor has the technical expertise and funds to deliver on time. The examination will include the proprietor's previous BTS real estate experience, credibility, and structure. The renter needs to choose whether it desires to direct the building and construction of the structure or leave it to the landlord. It may also require warranties and/or a letter of credit to guarantee the funding of the building and construction component.
Both celebrations will desire to supply input regarding the choice of designers, engineers, and specialists.
BTS Ask For Proposal
The occupant creates the request for proposal and distributes it to several designers. Typically, the RFP will deal with:
- The usages of the residential or commercial property
- The space required
- A calendar timeline for construction and occupancy
- The lease range that the occupant will accept
- Design specifications and details
Usually, the tenant disperses the RFP to multiple residential or commercial property owners/developers. It ends up being more complicated if the renter wants a particular site for the structure. In that case, the landowner might be the sole recipient of the RFP. Naturally, the landowner has more impact if the occupant wants to construct on the owner's land.
What is Build-to-Suit Financing?
A. Negotiating the Deal
Once the tenant picks the winning RFP participant, severe negotiations can begin. Normally, the procedure includes submissions from the property manager's architects that define the design plans.
In return, the occupant's space organizers and experts review the strategy and negotiate modifications. A natural tension is inevitable. On the one hand, the renter wants a space completely matched to its requirements. On the other hand, the landlord needs to balance the occupant's requirements with the availability of job funding. The landlord must also consider how easily it can re-let the residential or commercial property once the initial lease ends.
Eventually, the build to fit lease arrangement emerges from the negotiation process. It defines as much detail as possible about the building construction, the responsibilities of each party, and the lease terms. For example, the arrangement might need the property owner to construct a structure shell that the tenant completes.
Alternatively, the property owner might need to fit out a turn-key residential or commercial property in move-in condition. If the landlord delivers only a shell, the arrangement should specify how the two groups interface at the turnover time. The renter can prevent this concern by consenting to utilize the proprietor's developer for the finishing stage.
B. Timetable and Deliverables
Obviously, the build to match agreement should define a project timetable and turn-over period. Specifically, the contract will specify the shipment details and move-in date.
The expiration of the tenant's existing lease may produce the requirement for a set move-in date. For that reason, the parties should work backwards from the needed move-in date to set the timetable and milestones. Typical milestones consist of protecting the financing, breaking ground, pouring concrete for the foundation and putting up the structural steel.
Potential Delays
Delays can be extremely costly. The occupant might book the right to abandon the deal if hold-ups surpass a set date. For instance, the landlord might find it difficult to finance the job, delaying its start. Other sources of delays consist of obtaining permits, zone variances, and examinations.
Perhaps an unanticipated catastrophe will make it impossible to obtain building materials when needed. Or a labor action by the building team might close down the task. Moreover, environmental groups may file claims that stop building.
Indeed, the opportunities for hold-up are tremendous, and the BTS contract ought to attend to remedies upfront. The contract may define penalties that will greatly spur on the developer. The renter might discover new ways to inspire the property manager.
C. Rent
The construct to fit lease arrangement will specify the tenant's fundamental rental rate. The standard rate hinges on the land value, the cost of building, and the landlord's needed rate of return.
Sometimes the arrangement will permit changes to the rate if building and construction costs exceed expectations. The tenant might request change orders that include to the cost of construction and increase the last lease. If the occupant plays hardball on any lease increases, the task spending plan and scope ought to be extremely detailed.
The arrangement must specify the modification order process and the proprietor's right to authorize. The property manager might resist any changes that add building expenses without a corresponding rent increase.
Alternatively, the contract might specify that the renter pays for any accepted modification orders. The contract ought to also relieve the property owner of penalties due to delays originating from change orders.
D. Other Lease Considerations
Certain other issues need factor to consider when working out a BTS lease:
Commencement Date vs Construction Date: The property manager might desire the BTS lease to specify a beginning date for the tenant to start paying lease. However, the occupant might demand delaying any rent payments till building and construction is complete.
Right to Purchase: Some occupants might want the alternative to buy the residential or commercial property during the lease period. At the least, the occupant may want the right of very first offer to a proposed sale. Moreover, the tenant may ask for the right to match any purchase bid. The proprietor might consent to these renter rights as long as it does not decrease the finest asking price.
Space Migration: Sometimes, the BTS residential or commercial property is part of a commercial park. The renter may be concerned about broadening the quantity of area it occupies later. Therefore, the agreement might include an alternative for a brand-new building and construction stage. Alternatively, if the renter has excessive area, the lease needs to attend to subletting the residential or commercial property.
Warranties: The contract should deal with the warrantied expense of building flaws and shortages. The lease needs to specify the service warranty obligations for defective design, construction or materials.
What is Build-to-Suit Financing?
Build to Suit Lease Accounting
The Financial Account Standards Board (FASB) recently provided brand-new accounting standards for leases (Topic 842). The new standards cover BTS leases, which in some cases utilize sale-and-leaseback accounting.
If the tenant (lessee) controls the possession throughout the building and construction stage before lease beginning, it is the property owner. Upon completion of building, the renter sells the residential or commercial property to the landlord and leases it back. The lessee owns the residential or commercial property if any of the following are real:
- The lessee deserves to purchase the residential or commercial property during construction.
- The lessor (property manager) has the right to collect payment for work performed and has no other use for the residential or commercial property.
- Lessee owns either the land and residential or commercial property improvements, or the non-real-estate possessions under construction.
- The lessee manages the land and doesn't rent it to the lessor or another party before building begins.
- A lessee leases the land for a duration that reflects the significant financial life of the residential or commercial property enhancement. The lessee doesn't sublease the land before building and construction starts and before reaping the residential or commercial property's economic life.
Under these circumstances, the lessee is the asset's deemed owner throughout construction. Therefore, it needs to represent construction-in-progress utilizing ASC 360 - Residential Or Commercial Property, Plant and Equipment. The guideline requires the lessee to presume duty for the construction costs by means of a deemed loan from the lessor. When building ends, the lessee follows the sale and leaseback accounting rules.
On the other hand, if the lessee is not the deemed owner of the property throughout building and construction, it does not apply sale and leaseback treatment. Instead, it deals with payments it makes to utilize the property as lease payments.
For detailed information about construct to suit lease accounting, seek guidance from your accounting and legal advisors.
Benefits and drawbacks of BTS Real Estate
The pros of build to fit leasing frequently surpass the cons.
Pros of BTS Real Estate
Capital: The tenant need not designate the capital essential to build the residential or commercial property itself. The property manager gets to put its capital to work in return for long-lasting lease income.
Location: The occupant can select its area instead of choosing from available stock. It can select an area in a high-growth area with easy access. The proprietor exploits the land it owns with no risk that a new residential or commercial property will sit uninhabited.
Efficiency: The occupant defines the building size so that it's perfect for its requirements. Furthermore, it can require high energy effectiveness through modern devices and innovation. The property manager can use its involvement with a green task to burnish its reputation.
Branding: The occupant may gain from a structure that reflects its character and image. The occupant can pick the architectural design, finishes and colors to amplify its image.
Risk: The tenant might be able to ignore the lease if the construction falls substantially behind. The landlord benefits from a locked-in long-term lease when building and construction is complete.
Taxes: The occupant's lease payments are fully deductible over the life of the lease.
Cons of BTS Real Estate
Commitment: The renter incurs a long-lasting dedication that is challenging to leave before the term ends. Typical lease durations run 10 years or longer.
Financing: Typically, the lessee needs to show it is sufficiently creditworthy to manage a long-lasting lease commitment.
Cost: It's more affordable for the tenant to find and rent uninhabited area. Many business can not manage to pay for construct to fit realty.
Time: It takes longer to construct a structure than to lease space from an existing one.
How Assets America ® Can Help
Assets America ® can arrange funding for your BTS task beginning at $10 million, without any ceiling. We welcome you to contact us for more details for our total monetary services.
We can help make your BTS job possible through our network of personal financiers and banks. For the best in BTS funding, Assets America ® is the clever option.
What is a ground lease vs. develop to fit?
In a ground lease, the renter rents the underlying land rather than the residential or commercial property. In a develop to suit lease arrangement, the property manager owns the land and the occupant rents the building constructed on the land.
What does construct to match domestic indicate?
Often, develop to fit refers to commercial residential or commercial properties. However, it is possible to participate in a develop to fit arrangement for a multifamily house. Then, the occupant subleases the units to subtenants.
What is a reverse build to match?
A reverse develop to fit is when the occupant manages the building and construction of the residential or commercial property. Reverse BTS is useful when the renter has special knowledge in building the type of residential or commercial property involved. Typically, the property owner finances the reverse BTS offer.
Is a build-to-suit lease agreement right for me?
It might make sense for property owners who have uninhabited land they wish to develop. The BTS arrangement decreases the threat of developing the land given that the lease is locked-in. Tenants protect capital through a BTS lease arrangement.
Recent BTS News
If you're interested in news short articles about recent BTS advancements, you can check out this $75 million build-to-suit investment or this build to fit fulfillment center for Amazon. Additionally, you can examine out this build-to-suit commercial building in Janesville or these workplace occupants requiring develop to suit leases.
