What Is A Build To Suit Lease?
What Is A Build To Suit Lease Transaction?
A build-to-suit lease transaction is a commercial property transaction where a landlord or developer will custom build a commercial property for the specific needs of a particular tenant who will lease the building upon completion of construction. Build-to-suit transactions most commonly involve retail properties or industrial properties, but may also involve any other type of commercial property.
How Does The Build To Suit Process Work?
The build to suit process entails all the steps necessary to select, acquire, finance, and lease a property that is custom built to the specifications of the occupant. The build to suit process begins by identifying a business' needs for a particular type of space or building in a specified market. The need may be driven by a company's expansion, contraction, or need to attain greater efficiency.
The prospective tenant may engage with investors, developers, and commercial real estate firms that specialize in build to suit leasing, financing and development to initiate the process. On the other side of the coin, landowners may also list properties for sale or lease as build to suit to attract prospective clients. If any build to suit listings qualify, they should come up during the site search and selection stage of the process.
Once an agreement has been reached, a site has been selected, and plans have been drawn up, responsibility for financing and building the property generally falls upon the other parties, particularly the developer and investors. The tenant's financial responsibility is to qualify for the lease.
What Is A Reverse Build To Suit?
An exception is a reverse build to suit where the tenant effectively acts as the developer of the property. This can occur when the tenant has a high level of expertise in developing the property it needs that would be difficult for outside firms to duplicate. In a reverse build to suit, the construction is still financed by the investors or landlord. Upon completion, the tenant can occupy the property.
Tenant Motivation
The driving force behind a build-to-suit commercial property is a tenant's desire for a specific location, or a tenant who has specific requirements unique to their business. Build-to-suit transactions address the problem of the type of space or building demanded by the prospective tenant is not available in the location where they want to be.
The solution is to bring a developer and commercial tenant together to build a commercial property to the tenant's specifications. The additional advantage is the tenant does not have to layout the required capital to build the needed facilities. The tenant also does not have to spend the time developing the property and outsources the expertise necessary to ensure and manage the development process.
An example situation where a build-to-suit commercial property transaction would be appropriate is where a retailer is attracted to a specific location due to its traffic count and local demographics, but no physical building exists to meet the unique space, visibility, and parking demands of their business. A developer can be brought in to build the commercial property to the retailer's specific plans on the desired vacant lot, and then lease that retail property back to the retailer.
Landlord or Developer's Motivation
From the landlord's or developer's perspective, a build-to-suit transaction can be attractive as it may offer a longer term lease to a desirable and credit worthy tenant. It also avoids the risk of building on speculation. However, a build-to-suit real estate transaction has an increased level of risk and complexity than a standard commercial lease of existing commercial property to both landlord and tenant.
Risks of a Build To Suit
First, there is no building yet, hence there is more road to travel and many things that can go wrong before a commercial space can be ready to be occupied. There will be an approval process followed by the construction process. Second, there are more parties involved. Instead of a lease between a landlord and tenant, there is now a developer, an architect, a contractor and other parties involved. Costs and time projections may also not be as anticipated.
Finally, the landlord will have to assess the adaptability of the building to other uses at the end of the lease term. In the event the tenant does not renew, the landlord should ask how marketable will the property be and more importantly, do the lease terms justify the construction of such a unique commercial property.