Build to Suit (BTS) is an option for businesses that want to inhabit 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 suit is a plan in which a proprietor constructs a structure for a sole occupant. The resulting free-standing building fulfills the particular requirements of the tenant.
Typically, companies of all sizes set up BTS property contracts to efficiently get and manage custom-made facilities. In reality, many industrial structures and retail residential or commercial properties are BTS, although any kind of business realty is possible.
How Do Build to Suit Leases Work?
A construct to suit lease is a long-lasting commitment between a property manager and a renter.
How To Start a BTS Real Estate Project
The BTS process can begin in a few ways. For example, these include:
- A prospective renter can look for out a property owner to build a building according to the occupant's requirements. Thereafter, the renter participates in a long-lasting lease with the property owner.
- A landowner may promote land that it will build out to support a BTS lease. An interested business can get in touch with the landowner to set up a construct to fit lease agreement.
- In a reverse BTS, the potential occupant constructs the building. Typically, the property owner funds the project, but the renter runs the task. Then, the renter takes tenancy of the structure as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes good sense when the occupant has specific building and construction proficiency in the sort of center it desires.
Typically, the proprietor owns the land or has a ground lease on it. Upon lease expiration, the construct to match agreement enables the proprietor to re-let the residential or commercial property to a various renter.
Components of a Build to Suit Lease Arrangement
Essentially, a BTS arrangement consists of two elements:
Development Agreement: The designer agrees to construct or obtain and redevelop a building on behalf of the tenant. The contract arises from the tenant providing a request for proposition (RFP) to several developers. The development contract defines the relationship between the landlord and the renter. That is, the arrangement defines the design of the residential or commercial property, who will construct it and who will finance it. Typically, the tenant will take sole tenancy of the residential or commercial property, however sometimes other occupants will share the building. The construction part is the chief and most complex problem in a BTS contract.
Lease Agreement: The BTS lease defines the regards to tenancy once the designer finishes construction. Sometimes, the lease itself will define the construction provisions straight or through an accompanying work letter.
The Roles of BTS Participants
A develop to match lease is a significant undertaking for the proprietor and tenant. Clearly, they will be dealing with each other over a prolonged duration. Therefore, the BTS plan must thoroughly consider each individual's responsibilities:
Landlord: The proprietor must evaluate the occupant's credit reliability. Also, it should comprehend the requirements of the occupant as a guide to style and building. Frequently, the proprietor needs a guarantee and cash security from the renter. The property owner must define whether it or the occupant will lead the building and construction job. Furthermore, the property owner will want a long-enough lease term so that it can recover its financial investment.
Tenant: The occupant establishes the RFP. It needs to evaluate whether the landlord has the technical proficiency and funds to provide on time. The examination will include the landlord's prior BTS real estate experience, reputation, and structure. The tenant must decide whether it wants 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 ensure the financing of the construction part.
Both celebrations will desire to supply input relating to the selection of architects, engineers, and contractors.
BTS Request for Proposal
The renter creates the request for proposition and distributes it to one or more developers. Typically, the RFP will attend to:
- Making uses of the residential or commercial property
- The area needed
- A calendar timeline for building and construction and tenancy
- The rent variety that the renter will accept
- Design parameters and information
Usually, the tenant disperses the RFP to numerous residential or commercial property owners/developers. It ends up being more complex if the tenant desires a particular site for the structure. Because case, the landowner might be the sole recipient of the RFP. Naturally, the landowner has more influence if the tenant desires to build on the owner's land.
What is Build-to-Suit Financing?
A. Negotiating the Deal
Once the renter selects the winning RFP participant, serious settlements can begin. Normally, the process includes submissions from the proprietor's architects that specify the design plans.
In return, the occupant's space coordinators and specialists evaluate the strategy and negotiate changes. A natural tension is unavoidable. On the one hand, the occupant wants a space completely fit to its requirements. On the other hand, the property manager needs to balance the occupant's requirements with the schedule of project funding. The property manager must also think about how easily it can re-let the residential or commercial property once the initial lease expires.
Eventually, the build to fit lease arrangement emerges from the settlement procedure. It defines as much information as possible about the building construction, the responsibilities of each party, and the lease terms. For example, the agreement may require the property manager to build a building shell that the occupant finishes.
Alternatively, the proprietor might have to fit out a turn-key residential or commercial property in move-in condition. If the property owner provides just a shell, the agreement must define how the two teams interface at the turnover time. The renter can prevent this problem by agreeing to use the property manager's developer for the completing stage.
B. Timetable and Deliverables
Of course, the develop to match contract need to specify a job schedule and turn-over duration. Specifically, the agreement will state the delivery details and move-in date.
The expiration of the tenant's existing lease might develop the need for a set move-in date. For that factor, the celebrations should work backward from the required move-in date to set the timetable and turning points. Typical turning points include securing the financing, beginning, pouring concrete for the foundation and erecting the structural steel.
Potential Delays
Delays can be extremely pricey. The tenant may book the right to abandon the offer if hold-ups go beyond a set date. For example, the landlord might find it hard to finance the project, delaying its start. Other sources of hold-ups consist of acquiring licenses, zone variances, and inspections.
Perhaps an unanticipated catastrophe will make it impossible to obtain structure materials when required. Or a labor action by the construction team might close down the project. Moreover, ecological groups might file lawsuits that stop building.
Indeed, the chances for hold-up are immense, and the BTS arrangement need to resolve solutions upfront. The arrangement may specify charges that will considerably spur on the developer. The renter may find new ways to inspire the proprietor.
C. Rent
The construct to match lease agreement will define the tenant's basic rental rate. The basic rate hinges on the land value, the expense of building and construction, and the property owner's required rate of return.
Sometimes the arrangement will allow changes to the rate if construction costs exceed expectations. The tenant may ask for modification orders that add to the cost of building and construction and increase the final lease. If the renter plays hardball on any rent increases, the task budget and scope must be exceptionally detailed.
The arrangement needs to define the modification order process and the proprietor's right to approve. The proprietor might withstand any modifications that add building expenses without a corresponding rent increase.
Alternatively, the agreement might define that the renter spends for any approved change orders. The agreement must also eliminate the property owner of charges due to delays originating from change orders.
D. Other Lease Considerations
Certain other problems require factor to consider when working out a BTS lease:
Commencement Date vs Construction Date: The property manager may want the BTS lease to specify a commencement date for the tenant to start paying rent. However, the tenant may demand postponing any lease payments up until building is total.
Right to Purchase: Some tenants may desire the choice to buy the residential or commercial property throughout the lease duration. At the least, the tenant might want the right of first offer to a proposed sale. Moreover, the tenant may ask for the right to match any purchase bid. The landlord may concur to these renter rights as long as it doesn't decrease the very best asking price.
Space Migration: In many cases, the BTS residential or commercial property belongs to a commercial park. The tenant may be worried about broadening the amount of space it occupies later. Therefore, the agreement may consist of a choice for a brand-new building and construction phase. Alternatively, if the occupant has excessive area, the lease must deal with subletting the residential or commercial property.
Warranties: The arrangement ought to attend to the warrantied cost of building defects and shortages. The lease should specify the warranty obligations for malfunctioning design, construction or products.
What is Build-to-Suit Financing?
Build to Suit Lease Accounting
The Financial Account Standards Board (FASB) recently released brand-new accounting requirements for leases (Topic 842). The new requirements cover BTS leases, which often use sale-and-leaseback accounting.
If the tenant (lessee) controls the property throughout the construction phase before lease start, it is the asset owner. Upon conclusion of building and construction, the occupant 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 buy the residential or commercial property during construction.
- The lessor (property manager) has the right to gather payment for work carried out and has no other use for the residential or commercial property.
- Lessee owns either the land and residential or commercial property enhancements, or the non-real-estate assets under building.
- The lessee controls the land and doesn't lease it to the lessor or another celebration before building begins.
- A lessee leases the land for a duration that shows the substantial financial life of the residential or commercial property improvement. The lessee doesn't sublease the land before construction begins and before enjoying the residential or commercial property's economic life.
Under these situations, the lessee is the possession's deemed owner during building and construction. Therefore, it must account for construction-in-progress using ASC 360 - Residential Or Commercial Property, Plant and Equipment. The rule needs the lessee to assume obligation for the building costs through a deemed loan from the lessor. When construction ends, the lessee follows the sale and leaseback accounting rules.
On the other hand, if the lessee is not the deemed owner of the asset throughout building and construction, it does not apply sale and leaseback treatment. Instead, it deals with payments it makes to utilize the possession as lease payments.
For in-depth info about build to fit lease accounting, seek assistance from your accounting and legal advisors.
Pros and Cons of BTS Real Estate
The pros of build to suit leasing often outweigh the cons.
Pros of BTS Real Estate
Capital: The occupant need not designate the capital needed to build the residential or commercial property itself. The property owner gets to put its capital to work in return for long-term lease income.
Location: The occupant can choose its area instead of choosing from offered stock. It can choose an area in a high-growth location with easy access. The property owner exploits the land it owns without any danger that a brand-new residential or commercial property will sit uninhabited.
Efficiency: The renter specifies the building size so that it's ideal for its needs. Furthermore, it can require high energy efficiency through contemporary equipment and innovation. The landlord can use its involvement with a green project to burnish its reputation.
Branding: The renter may gain from a structure that reflects its character and image. The tenant can select the architectural style, finishes and colors to magnify its image.
Risk: The tenant might be able to walk away from the lease if the construction falls considerably behind. The property owner take advantage of a locked-in long-lasting lease when construction is total.
Taxes: The occupant's lease payments are fully deductible over the life of the lease.
Cons of BTS Real Estate
Commitment: The occupant sustains a long-lasting commitment that is challenging to leave before the term expires. Typical lease durations run ten years or longer.
Financing: Typically, the lessee requires to show it is sufficiently creditworthy to handle a long-term lease dedication.
Cost: It's more affordable for the occupant to discover and rent vacant area. Many companies can not afford to pay for develop to fit realty.
Time: It takes longer to construct a building than to rent space from an existing one.
How Assets America ® Can Help
Assets America ® can set up financing for your BTS task starting at $10 million, with no 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 very best in BTS financing, Assets America ® is the clever option.
What is a ground lease vs. build to match?
In a ground lease, the tenant leases the underlying land rather than the residential or commercial property. In a develop to fit lease agreement, the property owner owns the land and the occupant leases the building constructed on the land.
What does construct to suit residential indicate?
Generally, construct to match refers to business residential or commercial properties. However, it is possible to get in into a develop to suit agreement for a multifamily house. Then, the occupant subleases the systems to subtenants.
What is a reverse build to match?
A reverse develop to match is when the tenant oversees the building of the residential or commercial property. Reverse BTS is useful when the tenant has special competence in constructing the type of residential or commercial property included. Typically, the property owner funds the reverse BTS offer.
Is a build-to-suit lease agreement right for me?
It might make good sense for property managers who have uninhabited land they desire to develop. The BTS contract minimizes the danger of establishing the land given that the lease is locked-in. Tenants maintain capital through a BTS lease agreement.
Recent BTS News
If you're interested in news posts about current BTS advancements, you can check out about this $75 million build-to-suit financial investment or this develop to match satisfaction center for Amazon. Additionally, you can take a look at this build-to-suit commercial building in Janesville or these workplace tenants requiring build to match leases.
