Build to Suit (BTS) is a solution for organizations that wish to inhabit purpose-built residential or commercial property without owning it. In this post, 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 match is an arrangement in which a proprietor constructs a building for a sole renter. The resulting free-standing structure fulfills the specific requirements of the tenant.
Typically, companies of all sizes organize BTS real estate agreements to effectively get and manage customized centers. In truth, numerous industrial buildings and retail residential or commercial properties are BTS, although any type of industrial real estate is possible.
How Do Build to Suit Leases Work?
A construct to fit lease is a long-term dedication between a proprietor and a renter.
How To Start a BTS Real Estate Project
The BTS process can start in a few methods. For example, these include:
- A prospective tenant can seek out a proprietor to build a structure according to the tenant's specs. Thereafter, the tenant gets in into a long-term lease with the property owner.
- A landowner may promote land that it will build out to support a BTS lease. An interested company can get in touch with the landowner to set up a construct to match lease arrangement.
- In a reverse BTS, the potential renter constructs the structure. Typically, the property owner finances the job, however the renter runs the project. Then, the renter takes tenancy of the building as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes good sense when the renter has particular building and construction proficiency in the kind of facility it desires.
Typically, the property manager owns the land or has a ground lease on it. Upon lease expiration, the build to match agreement allows the landlord to re-let the residential or commercial property to a different renter.
Components of a Build to Suit Lease Arrangement
Essentially, a BTS arrangement includes 2 parts:
Development Agreement: The designer accepts build or get and redevelop a structure on behalf of the tenant. The contract arises from the tenant issuing an ask for proposition (RFP) to several designers. The development agreement defines the relationship in between the landlord and the renter. That is, the arrangement specifies the design of the residential or commercial property, who will develop it and who will fund it. Typically, the renter will take sole tenancy of the residential or commercial property, but often other tenants will share the building. The building part is the chief and most intricate issue in a BTS contract.
Lease Agreement: The BTS lease defines the terms of occupancy once the designer finishes construction. Sometimes, the lease itself will specify the construction provisions directly or through an accompanying work letter.
The Roles of BTS Participants
A build to fit lease is a significant endeavor for the property owner and tenant. Clearly, they will be dealing with each other over a prolonged duration. Therefore, the BTS arrangement need to thoroughly think about each individual's duties:
Landlord: The proprietor needs to examine the occupant's credit reliability. Also, it must comprehend the needs of the renter as a guide to style and building. Frequently, the proprietor requires a guarantee and cash security from the renter. The property owner should define whether it or the occupant will lead the construction project. Furthermore, the landlord will want a long-enough lease term so that it can recoup its financial investment.
Tenant: The occupant develops the RFP. It needs to assess whether the landlord has the technical knowledge and monetary resources to deliver on time. The examination will consist of the property owner's prior BTS genuine estate experience, track record, and structure. The renter needs to choose whether it desires to direct the building and construction of the building or leave it to the landlord. It might also require warranties and/or a letter of credit to assure the funding of the building component.
Both parties will wish to supply input regarding the choice of architects, engineers, and contractors.
BTS Ask For Proposal
The occupant creates the request for proposal and disperses it to one or more developers. Typically, the RFP will deal with:
- Usings the residential or commercial property
- The area required
- A calendar timeline for building and occupancy
- The lease variety that the tenant will accept
- Design parameters and details
Usually, the renter distributes the RFP to numerous residential or commercial property owners/developers. It becomes more complicated if the tenant wants a particular website for the building. In that case, the landowner may be the sole recipient of the RFP. Naturally, the landowner has more influence if the tenant wishes to construct on the owner's land.
What is Build-to-Suit Financing?
A. Negotiating the Deal
Once the occupant picks the winning RFP respondent, major settlements can start. Normally, the process involves submissions from the landlord's designers that specify the design strategies.
In return, the tenant's space coordinators and consultants review the plan and negotiate modifications. A natural tension is inevitable. On the one hand, the occupant desires a space perfectly suited to its requirements. On the other hand, the landlord requires to stabilize the occupant's needs with the accessibility of project financing. The landlord needs to likewise consider how easily it can re-let the residential or commercial property once the initial lease ends.
Eventually, the build to match lease contract emerges from the negotiation process. It specifies as much information as possible about the building construction, the tasks of each celebration, and the lease terms. For example, the contract may need the property manager to construct a structure shell that the renter completes.
Alternatively, the property manager might need to fit out a turn-key residential or commercial property in move-in condition. If the proprietor provides only a shell, the contract must define how the two groups user interface at the turnover time. The occupant can avoid this problem by accepting use the proprietor's designer for the completing phase.
B. Timetable and Deliverables
Naturally, the construct to suit arrangement must define a project schedule and turn-over period. Specifically, the agreement will specify the delivery details and move-in date.
The expiration of the occupant's existing lease might create the requirement for a set move-in date. For that factor, the celebrations must work backwards from the required move-in date to set the timetable and turning points. Typical turning points consist of protecting the funding, beginning, pouring concrete for the structure and putting up the structural steel.
Potential Delays
Delays can be extremely costly. The renter might schedule the right to abandon the deal if delays go beyond a set date. For example, the proprietor might find it challenging to finance the job, delaying its start. Other sources of hold-ups consist of acquiring licenses, zone variations, and examinations.
Perhaps an unforeseen disaster will make it impossible to obtain building materials when required. Or a labor action by the construction crew may shut down the job. Moreover, ecological groups may submit suits that halt building.
Indeed, the opportunities for hold-up are enormous, and the BTS agreement must address solutions upfront. The contract might specify charges that will greatly stimulate on the designer. The renter might discover new ways to encourage the property owner.
C. Rent
The build to fit lease contract will define the renter's standard rental rate. The basic rate hinges on the land value, the cost of building, and the landlord's needed rate of return.
Sometimes the arrangement will enable adjustments to the rate if building expenses surpass expectations. The tenant may ask for change orders that include to the cost of building and construction and increase the final rent. If the renter plays hardball on any lease increases, the task budget plan and scope ought to be incredibly detailed.
The agreement needs to define the change order procedure and the proprietor's right to approve. The proprietor may withstand any changes that add building costs without a matching lease boost.
Alternatively, the agreement might define that the tenant pays for any approved change orders. The contract needs to likewise ease the landlord of charges due to hold-ups stemming from modification orders.
D. Other Lease Considerations
Certain other problems need consideration when working out a BTS lease:
Commencement Date vs Construction Date: The property owner might desire the BTS lease to specify a commencement date for the tenant to begin paying rent. However, the renter might demand delaying any rent payments up until building and construction is total.
Right to Purchase: Some occupants might want the option to buy the residential or commercial property throughout the lease period. At the least, the occupant might desire the right of first offer to a proposed sale. Moreover, the tenant may ask for the right to match any purchase bid. The property owner may agree to these tenant rights as long as it doesn't lower the best market price.
Space Migration: In some cases, the BTS residential or commercial property is part of an industrial park. The tenant might be worried about broadening the quantity of space it inhabits later on. Therefore, the contract might consist of an option for a new building phase. Alternatively, if the tenant has too much area, the lease ought to attend to subletting the residential or commercial property.
Warranties: The agreement should resolve the warrantied cost of building and construction problems and shortages. The lease needs to define the guarantee obligations for malfunctioning style, building and construction or materials.
What is Build-to-Suit Financing?
Build to Suit Lease Accounting
The Financial Account Standards Board (FASB) recently provided new accounting requirements for leases (Topic 842). The new requirements cover BTS leases, which sometimes utilize sale-and-leaseback accounting.
If the occupant (lessee) manages the asset during the construction stage before lease start, it is the possession owner. Upon completion of building and construction, the renter sells the residential or commercial property to the proprietor and rents it back. The lessee owns the residential or commercial property if any of the following are real:
- The lessee has the right to purchase the residential or commercial property during construction.
- The lessor (property manager) deserves 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 building.
- The lessee manages the land and doesn't rent it to the lessor or another party before building starts.
- A lessee leases the land for a period that shows the substantial economic life of the residential or commercial property improvement. The lessee doesn't sublease the land before construction starts and before reaping 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 needs to represent construction-in-progress utilizing ASC 360 - Residential Or Commercial Property, Plant and Equipment. The rule requires the lessee to assume obligation for the building and construction costs by means of a considered loan from the lessor. When construction ends, the lessee follows the sale and leaseback accounting guidelines.
On the other hand, if the lessee is not the considered owner of the property throughout building and construction, it does not use sale and leaseback treatment. Instead, it treats payments it makes to use the possession as lease payments.
For in-depth information about build to fit lease accounting, look for assistance from your accounting and legal advisors.
Pros and Cons of BTS Real Estate
The pros of develop to fit leasing typically surpass the cons.
Pros of BTS Real Estate
Capital: The occupant need not allocate the capital required to build the residential or commercial property itself. The landlord gets to put its capital to work in return for long-term lease earnings.
Location: The occupant can choose its place rather than choosing from readily available stock. It can choose a location in a high-growth location with simple gain access to. The property manager exploits the land it owns without any threat that a new residential or commercial property will sit uninhabited.
Efficiency: The tenant defines the structure size so that it's perfect for its requirements. Furthermore, it can demand high energy performance through modern-day devices and technology. The proprietor can utilize its involvement with a green job to burnish its reputation.
Branding: The occupant might gain from a structure that shows its character and image. The occupant can pick the architectural style, finishes and colors to amplify its image.
Risk: The renter might be able to ignore the lease if the building falls substantially behind. The property owner advantages from a locked-in long-lasting lease as soon as building and construction is total.
Taxes: The renter's lease payments are totally deductible over the life of the lease.
Cons of BTS Real Estate
Commitment: The tenant incurs a long-lasting dedication that is hard to exit before the term ends. Typical lease periods run 10 years or longer.
Financing: Typically, the lessee requires to show it is sufficiently creditworthy to manage a long-term lease dedication.
Cost: It's less expensive for the occupant to discover and lease vacant area. Many business can not manage to spend for build to fit real estate.
Time: It takes longer to build a structure than to lease space from an existing one.
How Assets America ® Can Help
Assets America ® can organize financing for your BTS job beginning at $10 million, with no upper limitation. We welcome you to call us to learn more for our complete monetary services.
We can assist make your BTS project possible through our network of private investors and banks. For the very best in BTS financing, Assets America ® is the clever option.
What is a ground lease vs. build to suit?
In a ground lease, the renter leases the underlying land instead of the residential or commercial property. In a develop to suit lease agreement, the property owner owns the land and the tenant leases the structure built on the land.
What does build to fit residential mean?
Generally, build to match refers to industrial residential or commercial properties. However, it is possible to participate in a construct to fit contract for a multifamily house. Then, the occupant subleases the units to subtenants.
What is a reverse develop to fit?
A reverse construct to suit is when the occupant supervises the building of the residential or commercial property. Reverse BTS is useful when the tenant has special knowledge in building the type of residential or commercial property included. Typically, the landlord funds the reverse BTS offer.
Is a build-to-suit lease contract right for me?
It might make sense for property managers who have uninhabited land they desire to develop. The BTS arrangement reduces the danger of establishing the land since the lease is locked-in. Tenants protect capital through a BTS lease contract.
Recent BTS News
If you're interested in news articles about recent BTS developments, you can check out this $75 million build-to-suit investment or this construct to suit fulfillment center for Amazon. Additionally, you can inspect out this build-to-suit commercial structure in Janesville or these office tenants demanding develop to suit leases.
