What Is A Build-to-Suit Lease

Build to Suit (BTS) is a service for services that desire to occupy purpose-built residential or commercial property without owning it. In this short article, we cover:


- What is a Build-to-Suit Lease?
- How Do BTS Leases Work?
- New Build to Suit Accounting Rules (2016 )
- Benefits and drawbacks
- How to Arrange Financing
- Frequently Asked Questions
- Recent News & Related Articles


What Does Build to Suit Mean?


Build to suit is an arrangement in which a property owner constructs a structure for a sole renter. The resulting free-standing building fulfills the specific requirements of the occupant.


Typically, organizations of all sizes set up BTS realty contracts to efficiently obtain and manage customized facilities. In fact, lots of industrial buildings and retail residential or commercial properties are BTS, although any kind of business realty is possible.


How Do Build to Suit Leases Work?


A build to fit lease is a long-term commitment between a proprietor and a renter.


How To Start a BTS Real Estate Project


The can begin in a couple of ways. For instance, these include:


- A prospective occupant can look for a proprietor to build a building according to the occupant's specifications. Thereafter, the tenant participates in a long-lasting lease with the proprietor.
- A landowner may market land that it will develop out to support a BTS lease. An interested business can get in touch with the landowner to set up a develop to suit lease arrangement.
- In a reverse BTS, the prospective tenant constructs the structure. Typically, the property owner finances the project, however the occupant runs the task. Then, the tenant takes tenancy of the structure as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes good sense when the tenant has specific building and construction competence 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 enables the landlord to re-let the residential or commercial property to a different occupant.


Components of a Build to Suit Lease Arrangement


Essentially, a BTS plan consists of two elements:


Development Agreement: The developer consents to build or obtain and redevelop a building on behalf of the occupant. The contract results from the tenant releasing an ask for proposition (RFP) to several designers. The advancement agreement specifies the relationship between the property manager and the tenant. That is, the contract defines the style of the residential or commercial property, who will construct it and who will finance it. Typically, the occupant will take sole occupancy of the residential or commercial property, but sometimes other occupants will share the building. The building element is the chief and most intricate concern in a BTS contract.
Lease Agreement: The BTS lease specifies the regards to occupancy once the developer completes building. Sometimes, the lease itself will specify the construction provisions directly or through an accompanying work letter.


The Roles of BTS Participants


A construct to fit lease is a significant undertaking for the property manager and occupant. Clearly, they will be handling each other over an extended duration. Therefore, the BTS plan should carefully consider each individual's duties:


Landlord: The landlord should evaluate the occupant's credit reliability. Also, it should understand the needs of the tenant as a guide to style and building and construction. Frequently, the proprietor requires an assurance and cash security from the tenant. The property owner needs to specify whether it or the renter will lead the construction project. Furthermore, the landlord will desire a long-enough lease term so that it can recoup its financial investment.
Tenant: The renter establishes the RFP. It needs to assess whether the proprietor has the technical proficiency and monetary resources to deliver on time. The evaluation will consist of the proprietor's previous BTS property experience, credibility, and structure. The renter should choose whether it wishes to direct the construction of the structure or leave it to the property owner. It might also require guarantees and/or a letter of credit to ensure the financing of the construction element.


Both parties will wish to offer input relating to the selection of designers, engineers, and contractors.


BTS Request for Proposal


The occupant produces the ask for proposal and distributes it to one or more developers. Typically, the RFP will deal with:


- Usings the residential or commercial property
- The space required
- A calendar timeline for building and construction and occupancy
- The rent variety that the renter will accept
- Design parameters and information


Usually, the renter distributes the RFP to numerous residential or commercial property owners/developers. It becomes more complicated if the renter wants a specific site for the building. In that case, the landowner may be the sole recipient of the RFP. Naturally, the landowner has more impact if the occupant wants to develop on the owner's land.


What is Build-to-Suit Financing?


A. Negotiating the Deal


Once the occupant chooses the winning RFP respondent, severe settlements can start. Normally, the process includes submissions from the proprietor's architects that specify the style plans.


In return, the renter's space organizers and specialists review the plan and negotiate changes. A natural stress is inevitable. On the one hand, the tenant desires an area perfectly suited to its needs. On the other hand, the property owner requires to balance the renter's requirements with the accessibility of project funding. The landlord should likewise consider how quickly it can re-let the residential or commercial property once the preliminary lease expires.


Eventually, the develop to match lease arrangement emerges from the negotiation procedure. It defines as much information as possible about the structure construction, the duties of each celebration, and the lease terms. For instance, the arrangement might need the property owner to build a structure shell that the occupant completes.


Alternatively, the property manager might have to fit out a turn-key residential or commercial property in move-in condition. If the proprietor delivers just a shell, the arrangement must define how the 2 teams interface at the turnover time. The occupant can prevent this issue by accepting utilize the property manager's developer for the completing phase.


B. Timetable and Deliverables


Of course, the build to suit contract must define a job timetable and turn-over period. Specifically, the agreement will mention the delivery information and move-in date.


The expiration of the renter's existing lease might develop the requirement for a set move-in date. Because of that, the parties must work backwards from the needed move-in date to set the schedule and milestones. Typical turning points consist of securing the funding, beginning, pouring concrete for the foundation and setting up the structural steel.


Potential Delays


Delays can be very pricey. The occupant may book the right to desert the offer if delays surpass a set date. For instance, the property manager may find it hard to finance the project, delaying its start. Other sources of hold-ups consist of obtaining authorizations, zone differences, and inspections.


Perhaps an unexpected catastrophe will make it impossible to obtain building materials when required. Or a labor action by the construction crew may shut down the project. Moreover, ecological groups may file suits that halt construction.


Indeed, the opportunities for delay are tremendous, and the BTS agreement must attend to remedies upfront. The arrangement may define charges that will significantly spur on the designer. The occupant may find new methods to inspire the landlord.


C. Rent


The construct to suit lease agreement will define the renter's fundamental rental rate. The standard rate hinges on the land worth, the cost of building, and the property owner's required rate of return.


Sometimes the arrangement will permit adjustments to the rate if construction expenses surpass expectations. The tenant might ask for modification orders that include to the cost of building and construction and increase the last lease. If the renter plays hardball on any rent increases, the task budget and scope should be exceptionally detailed.


The agreement should specify the change order process and the proprietor's right to authorize. The property owner may withstand any modifications that include building and construction costs without a corresponding rent boost.


Alternatively, the contract may define that the occupant spends for any accepted change orders. The arrangement should also eliminate the landlord of charges due to hold-ups coming from modification orders.


D. Other Lease Considerations


Certain other issues need factor to consider when negotiating a BTS lease:


Commencement Date vs Construction Date: The proprietor may want the BTS lease to specify a start date for the tenant to start paying rent. However, the renter might demand postponing any rent payments till building is complete.
Right to Purchase: Some tenants may desire the choice to purchase the residential or commercial property throughout the lease period. At the least, the tenant might desire the right of first offer to a proposed sale. Moreover, the occupant might request the right to match any purchase quote. The landlord might concur to these renter rights as long as it doesn't reduce the finest selling cost.
Space Migration: In some cases, the BTS residential or commercial property becomes part of a commercial park. The occupant may be worried about broadening the amount of area it occupies later. Therefore, the agreement may include an option for a brand-new building and construction stage. Alternatively, if the tenant has too much space, the lease must address subletting the residential or commercial property.
Warranties: The agreement ought to resolve the warrantied cost of building defects and shortages. The lease should define the service warranty obligations for faulty design, building 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 brand-new requirements cover BTS leases, which often utilize sale-and-leaseback accounting.


If the renter (lessee) controls the possession throughout the building phase before lease beginning, it is the asset owner. Upon completion of building and construction, the tenant 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 hold true:


- The lessee can buy the residential or commercial property throughout building and construction.
- The lessor (proprietor) can gather payment for work performed and has no other usage for the residential or commercial property.
- Lessee owns either the land and residential or commercial property improvements, or the non-real-estate assets under building.
- The lessee controls the land and does not lease it to the lessor or another celebration before construction begins.
- A lessee leases the land for a period that reflects the significant economic life of the residential or commercial property enhancement. The lessee does not sublease the land before building and construction begins and before reaping the residential or commercial property's economic life.


Under these circumstances, the lessee is the possession's deemed owner throughout building. Therefore, it must account for construction-in-progress utilizing ASC 360 - Residential Or Commercial Property, Plant and Equipment. The guideline requires the lessee to presume responsibility for the building costs through a considered loan from the lessor. When building and 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 asset throughout construction, it does not apply sale and leaseback treatment. Instead, it treats payments it makes to use the property as lease payments.


For in-depth details about develop to suit lease accounting, look for assistance from your accounting and legal consultants.


Advantages and disadvantages of BTS Real Estate


The pros of construct to suit leasing frequently surpass the cons.


Pros of BTS Real Estate


Capital: The occupant need not allocate the capital necessary to construct 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 renter can pick its location rather than selecting from offered stock. It can select a location in a high-growth area with easy access. The property owner makes use of the land it owns with no risk that a new residential or commercial property will sit uninhabited.
Efficiency: The renter defines the structure size so that it's best for its requirements. Furthermore, it can demand high energy effectiveness through modern-day devices and technology. The proprietor can use its involvement with a green project to burnish its track record.
Branding: The tenant may gain from a structure that shows its personality 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 considerably behind. The landlord gain from a locked-in long-term lease as soon as building and construction is total.
Taxes: The occupant's lease payments are completely deductible over the life of the lease.
Cons of BTS Real Estate


Commitment: The tenant incurs a long-term dedication that is hard to leave before the term ends. Typical lease periods run ten years or longer.
Financing: Typically, the lessee needs to show it is adequately creditworthy to manage a long-term lease commitment.
Cost: It's less expensive for the tenant to discover and lease vacant area. Many business can not pay for to pay for develop to fit property.
Time: It takes longer to construct a structure than to lease space from an existing one.
How Assets America ® Can Help


Assets America ® can set up funding for your BTS project beginning at $10 million, without any upper limitation. We invite you to call us for additional information for our complete financial services.


We can assist make your BTS task possible through our network of private investors and banks. For the very best in BTS funding, Assets America ® is the smart option.


What is a ground lease vs. construct to suit?


In a ground lease, the renter rents the hidden land rather than the residential or commercial property. In a construct to suit lease arrangement, the property manager owns the land and the renter leases the structure constructed on the land.


What does develop to fit domestic indicate?


Almost constantly, build to fit refers to industrial residential or commercial properties. However, it is possible to get in into a construct to match agreement for a multifamily house. Then, the renter subleases the systems to subtenants.


What is a reverse construct to fit?


A reverse build to fit is when the renter manages the building of the residential or commercial property. Reverse BTS is helpful when the renter has unique know-how in building the type of residential or commercial property included. Typically, the landlord finances the reverse BTS deal.


Is a build-to-suit lease contract right for me?


It might make good sense for proprietors who have uninhabited land they wish to establish. The BTS contract reduces the danger of establishing the land because 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 developments, you can read about this $75 million build-to-suit investment or this develop to fit satisfaction center for Amazon. Additionally, you can check out this build-to-suit industrial building in Janesville or these office occupants requiring develop to suit leases.