Build to Suit (BTS) is an option for organizations that wish 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 a plan in which a property owner constructs a structure for a sole occupant. The resulting free-standing structure meets the specific requirements of the occupant.
Typically, businesses of all sizes arrange BTS property contracts to efficiently obtain and control custom facilities. In fact, many industrial buildings and retail residential or commercial properties are BTS, although any kind of industrial property is possible.
How Do Build to Suit Leases Work?
A construct to match lease is a long-lasting dedication between a proprietor and an occupant.
How To Start a BTS Real Estate Project
The BTS process can start in a couple of ways. For instance, these consist of:
- A potential renter can look for a proprietor to construct a structure according to the tenant's requirements. Thereafter, the renter participates in a long-term lease with the property owner.
- A landowner might promote land that it will construct out to support a BTS lease. An interested company can contact the landowner to arrange a develop to fit lease agreement.
- In a reverse BTS, the potential occupant constructs the building. Typically, the proprietor funds the job, however the tenant runs the job. Then, the renter takes occupancy 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 center it desires.
Typically, the landlord owns the land or has a ground lease on it. Upon lease expiration, the build to fit contract allows 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 plan includes 2 components:
Development Agreement: The designer consents to construct or get and redevelop a building on behalf of the tenant. The agreement results from the tenant issuing an ask for proposition (RFP) to one or more designers. The development contract specifies the relationship between the proprietor and the occupant. That is, the contract defines the style of the residential or commercial property, who will construct it and who will fund it. Typically, the occupant will take sole tenancy of the residential or commercial property, however in some cases other occupants will share the building. The building and construction element is the chief and most complicated problem in a BTS agreement.
Lease Agreement: The BTS lease specifies the regards to occupancy once the designer completes building. Sometimes, the lease itself will define the construction arrangements directly or through an accompanying work letter.
The Roles of BTS Participants
A build to match lease is a major endeavor for the property owner and renter. Clearly, they will be handling each other over a prolonged period. Therefore, the BTS arrangement must thoroughly think about each participant's responsibilities:
Landlord: The proprietor needs to examine the occupant's credit reliability. Also, it needs to understand the needs of the occupant as a guide to design and building and construction. Frequently, the landlord requires an assurance and money security from the tenant. The property manager needs to specify whether it or the tenant will lead the building and construction project. Furthermore, the landlord will want a long-enough lease term so that it can recover its financial investment.
Tenant: The renter establishes the RFP. It should evaluate whether the landlord has the technical competence and funds to provide on time. The evaluation will include the property manager's prior BTS realty experience, reputation, and structure. The occupant needs to choose whether it wishes to direct the building of the structure or leave it to the property manager. It might also require warranties and/or a letter of credit to guarantee the funding of the construction element.
Both celebrations will desire to provide input regarding the selection of architects, engineers, and contractors.
BTS Ask For Proposal
The occupant creates the demand for proposition and distributes it to several developers. Typically, the RFP will attend to:
- The usages of the residential or commercial property
- The area needed
- A calendar timeline for building and tenancy
- The lease variety that the renter will accept
- Design specifications and details
Usually, the occupant distributes the RFP to several residential or commercial property owners/developers. It ends up being more complex if the occupant desires 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 renter wants to develop on the owner's land.
What is Build-to-Suit Financing?
A. Negotiating the Deal
Once the tenant chooses the winning RFP participant, major negotiations can begin. Normally, the procedure includes submissions from the property owner's designers that define the style strategies.
In return, the tenant's space coordinators and experts evaluate the plan and negotiate changes. A natural tension is unavoidable. On the one hand, the occupant wants an area completely matched to its requirements. On the other hand, the property owner requires to balance the occupant's requirements with the schedule of task funding. The proprietor must likewise consider how quickly it can re-let the residential or commercial property once the initial lease ends.
Eventually, the construct to fit lease agreement emerges from the negotiation procedure. It specifies as much detail as possible about the building construction, the duties of each party, and the lease terms. For instance, the arrangement might need the property manager to construct a structure shell that the tenant finishes.
Alternatively, the proprietor may have to fit out a turn-key residential or commercial property in move-in condition. If the landlord delivers only a shell, the agreement should specify how the 2 teams user interface at the turnover time. The tenant can avoid this concern by accepting use the property owner's designer for the finishing stage.
B. Timetable and Deliverables
Naturally, the develop to fit contract must specify a project schedule and turn-over duration. Specifically, the arrangement will state the delivery information and move-in date.
The expiration of the occupant's existing lease may create the requirement for a set move-in date. Because of that, the parties should work backward from the needed move-in date to set the timetable and milestones. Typical turning points include securing the financing, beginning, pouring concrete for the foundation and setting up the structural steel.
Potential Delays
Delays can be really costly. The tenant might book the right to abandon the deal if delays surpass a set date. For instance, the landlord may discover it hard to fund the job, delaying its start. Other sources of delays consist of obtaining permits, zone variances, and evaluations.
Perhaps an unanticipated catastrophe will make it difficult to acquire building materials when needed. Or a labor action by the construction crew may close down the task. Moreover, ecological groups may submit claims that halt building.
Indeed, the opportunities for delay are enormous, and the BTS arrangement ought to resolve solutions in advance. The arrangement may specify penalties that will significantly spur on the developer. The renter might find new ways to motivate the property manager.
C. Rent
The build to fit lease contract will specify the renter's basic rental rate. The standard rate hinges on the land value, the expense of building, and the proprietor's needed rate of return.
Sometimes the contract will allow changes to the rate if building costs go beyond expectations. The renter may request modification orders that include to the expense of construction and increase the final rent. If the occupant plays hardball on any lease increases, the project budget and scope ought to be extremely detailed.
The contract ought to specify the change order process and the proprietor's right to approve. The property manager may resist any changes that add building and construction costs without a corresponding lease increase.
Alternatively, the contract might define that the renter pays for any approved modification orders. The contract needs to also relieve the landlord of penalties due to hold-ups 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 proprietor might want the BTS lease to specify a commencement date for the renter to start paying lease. However, the renter might firmly insist on postponing any rent payments until building and construction is total.
Right to Purchase: Some renters might desire the option to purchase the residential or commercial property throughout the lease period. At the least, the occupant might want the right of first deal to a proposed sale. Moreover, the renter might ask for the right to match any purchase quote. The proprietor may concur to these occupant rights as long as it doesn't lower the very best asking price.
Space Migration: In many cases, the BTS residential or commercial property is part of an industrial park. The occupant might be worried about broadening the amount of area it inhabits later on. Therefore, the arrangement may include an alternative for a new building and construction stage. Alternatively, if the renter has excessive area, the lease ought to deal with subletting the residential or commercial property.
Warranties: The contract should deal with the warrantied cost of construction flaws and deficiencies. The lease ought to define the service warranty commitments for malfunctioning style, construction or products.
What is Build-to-Suit Financing?
Build to Suit Lease Accounting
The Financial Account Standards Board (FASB) recently released new accounting requirements for leases (Topic 842). The new requirements cover BTS leases, which often use sale-and-leaseback accounting.
If the occupant (lessee) manages the possession throughout the building stage before lease start, it is the asset owner. Upon completion of construction, the occupant offers the residential or commercial property to the property manager and leases it back. The lessee owns the residential or commercial property if any of the following are true:
- The lessee can purchase the residential or commercial property during building.
- The lessor (property owner) deserves to 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 enhancements, or the non-real-estate possessions under building.
- The lessee manages the land and does not rent it to the lessor or another party before building starts.
- A lessee leases the land for a period that shows the considerable economic life of the residential or commercial property improvement. The lessee doesn't sublease the land before building and construction starts and before enjoying the residential or commercial property's economic life.
Under these circumstances, the lessee is the asset's considered owner throughout construction. Therefore, it needs to account for construction-in-progress utilizing ASC 360 - Residential Or Commercial Property, Plant and Equipment. The rule needs the lessee to presume obligation for the building and construction 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 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 property as lease payments.
For comprehensive information about construct to fit lease accounting, look for assistance from your accounting and legal advisors.
Advantages and disadvantages of BTS Real Estate
The pros of build to fit leasing typically surpass the cons.
Pros of BTS Real Estate
Capital: The renter need not designate the capital needed to construct the residential or commercial property itself. The proprietor gets to put its capital to operate in return for long-term lease earnings.
Location: The occupant can select its area rather than choosing from available stock. It can select an area in a high-growth area with simple access. The landlord makes use of the land it owns with no threat that a brand-new residential or commercial property will sit uninhabited.
Efficiency: The occupant defines the structure size so that it's perfect for its requirements. Furthermore, it can require high energy effectiveness through modern-day equipment and innovation. The landlord can use its involvement with a green job to burnish its track record.
Branding: The renter might benefit from a building that shows its personality and image. The occupant can select the architectural style, finishes and colors to amplify its image.
Risk: The occupant may be able to stroll away from the lease if the building and construction falls considerably behind. The landlord take advantage of a locked-in long-lasting lease once construction is complete.
Taxes: The tenant's lease payments are fully deductible over the life of the lease.
Cons of BTS Real Estate
Commitment: The renter sustains 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 deal with a long-lasting lease dedication.
Cost: It's more affordable for the renter to discover and rent vacant space. Many companies can not manage to spend for construct to match real estate.
Time: It takes longer to build a structure than to rent area from an existing one.
How Assets America ® Can Help
Assets America ® can organize financing for your BTS project starting at $10 million, with no ceiling. We welcome you to call us to find out more for our total monetary services.
We can assist make your BTS project possible through our network of private investors and banks. For the finest in BTS funding, Assets America ® is the smart choice.
What is a ground lease vs. construct to fit?
In a ground lease, the renter rents the hidden land instead of the residential or commercial property. In a build to fit lease agreement, the proprietor owns the land and the tenant rents the building constructed on the land.
What does construct to match property mean?
Generally, develop to fit describes business residential or commercial properties. However, it is possible to participate in a develop to match agreement for a multifamily house. Then, the renter subleases the units to subtenants.
What is a reverse develop to fit?
A reverse construct to fit is when the tenant manages the construction of the residential or commercial property. Reverse BTS works when the occupant has unique expertise in building the kind of residential or commercial property involved. Typically, the landlord funds the reverse BTS offer.
Is a build-to-suit lease arrangement right for me?
It may make good sense for property owners who have vacant land they want to develop. The BTS contract minimizes the threat of developing the land because the lease is locked-in. Tenants protect capital through a BTS lease arrangement.
Recent BTS News
If you have an interest in news short articles about recent BTS developments, you can read about this $75 million build-to-suit financial investment or this develop to fit fulfillment center for Amazon. Additionally, you can have a look at this build-to-suit industrial structure in Janesville or these workplace occupants demanding build to match leases.
