Build to Suit (BTS) is a solution for businesses 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 )
- Advantages and disadvantages
- 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 landlord constructs a structure for a sole renter. The resulting free-standing building fulfills the specific requirements of the occupant.
Typically, services of all sizes arrange BTS real estate contracts to efficiently acquire and manage custom-made facilities. In fact, numerous commercial 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 fit lease is a long-term commitment in between a property owner and a tenant.
How To Start a BTS Real Estate Project
The BTS procedure can start in a couple of methods. For instance, these include:
- A prospective occupant can look for a property owner to construct a structure according to the tenant's requirements. Thereafter, the occupant enters into a long-lasting lease with the proprietor.
- A landowner might market land that it will develop out to support a BTS lease. An interested business can contact the landowner to set up a build to match lease arrangement.
- In a reverse BTS, the prospective renter constructs the structure. Typically, the proprietor finances the job, however the tenant runs the job. Then, the tenant 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 expertise in the kind of center it desires.
Typically, the proprietor owns the land or has a ground lease on it. Upon lease expiration, the develop to match contract permits the landlord to re-let the residential or commercial property to a various occupant.
Components of a Build to Suit Lease Arrangement
Essentially, a BTS plan includes 2 elements:
Development Agreement: The developer consents to construct or acquire and redevelop a structure on behalf of the occupant. The arrangement arises from the occupant issuing a demand for proposal (RFP) to one or more designers. The advancement contract defines the relationship in between the proprietor and the renter. That is, the contract specifies the style of the residential or commercial property, who will build it and who will fund it. Typically, the tenant will take sole tenancy of the residential or commercial property, but often other renters will share the building. The construction part is the chief and most complex concern in a BTS agreement.
Lease Agreement: The BTS lease specifies the terms of tenancy once the designer finishes building and construction. Sometimes, the lease itself will specify the building and 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 landlord and tenant. Clearly, they will be dealing with each other over a prolonged duration. Therefore, the BTS plan need to thoroughly think about each participant's duties:
Landlord: The property owner must examine the renter's credit reliability. Also, it must understand the requirements of the renter as a guide to style and building and construction. Frequently, the property owner needs a warranty and money security from the tenant. The landlord should define whether it or the occupant will lead the construction job. Furthermore, the property owner will want a long-enough lease term so that it can recoup its investment.
Tenant: The occupant establishes the RFP. It needs to evaluate whether the property manager has the technical proficiency and financial resources to provide on time. The examination will include the landlord's previous BTS property experience, reputation, and structure. The tenant should choose whether it wishes to direct the building and construction of the building or leave it to the property manager. It might also need warranties and/or a letter of credit to guarantee the funding of the building and construction part.
Both celebrations will wish to supply input concerning the selection of architects, engineers, and professionals.
BTS Request for Proposal
The occupant creates the ask for proposal and disperses it to several designers. Typically, the RFP will attend to:
- The usages of the residential or commercial property
- The area required
- A calendar timeline for building and construction and tenancy
- The rent range that the renter will accept
- Design parameters and details
Usually, the occupant disperses the RFP to several residential or commercial property owners/developers. It becomes more complex if the tenant desires a particular site for the structure. In that case, the landowner might be the sole recipient of the RFP. Naturally, the landowner has more influence if the renter desires to build on the owner's land.
What is Build-to-Suit Financing?
A. Negotiating the Deal
Once the renter chooses the winning RFP participant, severe settlements can start. Normally, the process includes submissions from the proprietor's designers that specify the style plans.
In return, the occupant's area coordinators and consultants review the plan and negotiate changes. A natural tension is unavoidable. On the one hand, the renter desires an area completely suited to its needs. On the other hand, the landlord requires to balance the occupant's requirements with the availability of job financing. The proprietor should also consider how quickly it can re-let the residential or commercial property once the preliminary lease expires.
Eventually, the build to suit lease contract emerges from the negotiation procedure. It specifies as much information as possible about the structure construction, the tasks of each celebration, and the lease terms. For instance, the arrangement might need the proprietor to construct a structure shell that the renter completes.
Alternatively, the property owner may need to fit out a turn-key residential or commercial property in move-in condition. If the property manager provides only a shell, the arrangement should define how the 2 teams user interface at the turnover time. The renter can prevent this issue by accepting utilize the property manager's developer for the ending up phase.
B. Timetable and Deliverables
Obviously, the develop to fit arrangement must define a project schedule and turn-over period. Specifically, the arrangement will mention the shipment details and move-in date.
The expiration of the tenant's existing lease might develop the requirement for a set move-in date. For that factor, the celebrations should work backward from the required move-in date to set the schedule and milestones. Typical milestones consist of protecting the financing, breaking ground, pouring concrete for the structure and erecting the structural steel.
Potential Delays
Delays can be really pricey. The occupant might reserve the right to abandon the deal if delays surpass a set date. For example, the property manager may discover it difficult to finance the job, postponing its start. Other sources of delays include acquiring permits, zone variations, and assessments.
Perhaps an unforeseen disaster will make it impossible to obtain structure products when required. Or a labor action by the building team might close down the task. Moreover, ecological groups might file lawsuits that stop construction.
Indeed, the opportunities for delay are immense, and the BTS agreement need to deal with solutions in advance. The agreement might specify charges that will considerably stimulate on the developer. The occupant may discover new methods to encourage the property owner.
C. Rent
The build to suit lease agreement will specify the occupant's basic rental rate. The fundamental rate depend upon the land worth, the cost of building, and the proprietor's needed rate of return.
Sometimes the arrangement will enable adjustments to the rate if construction costs exceed expectations. The renter may request change orders that contribute to the cost of building and increase the final lease. If the occupant plays hardball on any lease increases, the task budget plan and scope ought to be extremely detailed.
The contract ought to define the change order procedure and the property manager's right to authorize. The proprietor might resist any modifications that add building expenses without a matching lease boost.
Alternatively, the arrangement may define that the tenant spends for any approved change orders. The contract should also eliminate the landlord of charges due to delays originating from change orders.
D. Other Lease Considerations
Certain other issues require factor to consider when working out a BTS lease:
Commencement Date vs Construction Date: The property owner may want the BTS lease to specify a commencement date for the occupant to begin paying lease. However, the occupant might demand postponing any rent payments till building is total.
Right to Purchase: Some renters may desire the alternative to acquire the residential or commercial property during the lease period. At the least, the tenant may want the right of very first offer to a proposed sale. Moreover, the occupant might ask for the right to match any purchase quote. The proprietor may accept these renter rights as long as it does not decrease the very best market price.
Space Migration: In many cases, the BTS residential or commercial property is part of a commercial park. The renter may be concerned about broadening the quantity of area it occupies later. Therefore, the contract might include an alternative for a new building stage. Alternatively, if the occupant has too much space, the lease should address subletting the residential or commercial property.
Warranties: The contract ought to attend to the warrantied expense of building and construction defects and deficiencies. The lease needs to define the warranty responsibilities for malfunctioning design, construction or materials.
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 utilize sale-and-leaseback accounting.
If the occupant (lessee) controls the possession during the construction stage before lease commencement, it is the asset owner. Upon completion of building and construction, the renter offers the residential or commercial property to the proprietor and leases it back. The lessee owns the residential or commercial property if any of the following hold true:
- The lessee has the right to buy the residential or commercial property during building and construction.
- The lessor (landlord) can collect payment for work carried out 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 and construction.
- The lessee manages the land and doesn't rent it to the lessor or another party before construction begins.
- A lessee rents 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 begins and before reaping the residential or commercial property's financial life.
Under these circumstances, the lessee is the possession's considered owner throughout building. Therefore, it must account for construction-in-progress using ASC 360 - Residential Or Commercial Property, Plant and Equipment. The rule needs the lessee to presume obligation for the construction costs through a considered loan from the lessor. When building and 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 construction, it does not apply sale and leaseback treatment. Instead, it treats payments it makes to utilize the possession as lease payments.
For in-depth details about build to suit lease accounting, look for guidance from your accounting and legal consultants.
Benefits and drawbacks of BTS Real Estate
The pros of develop to suit leasing typically outweigh the cons.
Pros of BTS Real Estate
Capital: The tenant need not assign the capital essential to construct the residential or commercial property itself. The property manager gets to put its capital to work in return for long-lasting lease earnings.
Location: The occupant can choose its place rather than selecting from offered stock. It can pick a place in a high-growth area with easy access. The property manager exploits the land it owns without any danger that a new residential or commercial property will sit uninhabited.
Efficiency: The occupant defines the building size so that it's best for its needs. Furthermore, it can require high energy efficiency through contemporary equipment and innovation. The property owner can use its involvement with a green task to burnish its reputation.
Branding: The renter may take advantage of a structure that shows its character and image. The tenant can select the architectural style, finishes and colors to amplify its image.
Risk: The renter may be able to leave the lease if the building falls significantly behind. The property manager take advantage of a locked-in long-term lease as soon as building and construction is total.
Taxes: The renter's lease payments are completely deductible over the life of the lease.
Cons of BTS Real Estate
Commitment: The renter incurs a long-lasting dedication that is not easy to exit before the term ends. Typical lease periods run 10 years or longer.
Financing: Typically, the lessee needs to demonstrate it is sufficiently creditworthy to manage a long-lasting lease commitment.
Cost: It's more affordable for the tenant to discover and lease uninhabited space. Many business can not manage to spend for construct to suit realty.
Time: It takes longer to construct a structure than to lease area from an existing one.
How Assets America ® Can Help
Assets America ® can organize funding for your BTS task starting at $10 million, with no ceiling. We welcome you to call us for more information for our complete financial services.
We can help make your BTS job possible through our network of personal investors and banks. For the very best in BTS financing, Assets America ® is the wise choice.
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 build to suit lease arrangement, the proprietor owns the land and the renter leases the building constructed on the land.
What does build to suit property indicate?
Often, develop to fit describes industrial residential or commercial properties. However, it is possible to participate in a develop to match agreement for a multifamily house. Then, the tenant subleases the systems to subtenants.
What is a reverse build to fit?
A reverse build to match is when the occupant supervises the construction of the residential or commercial property. Reverse BTS works when the renter has special proficiency in building the kind of residential or commercial property included. Typically, the landlord finances the reverse BTS offer.
Is a build-to-suit lease agreement right for me?
It might make sense for property managers who have vacant land they wish to develop. The BTS arrangement lowers the risk of establishing the land considering that 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 check out about this $75 million build-to-suit financial investment or this build to suit satisfaction center for Amazon. Additionally, you can check out this build-to-suit industrial building in Janesville or these office renters demanding build to fit leases.
