Build to Suit (BTS) is a service for businesses that wish to occupy 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 fit is an arrangement in which a landlord constructs a building for a sole occupant. The resulting free-standing building fulfills the specific requirements of the occupant.
Typically, organizations of all sizes arrange BTS property
arrangements to efficiently acquire and control custom facilities. In fact, many commercial structures and retail residential or commercial properties are BTS, although any kind of commercial genuine estate is possible.
How Do Build to Suit Leases Work?
A develop to suit lease is a long-lasting commitment between a landlord and a tenant.
How To Start a BTS Real Estate Project
The BTS process can begin in a couple of ways. For example, these consist of:
- A prospective renter can look for out a property manager to build a building according to the occupant's requirements. Thereafter, the tenant participates in a long-term lease with the proprietor.
- A landowner may advertise land that it will construct out to support a BTS lease. An interested business can call the landowner to organize a construct to fit lease arrangement.
- In a reverse BTS, the potential tenant constructs the structure. Typically, the property manager funds the task, but the
occupant runs the job. Then, the tenant takes occupancy of the building as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes good sense when the renter has specific building and construction expertise in the sort of facility it desires.
Typically, the proprietor owns the land or has a ground lease on it. Upon lease expiration, the build to fit arrangement enables the property manager to re-let the residential or commercial property to a different renter.
Components of a Build to Suit Lease Arrangement
Essentially, a BTS arrangement consists of 2 components:
Development Agreement: The developer accepts construct or acquire and redevelop a structure on behalf of the occupant. The agreement arises from the tenant issuing an ask for proposition (RFP) to several developers. The development contract defines the relationship between the proprietor and the occupant. That is, the contract specifies the design of the residential or commercial property, who will build it and who will fund it. Typically, the renter will take sole occupancy of the residential or commercial property, but sometimes other renters will share the structure. The building and construction element is the chief and most complicated problem in a BTS contract.
Lease Agreement: The BTS lease defines the terms of occupancy once the developer completes construction. Sometimes, the lease itself will define the construction arrangements straight or through an accompanying work letter.
The Roles of BTS Participants
A build to match lease is a major undertaking for the landlord and renter. Clearly, they will be handling each other over a prolonged duration. Therefore, the BTS plan should carefully consider each individual's duties:
Landlord: The landlord needs to examine the renter's creditworthiness. Also, it must understand the
requirements of the renter as a guide to design and
building and construction. Frequently, the landlord requires a warranty and cash security from the occupant. The landlord must specify whether it or the renter will lead the construction task. Furthermore, the property owner will desire a long-enough lease term so that it can recover its investment.
Tenant: The renter establishes the RFP. It must examine whether the property owner has the technical knowledge and financial resources to deliver on time. The evaluation will consist of the landlord's prior BTS real estate experience, reputation, and structure. The tenant must decide whether it desires to direct the construction of the structure or leave it to the proprietor. It might likewise need assurances and/or a letter of credit to ensure the funding of the building component.
Both parties will desire to supply input concerning the choice of architects, engineers, and specialists.
BTS Ask For Proposal
The tenant produces the ask for proposal and distributes it to several developers. Typically, the RFP will resolve:
- Usings the residential or commercial property
- The area required
- A calendar timeline for building and
tenancy- The rent variety that the tenant will accept
- Design criteria and information
Usually, the tenant distributes the RFP to numerous residential or commercial property owners/developers. It ends up being more complex if the occupant desires a particular website for the building. Because case, the landowner might be the sole recipient of the RFP. Naturally, the landowner has more influence if the tenant wishes to build on the owner's land.
What is Build-to-Suit Financing?
A. Negotiating the Deal
Once the renter selects the winning RFP respondent, serious settlements can begin. Normally, the process includes submissions from the property owner's designers that define the style plans.
In return, the occupant's space planners and experts examine the
strategy and work out changes. A natural stress is unavoidable. On the one hand, the renter wants an area completely matched to its requirements. On the other hand, the property manager needs to stabilize the renter's needs with the schedule of task financing. The property manager must likewise think about how quickly it can re-let the residential or commercial property once the initial lease expires.
Eventually, the develop to suit lease agreement emerges from the negotiation process. It defines as much detail as possible about the building construction, the tasks of each party, and the lease terms. For example, the contract may require the landlord to build a structure shell that the renter finishes.
Alternatively, the property manager might need to fit out a turn-key residential or commercial property in move-in condition. If the property manager provides just a shell, the
contract must define how the two teams user
interface at the
turnover time. The tenant can avoid this issue by consenting to use the proprietor's developer for the ending up stage.
B. Timetable and Deliverables
Obviously, the develop to suit agreement must specify a project timetable and turn-over duration. Specifically, the contract will specify the shipment details and move-in date.
The expiration of the tenant's existing lease may create the need for a set move-in date. For that factor, the celebrations should work backwards from the required move-in date to set the schedule and milestones. Typical turning points include securing the funding, breaking ground, pouring concrete for the foundation and erecting the structural steel.
Potential Delays
Delays can be very costly. The renter may schedule the right to desert the offer if hold-ups go beyond a set date. For instance, the proprietor may find it difficult to finance the project, postponing its start. Other sources of hold-ups include obtaining authorizations, zone variances, and examinations.
Perhaps an unexpected disaster will make it difficult to get building materials when needed. Or a labor action by the building team might close down the task. Moreover, environmental groups may file lawsuits that stop building.
Indeed, the chances for delay are immense, and the BTS arrangement ought to resolve remedies upfront. The contract might specify penalties that will considerably spur on the designer. The renter may find brand-new methods to inspire the landlord.
C. Rent
The build to fit lease arrangement will define the occupant's fundamental rental rate. The fundamental rate hinges on the land worth, the cost of building and construction, and the property owner's needed rate of return.
Sometimes the contract will allow adjustments to the rate if building and construction costs exceed expectations. The occupant may request change orders that contribute to the expense of building and increase the final lease. If the occupant plays hardball on any lease increases, the task spending plan and scope need to be incredibly detailed.
The agreement needs to specify the modification order procedure and the property owner's right to approve. The landlord may withstand any modifications that include building expenses without a matching rent increase.
Alternatively, the contract may define that the renter pays for any approved change orders. The arrangement should also alleviate the property manager of charges due to hold-ups coming from modification orders.
D. Other Lease Considerations
Certain other
issues require consideration when working out a BTS lease:
Commencement Date vs Construction Date: The landlord may want the BTS lease to specify a beginning date for the tenant to start paying rent. However, the occupant might insist on postponing any rent payments up until construction is complete.
Right to Purchase: Some renters might want the option to purchase the residential or commercial property throughout the
lease duration. At the least, the renter may want the right of first offer to a proposed sale. Moreover, the renter might request the right to match any purchase bid. The property manager might consent to these tenant rights as long as it doesn't minimize the very best asking price.
Space Migration: Sometimes, the BTS residential or commercial property belongs to a commercial park. The tenant may be concerned about broadening the amount of space it inhabits later. Therefore, the
contract might include a choice for a new construction phase. Alternatively, if the renter has too much area, the lease needs to address subletting the residential or commercial property.
Warranties: The agreement ought to deal with the warrantied cost of building and construction flaws and deficiencies. The lease should define the guarantee obligations for faulty design, building or materials.
What is Build-to-Suit Financing?
Build to Suit Lease Accounting
The Financial Account Standards Board (FASB) just recently provided new accounting requirements for leases (Topic 842). The new requirements cover BTS leases, which sometimes use sale-and-leaseback accounting.
If the occupant (lessee) controls the asset throughout the building phase before lease beginning, it is the possession owner. Upon conclusion of building, the renter sells 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 are real:
- The lessee can buy the residential or commercial property throughout building.
- The lessor (property owner) can gather 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 assets under building and construction.
- The lessee controls the land and does not lease it to the lessor or another celebration before building starts.
- A lessee rents the land for a duration that shows the significant economic life of the residential or commercial property improvement. The lessee doesn't sublease the land before construction starts and before gaining the residential or commercial property's economic life.
Under these scenarios, the lessee is the property's considered owner throughout building. Therefore, it needs to account for construction-in-progress using ASC 360 - Residential Or Commercial Property, Plant and Equipment. The rule needs the lessee to assume responsibility for the building costs by means of a deemed loan from the lessor. When building ends, the lessee follows the sale and leaseback accounting rules.
On the other hand, if the lessee is not the considered owner of the asset throughout construction, it does not use sale and leaseback treatment. Instead, it deals with payments it makes to utilize the property as lease payments.
For comprehensive info about construct to fit lease accounting, look for assistance from your accounting and
legal consultants.
Pros and Cons of BTS Real Estate
The pros of construct to match leasing typically exceed the cons.
Pros of BTS Real Estate
Capital: The renter need not assign the capital required to construct the residential or commercial property itself. The property owner gets to put its capital to work in return for long-lasting lease income.
Location: The tenant can choose its location instead of picking from available stock. It can pick a location in a high-growth location with easy access. The proprietor makes use of the land it owns without any threat 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 modern devices and technology. The proprietor can utilize its participation with a green task to burnish its track record.
Branding: The renter might gain from a structure that shows its character and image. The occupant can pick the architectural design, surfaces and colors to amplify its image.
Risk: The tenant may be able to walk away from the lease if the building falls substantially behind. The landlord gain from a locked-in long-term lease when building is complete.
Taxes: The occupant's lease payments are fully deductible over the life of the lease.
Cons of BTS Real Estate
Commitment: The renter incurs a long-lasting commitment that is challenging to exit before the term expires. Typical lease durations run ten years or longer.
Financing: Typically, the lessee needs to show it is adequately creditworthy to deal with a long-term lease dedication.
Cost: It's less expensive for the renter to discover and lease uninhabited space. Many companies can not manage to pay for construct to fit real estate.
Time: It takes longer to build a structure than to lease area from an existing one.
How Assets America ® Can Help
Assets America ® can arrange funding for your BTS job beginning at $10 million, without any upper limit. We welcome you to call us to learn more for our total monetary services.
We can assist make your BTS job possible through our network of personal investors and banks. For the very best in BTS financing, Assets America ® is the clever choice.
What is a ground lease vs. construct to suit?
In a ground lease, the tenant rents the underlying land instead of the residential or commercial property. In a construct to suit lease arrangement, the proprietor owns the land and the tenant leases the structure built on the land.
What does build to fit residential imply?
Often, build to match refers to industrial residential or commercial properties. However, it is possible to participate in a construct to suit contract for a multifamily house. Then, the occupant subleases the units to subtenants.
What is a reverse construct to match?
A reverse build to suit is when the renter oversees the building and construction of the residential or commercial property. Reverse BTS is useful when the tenant has special competence in building the type of residential or commercial property included. Typically, the property owner finances the reverse BTS deal.
Is a build-to-suit lease agreement right for me?
It may make good sense for landlords who have uninhabited land they wish to establish. The BTS agreement reduces the threat of developing the land given that the lease is locked-in. Tenants preserve capital through a BTS lease agreement.
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 satisfaction center for Amazon. Additionally, you can have a look at this build-to-suit industrial building in Janesville or these office renters demanding construct to fit leases.
