TABLE OF CONTENTS
- What is a build to suit?
- Are there different types of build to suit developments?
- What is a Sale-leaseback build to suit?
- What if I use a commercial developer for my build to suit project?
- What is involved in creating a build to suit development?
- How much input does the tenant have in developing the property?
- What are the advantages of a build to suit?
- Are there any disadvantages of a build to suit?
What is a build to suit?
A build to suit is a commercial building specifically constructed to meet the design and physical specifications of one particular user.
Are there different types of build to suit developments?
Yes. A build to suit development can use either a sale-leaseback process or can be managed by a commercial developer.
What is a Sale-leaseback build to suit?
In this process, a tenant will acquire the land, assume the liability of financing, and hire a general contractor to plan and construct the building. The tenant may then sell the property to an investor and lease the property back.
What if I use a commercial developer for my build to suit project?
Based on the company specifications, a tenant will hire a commercial developer. The developer will acquire, take ownership, and manage the risk of construction of the property. The tenant will then lease the property from the developer/owner.
What is involved in creating a build to suit development?
As with any commercial development, there is an extensive process involved in build to suit development. It begins with having a plan/design/prototype in place and then searching for sites. Once the proper due diligence, site investigation, and budgets have been established, you’ll move forward with the development of the project.
How much input does the tenant have in developing the property?
While consultants, architects, engineers, and the developer will be the leads throughout the development and construction process, a build to suit project is meant to give the tenant significant control. The tenant can and will be able to provide as much input as possible in order to meet company/corporate standards.
What are the advantages of a build to suit?
In the long run, a new build to suit development tends to be a more cost-effective and less risky endeavor than other types of development.
The tenant has significant input into the design and construction. Ultimately, this approach helps to:
Reduce long-term costs
Other advantages include:
Preservation of Capital
If a tenant uses a commercial developer to meet their build to suit needs, it can help protect the tenant from the downsides of handling their own development. The developer will carry the financial burden of development of the project. So, instead of tying up capital in slowly appreciating real estate, tenants can use that to help grow their business.
Allow for a greater rate of expansion
If a tenant considers a build to suit option using a commercial developer, it will help expedite the development process. Using a developer who understands your approach can significantly benefit your business. It can:
cut down on inefficiencies and time lags in finding pre existing buildings that meet your exact specifications.
help you grow at a faster pace than a tenant may be able to allocate the proper funds and financing. This applies if your business is considering expansion and thinking of allocating your own funds to construct a new property.
Are there any disadvantages of a build to suit?
For one, the longer-term lease deals may be a drawback as it means the tenant must be willing and able to commit to longer timeframes.
Due to the costs, tenants must also have excellent credit to gain financing and move forward with such projects.
And overall, build to suit development can be costly, and time frames can be lengthy. Therefore, a tenant must be able to reasonably forecast future expansion plans to ensure the property is going to meet the company’s long-term needs.
How does the design process work?
The design phase of the build to suit process should be collaborative between the tenant, architects, engineers, consultants, and the commercial developer. This results in a customized design specifically tailored to the tenant's specifications. One or two initial meetings with the design team is typically required to establish your design criteria and objectives, followed by review and refinement of the resulting intermediate plans until the final design exactly meets your requirements.
How much does a build to suit cost?
The costs of build to suit projects will depend on location, size, type of building, level of improvements and finishes, and the construction market.
There are a number of different factors that come into play, but the truth of the matter is that build to suit developments can have more of an initial cost commitment than other types of development. However, the space and efficiencies build to suit projects provide may help offset the costs.
How long does a build to suit project take?
The length of a project again depends on project location, size, type of building, level of improvements and finishes, and the construction market.
Tenants should always allot time for preparation, municipal review and approval of plans, and time for obtaining a building permit. Some of these processes can take anywhere from a couple of weeks to months. So, as with many development projects timeframes can be difficult to estimate.
How long is a build to suit lease term?
A tenant must usually commit to a longer-term lease deal in order to justify a developer’s investment. In many cases, leases are at least 10 years in order to provide a reasonable return on investment. If a project is more specialized, it may become more important for the lease term to be longer in order to fully amortize the landlord’s investment in the property.
How is rent determined on a build to suit lease?
Rent calculations for build to suit leases are different than do leases of constructed premises where the rental rate can be easily fixed at the commencement of negotiations.
The rent on a build to suit project is typically based on a rate of return applied to the project costs. In some cases, the rate may be subject to adjustments based on actual construction costs.
The rate will vary based on current market conditions, the type of facility, and the user's credit standing.
What services are included in the rent?
Most build to suit leases are net leases, in which the occupant is responsible for the costs of operating the facility. Net leases may be broken down into three primary categories:
Single Net: tenant pays one of the three expense categories
Double Net (NN): tenant pays two of the three expense categories
Triple Net (NNN): tenant pays all three expense categories. Triple net leases are usually whole building leases with a single tenant for the long term (10 years or more)