TABLE OF CONTENTS
- What is a build to suit?
- What are the advantages of a build to suit?
- What are the advantages of using a developer for a build to suit?
- How does the design process work?
- What are the costs of a build to suit?
- What is the lease structure of a build to suit?
- What are the disadvantages of a build to suit?
Developing build to suit (BTS) properties means working to fully meet the operational and corporate needs of the client. From site selection to completion of turnkey and complex projects, build to suit development is an exciting process.
But before we even get there, it’s important to understand some of the basic elements of a new build to suit commercial property.
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.
These developments may come in a couple of different forms:
Sale-leaseback: 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.
Using a Developer: 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.
The property is typically leased for a predetermined length of time and typically longer term, due to the fact the building is designed specifically for the tenant.
What are the advantages of a build to suit?
In most cases, a new build to suit development tends to be a more cost-effective (not necessarily total cost, just cost-effectiveness) and less risky endeavor than some other types of development. Right out the gate, a couple of reasons for this are:
The buildings are fairly uniform/constant - meaning, the tenant has a standard their working off of, so you know what to expect.
And for the developer/owner, there’s almost no leasing risk. The tenant is already identified and under lease.
Probably the biggest advantage of build to suit development is, as we’ve mentioned and as the name implies, the property is designed and built to suit the specifications of the tenant. Therefore, the tenant has significant input into the design and construction. Ultimately, this approach helps to:
Reduce long-term costs
The creation of a tenant’s ideal property helps them to avoid settling for an existing structure that may not meet their specific requirements and therefore lack the needed efficiency.
What are the advantages of using a developer for a build to suit?
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.
It saves the tenant time and resources allowing for greater expansion, while also getting a facility that will allow them to meet their full potential.
Additionally, because most tenants seek double-digit returns, and with CAP and return rates in the single digits, deploying capital into development projects doesn’t always make sense.
How does the design process work?
The point of a build to suit is to develop a commercial property that meets the specifications of a tenant. Meaning, the design phase of the build to suit process is a collaborative approach between the tenant, architects, engineers, consultants, and the commercial developer.
Typically, a tenant will have maximum to significant input on the design of the property in order to meet company/corporate standards.
However, the developer will play a vital role in building design, as the developer has a fundamental interest in the project, as well as expertise and understanding of the specific site and municipal requirements.
One important consideration of design is market standards. If the building is not “market standard,” but is instead vastly unique to a tenant’s specialized design, the building can be less attractive to investors and future users.
What are the costs of a build to suit?
Simply put, construction cost estimates can be one of the most vital, yet confusing elements of determining project costs.
There are a number of different factors that come into play, but the truth of the matter is that build to suit developments can lean towards more of a cost commitment than say leasing existing space. However, the space and efficiencies build to suit projects provide may help offset the costs.
There are a number of factors that determine the specific costs of a build to suit project. They may include:
Type of Building
Credit of the Tenant
Length of Lease
Current State of Market
Typically, the specific design requirements of the tenant will play a significant role in establishing the cost of the project.
What is the lease structure of a build to suit?
Most build to suit projects tend to be net leases, where the occupant is responsible for the operating and management costs of the property.
The lease period may be longer than a typical lease. This is because build to suit properties are designed based on the specifications of a particular tenant. In many cases, they are at least 10 years in order to provide a developer/landlord a reasonable return on investment.
A longer-term lease generally allows the developer to achieve more favorable financing, translating into a reduction in rental rate.
What are the disadvantages of a build to suit?
Some of the elements of new build to suit development can be both advantageous and detrimental, depending on a tenant’s business approach.
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.
Build to suit development is surely one of the most exciting, advantageous commercial real estate development processes for companies looking to grow and put down roots.
But before you even start down the road of a build to suit development, before design or site selection, it’s important to find a developer and take advantage of their expertise early on.