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Build to Suit: What It Is and Why You Might Need It

If you’re a business owner, you know that finding a suitable space for your company is essential. What if you don’t find anything that meets your needs? That’s where build-to-suit commercial property comes in. This type of construction allows businesses to build their own space explicitly tailored to their commercial real estate needs.

Read on to learn more about build-to-suit and why you might need it!

What is a Build to Suit lease?

Build-to-suit (BTS) leasing arrangements are where a property owner builds a new building to fit a business tenant’s specific needs. These properties are mostly grounded developments based on tenants’ needs but are funded by the commercial developer.

In this situation, the developer is not building the property for sale. The building has been built in an intended way to be given away for leased purposes by a previously appointed tenant.

A BTS lease is a typical build-to-suit agreement in which the developer assumes the cost of the entire property plus the major structural repairs to the property.

How does a built-to-suit lease work?

Tenants typically commit to leasing rented buildings for a specific period (between 10-20 years is common) with many options for extensions beyond the initial duration. Many built-on properties are free-standing and only have one tenant.

BTS leasing is generally double net.

The tenant pays the property tax, property insurance, and most repairs during the period leased. The general procedure begins with the tenant selecting the site of their property, typically in cooperation with an architect. Find out more about double net

How do design and build processes work for a build to suit development?

Because building a custom build is primarily made for a single user, the tenant has nearly total creative freedom in all areas of the project. They will cooperate in design with a general contractor, engineers, architects, and developers on their projects.

The developer team serves as tenant project manager and guides the tenants through the process.

However, real estate development can be a powerful influence on design.

Suppose an idea has crossed over from market norms. A build-to-suit tenant will have to make a decision as to whether they want the new product or not. It would be nonsensical for them to put everything on hold because of this single choice so it’s likely that some negotiations and give-and-takes will take place in order to keep the project alive without compromising its design integrity.

build to suit lease

Is a Build to Suit commercial building right for my company?

While demand for specific product types increases across many markets, construction costs have climbed because of supply chain delays and material shortages.

Rent is passed onto a third party – tenants feel the burden as they have a higher rental rate and fewer affordable rental options in many markets already facing upward pressure on rental.

These confluences of factors create a problem for effective markets to function. The yields on land for developers have continued to decline as demand for rented space has increased.

How do we resolve this issue?

Are you a developer who wants to avoid buying $20 per foot of space in $12/ft neighborhoods?

Are you a tenant who wants an affordable build-out that doesn’t sacrifice your brand and design standards?

If so, BTS may be the best solution for you.

It’s important to note that not every business is a good fit for build-to-suit leasing. This type of lease is most beneficial for companies that have a specific space requirement and want more control over their property.

If you’re not sure whether build-to-suit is right for you, contact our commercial real estate experts to discuss your options!

Advantages of a build-to-suit commercial property lease

A building lease can prove advantageous from the tenant’s point of view. A construction lease is based on custom-made and brand-new properties and does not require a considerable investment.

In addition, build-to-suit leases can be beneficial in taxing property owners. The build-to-suit lease can lower overall costs because the owner avoids paying capital gains taxes.

Disadvantages of a Build to suit your needs.

The cost of an application depends on the business lines of operation. It has some negative aspects.

Also, business owners are generally required to maintain the property in good condition and make any necessary repairs.

Lastly, build-to-suit leases usually have a longer lease term duration than other types of leases so your businesses may have been stuck in that location for a while.

built to suit

What is a reverse build-to-suit?

A build-to-suit lease may be terminated early by the tenant through a process called a “reverse build to suit.” In this case, the tenant returns the property to the landlord in its original condition and is no longer responsible for paying rent or maintaining the property.

The reverse build-to-suit option is generally included in BTS leases as a way for the tenant to get out of the lease early if their business needs change.

However, the reverse build-to-suit option can be costly for the tenant because they may have to pay for any damage that has been done to the property during their lease.

How does a build-to-suit differ from a sale-leaseback?

Sale-leasebacks are often used by owners who want to free up cash that’s tied up in their real estate holdings. In a build-to-suit transaction, the tenant usually has a long-term lease on the property for a set period, such as ten years.

At the end of the lease, the tenant may be able to purchase the property, renew the lease, or move out.

A build-to-suit transaction is typically used when a company needs a custom-built facility for its operations. For example, a manufacturing company may build a factory to suit their specific needs; however, it does not have the initial capital to purchase the property outright.

A build-to-suit transaction can also be used for office space, retail space, warehouses, or any number of commercial real estate properties.

Are there tax benefits to build to suit real estate development?

There are many tax benefits to BTS real estate developments.

The two most common are the ability to depreciate the building and not paying capital gains taxes on the property.

Both of these benefits make it easier for developers to finance their projects.

Conclusion

A build-to-suit lease is a type of agreement in which the developer assumes the cost of the entire property plus the major structural repairs to the property.

This type of lease can be beneficial from the tenant’s point of view, but it also has some disadvantages that should be considered before entering into this type of agreement.

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