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Real Estate

Build-To-Suit: Ultimate Guide

Blaine Annett
I
February 1, 2022

Build-To-Suit: Ultimate Guide


Building build-to-suit (BTS) properties require that you meet all your client's corporate and operational needs. Build to suit development is a fun process that involves everything from site selection to the completion of complex and turnkey projects.


Before we get there, let's first understand the basics of a commercial building.


What is build to suit?


A build-to-suit is a commercial structure that has been specifically designed to meet the needs of a specific user.


These developments can take many forms.


  • A sale-leaseback is when a tenant acquires the land and assumes the financing liability. Then, the tenant hires a general contractor to design and build the building. A tenant can then lease back the property or sell it to an investor.
  • A Developer: The company's specifications dictate that a tenant hires a developer. The developer will purchase the property, take ownership and manage the risks of its construction. The developer/owner will then let the tenant lease the property.


Because the property was designed for the tenant, it is usually rented for a predetermined period.


What are the benefits of a build to suit?


A new build to suit the development is more cost-effective than other types of development. There are a few reasons why this is so.


  • The buildings are relatively uniform/constant. This means that each tenant has a standard they work from, so you know what to look for.
  • The developer/owner has almost no risk of leasing. The tenant has been identified and is currently under lease.


The most significant advantage to build-to-suit development is, as we have mentioned and as its name suggests, that the property is designed and constructed to the tenant's specific requirements. The tenant can have a significant influence on the design and construction. This approach ultimately helps:


  • Maximize space
  • Maximize efficiency
  • Long-term savings


It is possible to create a tenant's ideal home and avoid settling for a structure that does not meet their needs.


What are the benefits of using a developer for a build to suit?


Tenants can use a commercial developer to build their homes to their specifications. This will help protect them from the negatives of developing their property.


Developers will bear the financial responsibility for the development of the project. Instead of investing in slow-appreciating real property, tenants can use it to grow their businesses.


This allows tenants to save time and money, expanding more quickly. They also get a facility that will enable them to reach their full potential.


Furthermore, most tenants want double-digit returns, and with CAP rates and return rates in single digits, it's not always a good idea to invest capital into development projects.


What is the design process?


A build to suit is a process that creates a commercial property that meets tenant specifications. The design phase of a build-to-suit process involves collaboration between the tenant, architects, engineers, and consultants.


Tenants will typically have the most input to the property's design to ensure it meets company/corporate standards.


The developer will still play an essential role in designing buildings since he has a fundamental interest and knowledge of the site and the municipal requirements.


Market standards are an essential aspect of design. However, the building may not be "market-standard" but can instead be highly unique for a tenant's specialized design. This could make it less appealing to future investors.


What is the cost of a build to suit?


Construction cost estimates are, in simple words, one of the most critical but confusing elements of project cost determination.


While many factors can play into the decision, the fact is that building to suit developments may require a more significant cost commitment than leasing space. However, the space and efficiency built to suit projects can offset these costs.


Many factors influence the cost of a project. These factors may include:


  • Localization
  • Size
  • Type of building
  • Credit to the Tenant
  • Length of the Lease
  • Municipal Requirements
  • Specific Improvements
  • Current Market Situation


The tenant's specific design requirements will often play a significant role in setting the project's cost.


What is the lease structure for a build-to-suit?


Net leases are the most common form of build-to-suit projects. This means that the occupant is responsible for paying the property's operating and management expenses.


A longer lease term may be possible than a standard lease. Because build-to-suit properties are tailored to the needs of each tenant, they may be longer than a typical lease. However, they should be at least ten years in most cases to give a landlord/developer a reasonable return.


A longer-term lease allows the developer to obtain more favorable financing. This results in a lower rental rate.


What are the drawbacks of a build to suit?


Tenants' business strategy will determine whether some elements of new build-to-suit development are beneficial or detrimental.


One, longer-term lease agreements can be problematic because it requires that the tenant is willing and able to commit to more extended periods.


Tenants must have excellent credit to finance these projects and get financing.


Build to suit development is expensive and can take a long time. To ensure that the property meets the company's long-term requirements, the tenant must forecast future expansion plans.


Companies looking to expand and establish roots are sure to find Build to Suit Development one of the most attractive, profitable commercial real estate development options.


Before you begin building a build-to-suit development or before designing or selecting a site, it is essential to locate a developer early and benefit from their expertise.


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