Build to Suit (BTS) is a solution for companies that want to inhabit purpose-built residential or commercial property without owning it. In this article, we cover:

- What is a Build-to-Suit Lease?
- How Do BTS Leases Work?
- New Build to Suit Accounting Rules (2016 )
- Benefits and drawbacks
- How to Arrange Financing
- Frequently Asked Questions
- Recent News & Related Articles

What Does Build to Suit Mean?

Build to suit is a plan in which a landlord constructs a structure for a sole renter. The resulting free-standing building fulfills the particular requirements of the tenant.

Typically, services of all sizes organize BTS realty agreements to efficiently obtain and control customized facilities. In fact, numerous industrial buildings and retail residential or commercial properties are BTS, although any kind of business real estate is possible.

How Do Build to Suit Leases Work?

A develop to match lease is a long-lasting commitment in between a property owner and a renter.

How To Start a BTS Real Estate Project

The BTS process can start in a few ways. For instance, these consist of:

- A potential tenant can look for out a proprietor to build a building according to the occupant's specs. Thereafter, the tenant enters into a long-term lease with the property owner.
- A landowner might promote land that it will develop out to support a BTS lease. An interested company can get in touch with the landowner to set up a construct to fit lease arrangement.
- In a reverse BTS, the potential renter constructs the building. Typically, the proprietor finances the project, but the tenant runs the job. Then, the occupant takes tenancy of the structure as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes good sense when the renter has specific building competence in the kind of facility it desires.

Typically, the landlord owns the land or has a ground lease on it. Upon lease expiration, the construct to fit contract allows the landlord to re-let the residential or commercial property to a various tenant.

Components of a Build to Suit Lease Arrangement

Essentially, a BTS plan includes 2 components:

Development Agreement: The designer accepts construct or get and redevelop a building on behalf of the renter. The arrangement results from the occupant issuing a request for proposal (RFP) to several designers. The advancement agreement specifies the relationship in between the property manager and the tenant. That is, the contract specifies the design of the residential or commercial property, who will construct it and who will finance it. Typically, the renter will take sole occupancy of the residential or commercial property, but sometimes other tenants will share the building. The building and construction part is the chief and most complicated concern in a BTS agreement.
Lease Agreement: The BTS lease defines the regards to tenancy once the developer finishes building. Sometimes, the lease itself will define the construction arrangements straight or through an accompanying work letter.

The Roles of BTS Participants

A construct to match lease is a significant undertaking for the landlord and occupant. Clearly, they will be handling each other over an extended duration. Therefore, the BTS arrangement must carefully consider each participant's responsibilities:

Landlord: The landlord needs to assess the tenant's credit reliability. Also, it should understand the needs of the renter as a guide to style and building and construction. Frequently, the landlord needs a warranty and cash security from the occupant. The property owner must specify whether it or the tenant will lead the building job. Furthermore, the proprietor will desire a long-enough lease term so that it can recover its investment.
Tenant: The occupant establishes the RFP. It must examine whether the proprietor has the technical know-how and funds to provide on time. The examination will include the landlord's previous BTS real estate experience, reputation, and structure. The tenant needs to decide whether it desires to direct the construction of the structure or leave it to the property manager. It may likewise require assurances and/or a letter of credit to assure the funding of the building element.

Both celebrations will want to offer input relating to the selection of designers, engineers, and professionals.

BTS Request for Proposal

The tenant creates the ask for proposal and distributes it to several designers. Typically, the RFP will attend to:

- The uses of the residential or commercial property
- The space needed
- A calendar timeline for building and construction and tenancy
- The rent range that the occupant will accept
- Design specifications and information

Usually, the occupant distributes the RFP to several residential or commercial property owners/developers. It ends up being more complex if the renter wants a specific website for the building. Because case, the landowner may be the sole recipient of the RFP. Naturally, the landowner has more impact if the occupant desires to construct on the owner's land.

What is Build-to-Suit Financing?

A. Negotiating the Deal

Once the renter chooses the winning RFP respondent, severe settlements can start. Normally, the process involves submissions from the proprietor's designers that define the design strategies.

In return, the renter's space planners and experts examine the plan and work out modifications. A natural stress is unavoidable. On the one hand, the tenant desires an area perfectly fit to its needs. On the other hand, the property owner needs to balance the occupant's needs with the availability of project financing. The proprietor needs to likewise consider how quickly it can re-let the residential or commercial property once the preliminary lease ends.

Eventually, the develop to suit lease contract emerges from the negotiation process. It defines as much detail as possible about the building construction, the responsibilities of each party, and the lease terms. For example, the agreement may need the property owner to construct a building shell that the tenant completes.

Alternatively, the landlord might need to fit out a turn-key residential or commercial property in move-in condition. If the property manager delivers just a shell, the arrangement ought to specify how the two teams user interface at the turnover time. The renter can prevent this concern by concurring to utilize the property owner's developer for the ending up stage.

B. Timetable and Deliverables

Obviously, the develop to suit agreement need to specify a task timetable and turn-over duration. Specifically, the arrangement will mention the delivery information and move-in date.

The expiration of the occupant's existing lease might create the need for a set move-in date. For that factor, the parties must work backwards from the required move-in date to set the schedule and milestones. Typical turning points consist of protecting the financing, beginning, putting concrete for the structure and putting up the structural steel.

Potential Delays

Delays can be very expensive. The tenant might book the right to abandon the deal if delays exceed a set date. For example, the property manager might discover it hard to fund the task, delaying its start. Other sources of delays consist of procuring licenses, zone variations, and evaluations.

Perhaps an unexpected catastrophe will make it difficult to obtain building materials when required. Or a labor action by the building team may shut down the job. Moreover, ecological groups may file lawsuits that halt building and construction.

Indeed, the opportunities for delay are enormous, and the BTS arrangement must attend to remedies upfront. The agreement might define penalties that will significantly stimulate on the designer. The renter may find new ways to inspire the property manager.

C. Rent

The develop to fit lease contract will define the occupant's basic rental rate. The fundamental rate depend upon the land worth, the cost of building, and the landlord's needed rate of return.

Sometimes the arrangement will enable adjustments to the rate if construction expenses surpass expectations. The occupant might ask for modification orders that contribute to the expense of construction and increase the final rent. If the renter plays hardball on any rent increases, the job budget and scope need to be incredibly detailed.

The contract must specify the modification order process and the property manager's right to approve. The proprietor might resist any modifications that add building and construction expenses without a matching lease increase.

Alternatively, the agreement might define that the tenant pays for any approved change orders. The contract needs to also relieve the landlord of charges due to delays coming from change orders.

D. Other Lease Considerations

Certain other issues need consideration when negotiating a BTS lease:

Commencement Date vs Construction Date: The property manager may desire the BTS lease to specify a commencement date for the tenant to start paying rent. However, the tenant may firmly insist on delaying any rent payments till building is complete.
Right to Purchase: Some renters may desire the choice to buy the residential or commercial property during the lease period. At the least, the tenant may want the right of very first deal to a proposed sale. Moreover, the tenant may request the right to match any purchase quote. The landlord may concur to these tenant rights as long as it doesn't reduce the best asking price.
Space Migration: Sometimes, the BTS residential or commercial property belongs to a commercial park. The tenant might be worried about expanding the amount of space it inhabits later. Therefore, the arrangement might consist of an option for a brand-new construction phase. Alternatively, if the occupant has excessive space, the lease should deal with subletting the residential or commercial property.
Warranties: The agreement needs to resolve the warrantied expense of construction flaws and deficiencies. The lease should specify the warranty responsibilities for faulty style, building and construction or products.
What is Build-to-Suit Financing?

Build to Suit Lease Accounting

The Financial Account Standards Board (FASB) recently provided new accounting standards for leases (Topic 842). The brand-new standards cover BTS leases, which often use sale-and-leaseback accounting.

If the renter (lessee) manages the asset throughout the building stage before lease commencement, it is the possession owner. Upon completion of construction, the renter offers 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 hold true:

- The lessee can buy the residential or commercial property during construction.
- The lessor (property manager) deserves to gather payment for work performed and has no other usage for the residential or commercial property.
- Lessee owns either the land and residential or commercial property enhancements, or the non-real-estate properties under construction.
- The lessee controls the land and does not lease it to the lessor or another celebration before construction begins.
- A lessee leases the land for a duration that reflects the substantial financial life of the residential or commercial property improvement. The lessee does not sublease the land before construction starts and before enjoying the residential or commercial property's financial life.

Under these situations, the lessee is the asset's considered owner throughout construction. Therefore, it must represent construction-in-progress utilizing ASC 360 - Residential Or Commercial Property, Plant and Equipment. The rule requires the lessee to assume duty for the construction costs via a considered loan from the lessor. When construction ends, the lessee follows the sale and leaseback accounting rules.

On the other hand, if the lessee is not the considered owner of the possession throughout building, it does not apply sale and leaseback treatment. Instead, it treats payments it makes to utilize the asset as lease payments.

For in-depth info about develop to suit lease accounting, look for assistance from your accounting and legal advisors.

Benefits and drawbacks of BTS Real Estate

The pros of construct to match leasing typically outweigh the cons.

Pros of BTS Real Estate

Capital: The occupant need not allocate the capital necessary to build the residential or commercial property itself. The property owner gets to put its capital to work in return for long-term lease earnings.
Location: The occupant can pick its place rather than selecting from available stock. It can select a location in a high-growth area with simple access. The property manager exploits the land it owns without any threat that a new residential or commercial property will sit uninhabited.
Efficiency: The occupant defines the building size so that it's ideal for its requirements. Furthermore, it can require high energy effectiveness through contemporary equipment and innovation. The property owner can use its participation with a green task to burnish its track record.
Branding: The occupant may take advantage of a building that shows its character and image. The renter can pick the architectural design, finishes and colors to magnify its image.
Risk: The renter may be able to ignore the lease if the building and construction falls substantially behind. The property manager take advantage of a locked-in long-lasting lease as soon as building and construction is complete.
Taxes: The renter's lease payments are completely deductible over the life of the lease.
Cons of BTS Real Estate

Commitment: The occupant sustains a long-term commitment that is not simple to exit before the term expires. Typical lease durations run ten years or longer.
Financing: Typically, the lessee needs to show it is sufficiently creditworthy to handle a long-term lease dedication.
Cost: It's less expensive for the renter to find and lease vacant area. Many companies can not afford to spend for develop to match real estate.
Time: It takes longer to build a building than to rent area from an existing one.
How Assets America ® Can Help

Assets America ® can organize funding for your BTS task starting at $10 million, with no ceiling. We welcome you to call us for more details for our complete monetary services.

We can assist make your BTS job possible through our network of private investors and banks. For the very best in BTS funding, Assets America ® is the clever option.

What is a ground lease vs. construct to suit?

In a ground lease, the renter rents the hidden land rather than the residential or commercial property. In a construct to suit lease contract, the property manager owns the land and the renter leases the building built on the land.

What does develop to match property suggest?

Often, develop to fit refers to business residential or commercial properties. However, it is possible to enter into a develop to fit contract for a multifamily house. Then, the renter subleases the systems to subtenants.

What is a reverse develop to fit?

A reverse construct to fit is when the renter manages the construction of the residential or commercial property. Reverse BTS is useful when the renter has special expertise in building the kind of residential or commercial property involved. Typically, the landlord finances the reverse BTS offer.

Is a build-to-suit lease agreement right for me?

It may make good sense for proprietors who have vacant land they desire to establish. The BTS arrangement decreases the danger of establishing the land because the lease is locked-in. Tenants protect capital through a BTS lease contract.

Recent BTS News

If you're interested in news short articles about current BTS advancements, you can check out about this $75 million build-to-suit investment or this build to fit fulfillment center for Amazon. Additionally, you can inspect out this build-to-suit industrial structure in Janesville or these workplace occupants demanding build to suit leases.