Build to Suit (BTS) is a service for organizations that wish to inhabit purpose-built residential or commercial property without owning it. In this post, 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 fit is a plan in which a landlord constructs a structure for a sole renter. The resulting free-standing structure satisfies the specific requirements of the occupant.

Typically, companies of all sizes set up BTS genuine estate contracts to efficiently acquire and manage customized facilities. In truth, numerous industrial structures and retail residential or commercial properties are BTS, although any kind of commercial genuine estate is possible.

How Do Build to Suit Leases Work?

A construct to suit lease is a long-lasting commitment between a property manager and a tenant.

How To Start a BTS Real Estate Project

The BTS procedure can begin in a couple of ways. For instance, these include:

- A potential tenant can look for a landlord to construct a building according to the renter's specs. Thereafter, the tenant gets in into a long-lasting lease with the proprietor.
- A landowner may advertise land that it will build out to support a BTS lease. An interested business can call the landowner to organize a develop to match lease agreement.
- In a reverse BTS, the potential renter constructs the structure. Typically, the proprietor funds the task, however the renter runs the job. Then, the tenant takes tenancy of the building as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes good sense when the occupant has particular building competence in the kind of center it desires.

Typically, the property owner owns the land or has a ground lease on it. Upon lease expiration, the build to fit arrangement permits the property owner to re-let the residential or commercial property to a different renter.

Components of a Build to Suit Lease Arrangement

Essentially, a BTS arrangement consists of 2 parts:

Development Agreement: The developer accepts build or obtain and redevelop a structure on behalf of the tenant. The arrangement arises from the renter releasing a request for proposition (RFP) to one or more developers. The advancement agreement specifies the relationship in between the landlord and the renter. That is, the arrangement defines the style of the residential or commercial property, who will construct it and who will fund it. Typically, the tenant will take sole tenancy of the residential or commercial property, but in some cases other tenants will share the structure. The building component is the chief and most complex issue in a BTS arrangement.
Lease Agreement: The BTS lease defines the terms of tenancy once the designer finishes construction. Sometimes, the lease itself will define the building and construction provisions straight or through an accompanying work letter.

The Roles of BTS Participants

A develop to match lease is a major undertaking for the landlord and renter. Clearly, they will be handling each other over a prolonged period. Therefore, the BTS arrangement must thoroughly think about each participant's obligations:

Landlord: The property manager should evaluate the occupant's credit reliability. Also, it must comprehend the needs of the tenant as a guide to design and building. Frequently, the proprietor needs a guarantee and money security from the tenant. The proprietor must define whether it or the renter will lead the building task. Furthermore, the landlord will desire a long-enough lease term so that it can recover its financial investment.
Tenant: The occupant develops the RFP. It needs to assess whether the property owner has the technical know-how and funds to deliver on time. The evaluation will consist of the property owner's previous BTS genuine estate experience, reputation, and structure. The occupant should decide whether it wishes to direct the building and construction of the structure or leave it to the proprietor. It might also need warranties and/or a letter of credit to guarantee the funding of the construction element.

Both parties will desire to provide input relating to the selection of designers, engineers, and professionals.

BTS Ask For Proposal

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

- Making uses of the residential or commercial property
- The area needed
- A calendar timeline for construction and occupancy
- The lease variety that the occupant will accept
- Design criteria and details

Usually, the occupant distributes the RFP to multiple residential or commercial property owners/developers. It becomes more complex if the renter wants a particular site for the structure. In that case, the landowner may be the sole recipient of the RFP. Naturally, the landowner has more influence if the occupant wants to develop on the owner's land.

What is Build-to-Suit Financing?

A. Negotiating the Deal

Once the occupant picks the winning RFP respondent, major negotiations can start. Normally, the procedure involves submissions from the landlord's architects that specify the style strategies.

In return, the occupant's space coordinators and experts evaluate the strategy and negotiate changes. A natural tension is inescapable. On the one hand, the renter desires an area completely suited to its needs. On the other hand, the landlord needs to balance the occupant's requirements with the accessibility of project financing. The proprietor needs to also think about 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 information as possible about the building construction, the tasks of each party, and the lease terms. For instance, the contract might need the property owner to build a structure shell that the occupant finishes.

Alternatively, the proprietor may need to fit out a turn-key residential or commercial property in move-in condition. If the property manager provides only a shell, the arrangement ought to define how the 2 teams interface at the turnover time. The tenant can avoid this concern by agreeing to utilize the property owner's designer for the ending up phase.

B. Timetable and Deliverables

Obviously, the build to suit contract should specify a job schedule and turn-over period. Specifically, the agreement will specify the shipment details and move-in date.

The expiration of the renter's existing lease might create the requirement for a set move-in date. Because of that, the celebrations should work backwards from the needed move-in date to set the timetable and turning points. Typical milestones consist of protecting the financing, beginning, putting concrete for the foundation and putting up the structural steel.

Potential Delays

Delays can be extremely costly. The occupant may schedule the right to abandon the offer if delays go beyond a set date. For instance, the property owner may find it tough to finance the task, delaying its start. Other sources of delays include procuring licenses, zone variations, and evaluations.

Perhaps an unexpected catastrophe will make it impossible to acquire building products when required. Or a labor action by the building and construction crew might shut down the job. Moreover, environmental groups might submit lawsuits that halt building and construction.

Indeed, the opportunities for delay are immense, and the BTS contract should attend to remedies upfront. The arrangement may specify penalties that will considerably spur on the designer. The tenant might find brand-new methods to motivate the property owner.

C. Rent

The construct to suit lease arrangement will define the tenant's standard rental rate. The basic rate depend upon the land value, the expense of construction, and the proprietor's needed rate of return.

Sometimes the contract will allow changes to the rate if construction expenses exceed expectations. The occupant might ask for modification orders that contribute to the cost of building and construction and increase the last lease. If the renter plays hardball on any rent increases, the project spending plan and scope must be very detailed.

The arrangement needs to define the modification order procedure and the landlord's right to approve. The property owner may resist any modifications that add building and construction costs without a corresponding rent increase.

Alternatively, the agreement may specify that the tenant pays for any approved modification orders. The agreement must also alleviate the proprietor of penalties due to delays originating from modification orders.

D. Other Lease Considerations

Certain other problems require factor to consider when working out a BTS lease:

Commencement Date vs Construction Date: The property manager might want the BTS lease to specify a start date for the renter to start paying rent. However, the renter may demand postponing any lease payments up until building is complete.
Right to Purchase: Some occupants may want the choice to purchase the residential or commercial property throughout the lease duration. At the least, the tenant may want the right of first deal to a proposed sale. Moreover, the renter might ask for the right to match any purchase bid. The property manager might accept these occupant rights as long as it does not minimize the finest market price.
Space Migration: Sometimes, the BTS residential or commercial property becomes part of an industrial park. The renter may be worried about expanding the amount of space it occupies later on. Therefore, the contract may include an option for a brand-new building phase. Alternatively, if the occupant has excessive space, the lease ought to attend to subletting the residential or commercial property.
Warranties: The agreement should address the warrantied expense of construction flaws and deficiencies. The lease must define the guarantee responsibilities for defective design, building or materials.
What is Build-to-Suit Financing?

Build to Suit Lease Accounting

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

If the renter (lessee) controls the property during the building and construction stage before lease start, it is the asset owner. Upon conclusion of construction, the occupant offers the residential or commercial property to the property manager and rents it back. The lessee owns the residential or commercial property if any of the following are true:

- The lessee has the right to buy the residential or commercial property during construction.
- The lessor (property manager) deserves to gather payment for work performed and has no other use for the residential or commercial property.
- Lessee owns either the land and residential or commercial property enhancements, or the non-real-estate assets under building.
- The lessee controls the land and doesn't rent it to the lessor or another party before building starts.
- A lessee rents the land for a period that shows the significant economic life of the residential or commercial property improvement. The lessee doesn't sublease the land before building starts and before reaping the residential or commercial property's economic life.

Under these scenarios, the lessee is the possession's considered owner during building. Therefore, it must account for construction-in-progress utilizing ASC 360 - Residential Or Commercial Property, Plant and Equipment. The guideline needs the lessee to assume obligation for the building costs via a considered loan from the lessor. When building ends, the lessee follows the sale and leaseback accounting rules.

On the other hand, if the lessee is not the considered owner of the property during building, it does not apply sale and leaseback treatment. Instead, it deals with payments it makes to use the asset as lease payments.

For detailed information about construct to suit lease accounting, look for assistance from your accounting and legal advisors.

Advantages and disadvantages of BTS Real Estate

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

Pros of BTS Real Estate

Capital: The occupant need not assign the capital required to construct the residential or commercial property itself. The property owner gets to put its capital to work in return for long-lasting lease earnings.
Location: The renter can choose its area rather than selecting from available stock. It can pick a place in a high-growth area with simple gain access to. The property manager makes use of the land it owns without any danger that a new residential or commercial property will sit vacant.
Efficiency: The renter specifies the building size so that it's ideal for its requirements. Furthermore, it can demand high energy effectiveness through modern equipment and innovation. The property owner can use its participation with a green job to burnish its credibility.
Branding: The renter might gain from a structure that reflects its personality and image. The tenant can pick the architectural style, finishes and colors to amplify its image.
Risk: The occupant may be able to stroll away from the lease if the building falls considerably behind. The property owner gain from a locked-in long-lasting lease as soon as building and construction is total.
Taxes: The tenant's lease payments are completely deductible over the life of the lease.
Cons of BTS Real Estate

Commitment: The tenant incurs a long-lasting commitment that is hard to leave before the term ends. Typical lease periods run 10 years or longer.
Financing: Typically, the lessee requires to show it is sufficiently creditworthy to deal with a long-term lease dedication.
Cost: It's more affordable for the tenant to discover and rent vacant space. Many companies can not manage to pay for construct to match property.
Time: It takes longer to construct a structure than to rent area from an existing one.
How Assets America ® Can Help

Assets America ® can organize funding for your BTS job starting at $10 million, without any ceiling. We welcome you to call us for additional information for our complete monetary services.

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

What is a ground lease vs. develop to suit?

In a ground lease, the occupant leases the underlying land rather than the residential or commercial property. In a construct to fit lease agreement, the proprietor owns the land and the renter leases the structure constructed on the land.

What does construct to fit domestic imply?

Often, build to suit describes commercial residential or commercial properties. However, it is possible to participate in a build to match agreement for a multifamily home. Then, the renter subleases the units to subtenants.

What is a reverse construct to fit?

A reverse build to fit is when the occupant supervises the building and construction of the residential or commercial property. Reverse BTS is beneficial when the occupant has special competence in building the kind of residential or commercial property involved. Typically, the landlord funds the reverse BTS offer.

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

It might make good sense for property managers who have uninhabited land they desire to develop. The BTS contract lowers the risk of developing the land since the lease is locked-in. Tenants protect capital through a BTS lease agreement.

Recent BTS News

If you have an interest in news posts about current BTS developments, you can check out about this $75 million build-to-suit investment or this construct to suit fulfillment center for Amazon. Additionally, you can check out this build-to-suit commercial structure in Janesville or these workplace renters demanding construct to match leases.