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Build to Suit (BTS) is a service for companies that wish to occupy 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 )
Advantages and disadvantages
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 property owner constructs a structure for a sole occupant. The resulting free-standing building meets the particular requirements of the occupant.

Typically, companies of all sizes arrange BTS real estate contracts to efficiently obtain and manage customized centers. In fact, lots of industrial structures and retail residential or commercial properties are BTS, although any kind of commercial realty is possible.

How Do Build to Suit Leases Work?

A develop to suit lease is a long-lasting commitment between a proprietor and a renter.

How To Start a BTS Real Estate Project

The BTS process can start in a couple of methods. For instance, these consist of:

- A potential tenant can look for a property manager to build a building according to the renter's specs. Thereafter, the renter participates in a long-lasting lease with the property manager.
A landowner might promote land that it will develop out to support a BTS lease. An interested company can contact the landowner to organize a build to suit lease arrangement.
In a reverse BTS, the prospective tenant constructs the building. Typically, the property owner funds the job, however the occupant runs the job. Then, the tenant takes occupancy of the structure as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes good sense when the occupant has specific building and construction proficiency in the type of center it desires.

Typically, the property owner owns the land or has a ground lease on it. Upon lease expiration, the develop to match arrangement enables the property owner to re-let the residential or commercial property to a various renter.

Components of a Build to Suit Lease Arrangement

Essentially, a BTS arrangement includes 2 parts:

Development Agreement: The developer concurs to build or acquire and redevelop a building on behalf of the renter. The arrangement arises from the tenant providing an ask for proposition (RFP) to several developers. The advancement contract defines the relationship between the property owner and the occupant. That is, the arrangement defines the design of the residential or commercial property, who will construct it and who will fund it. Typically, the occupant will take sole tenancy of the residential or commercial property, however often other occupants will share the building. The building component is the chief and most intricate concern in a BTS contract. Lease Agreement: The BTS lease specifies the regards to occupancy once the developer completes construction. Sometimes, the lease itself will specify the building and construction arrangements straight or through an accompanying work letter.

The Roles of BTS Participants

A develop to suit lease is a major endeavor for the property owner and occupant. Clearly, they will be handling each other over an extended period. Therefore, the BTS plan must thoroughly think about each participant's duties:

Landlord: The proprietor should evaluate the occupant's credit reliability. Also, it needs to understand the needs of the tenant as a guide to style and construction. Frequently, the property manager requires a guarantee and money security from the renter. The landlord must define whether it or the tenant will lead the building project. Furthermore, the proprietor will want a long-enough lease term so that it can recover its investment. Tenant: The renter establishes the RFP. It should evaluate whether the proprietor has the technical proficiency and funds to deliver on time. The assessment will consist of the property owner's previous BTS realty experience, reputation, and structure. The tenant should decide whether it wishes to direct the building and construction of the structure or leave it to the landlord. It might also require guarantees and/or a letter of credit to assure the financing of the construction part.

Both parties will want to offer input regarding the selection of designers, engineers, and specialists.

BTS Request for Proposal

The occupant develops the request for proposal and disperses it to several developers. Typically, the RFP will address:

- Usings the residential or commercial property
The space needed
A calendar timeline for building and construction and occupancy
The lease range that the renter will accept
Design criteria and details

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

What is Build-to-Suit Financing?

A. Negotiating the Deal

Once the renter picks the winning RFP participant, severe settlements can begin. Normally, the process includes submissions from the landlord's architects that specify the style plans.

In return, the occupant's space coordinators and specialists examine the plan and work out modifications. A natural stress is inescapable. On the one hand, the renter desires an area perfectly matched to its requirements. On the other hand, the property manager needs to balance the renter's requirements with the accessibility of task funding. The must also think about how quickly it can re-let the residential or commercial property once the initial lease ends.

Eventually, the construct to suit lease arrangement emerges from the settlement process. It defines as much information as possible about the building construction, the duties of each celebration, and the lease terms. For example, the contract may need the landlord to construct a building shell that the tenant finishes.

Alternatively, the property owner might need to fit out a turn-key residential or commercial property in move-in condition. If the property manager provides just a shell, the contract needs to specify how the two groups user interface at the turnover time. The tenant can prevent this problem by accepting utilize the property manager's developer for the completing phase.

B. Timetable and Deliverables

Naturally, the develop to fit contract need to define a task timetable and turn-over period. Specifically, the contract will mention the delivery information and move-in date.

The expiration of the occupant's existing lease might develop the requirement for a set move-in date. Because of that, the parties should work backwards from the needed move-in date to set the schedule and turning points. Typical milestones include protecting the financing, beginning, putting concrete for the foundation and erecting the structural steel.

Potential Delays

Delays can be extremely costly. The tenant may reserve the right to abandon the offer if delays surpass a set date. For instance, the landlord might find it difficult to fund the project, delaying its start. Other sources of delays include procuring authorizations, zone differences, and inspections.

Perhaps an unforeseen catastrophe will make it difficult to acquire building products when required. Or a labor action by the building team might shut down the job. Moreover, ecological groups may file claims that halt construction.

Indeed, the opportunities for delay are immense, and the BTS arrangement should resolve treatments upfront. The agreement might specify charges that will greatly spur on the developer. The tenant might discover brand-new ways to inspire the proprietor.

C. Rent

The develop to suit lease arrangement will specify the tenant's fundamental rental rate. The basic rate hinges on the land worth, the expense of construction, and the property manager's needed rate of return.

Sometimes the arrangement will allow adjustments to the rate if construction expenses go beyond expectations. The tenant may ask for modification orders that include to the expense of building and construction and increase the last rent. If the renter plays hardball on any rent increases, the job budget plan and scope should be incredibly detailed.

The arrangement needs to specify the change order procedure and the landlord's right to approve. The property manager might withstand any modifications that add construction expenses without a corresponding rent boost.

Alternatively, the agreement might specify that the renter pays for any accepted modification orders. The arrangement must likewise ease the landlord of penalties due to hold-ups stemming from modification orders.

D. Other Lease Considerations

Certain other problems require consideration when working out a BTS lease:

Commencement Date vs Construction Date: The landlord might desire the BTS lease to specify a start date for the occupant to begin paying lease. However, the tenant might demand delaying any lease payments up until building is total. Right to Purchase: Some renters may want the option to acquire the residential or commercial property throughout the lease period. At the least, the tenant may desire the right of very first offer to a proposed sale. Moreover, the renter might request the right to match any purchase quote. The property owner may consent to these renter rights as long as it does not reduce the very best selling cost. Space Migration: In many cases, the BTS residential or commercial property belongs to a business park. The occupant might be worried about broadening the amount of area it occupies later on. Therefore, the contract may consist of a choice for a new construction stage. Alternatively, if the occupant has excessive space, the lease must deal with subletting the residential or commercial property. Warranties: The arrangement ought to resolve the warrantied cost of building flaws and deficiencies. The lease must specify the warranty responsibilities for faulty design, construction or products. What is Build-to-Suit Financing?

Build to Suit Lease Accounting

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

If the occupant (lessee) manages the property throughout the building and construction phase before lease beginning, it is the asset owner. Upon conclusion of building, the tenant sells the residential or commercial property to the property owner and rents it back. The lessee owns the residential or commercial property if any of the following are real:

- The lessee has the right to buy the residential or commercial property during building and construction.
The lessor (property manager) has the right 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 improvements, or the non-real-estate assets under building and construction.
The lessee controls the land and doesn't lease it to the lessor or another party before construction begins.
A lessee leases the land for a duration that reflects the significant financial life of the residential or commercial property enhancement. The lessee does not sublease the land before building begins and before gaining the residential or commercial property's financial life.

Under these scenarios, the lessee is the possession's deemed owner throughout construction. Therefore, it needs to represent 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 and construction ends, the lessee follows the sale and leaseback accounting guidelines.

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

For comprehensive details about construct to suit lease accounting, seek assistance from your accounting and legal advisors.

Advantages and disadvantages of BTS Real Estate

The pros of build to suit leasing often exceed the cons.

Pros of BTS Real Estate

Capital: The occupant need not allocate the capital required to build the residential or commercial property itself. The proprietor gets to put its capital to work in return for long-lasting lease income. Location: The tenant can choose its area instead of choosing from offered stock. It can select a location in a high-growth location with simple access. The landlord makes use of the land it owns without any risk that a new residential or commercial property will sit vacant. Efficiency: The renter defines the building size so that it's perfect for its requirements. Furthermore, it can demand high energy efficiency through modern-day devices and technology. The property owner can use its involvement with a green project to burnish its track record. Branding: The renter may gain from a structure that shows its personality and image. The occupant can pick the architectural design, finishes and colors to magnify its image. Risk: The occupant might be able to ignore the lease if the construction falls significantly behind. The landlord take advantage of a locked-in long-term lease when construction is total. Taxes: The occupant's lease payments are fully deductible over the life of the lease. Cons of BTS Real Estate

Commitment: The occupant incurs a long-lasting commitment that is difficult to leave before the term ends. Typical lease periods run 10 years or longer. Financing: Typically, the lessee needs to show it is sufficiently creditworthy to manage a long-lasting lease commitment. Cost: It's less expensive for the occupant to find and lease uninhabited space. Many companies can not pay for to spend for construct to match property. Time: It takes longer to construct a building than to rent area from an existing one. How Assets America ® Can Help

Assets America ® can arrange financing for your BTS project starting at $10 million, with no upper limitation. We invite you to call us to find out more for our complete monetary services.

We can help make your BTS project possible through our network of personal investors and banks. For the very best in BTS funding, Assets America ® is the wise choice.

What is a ground lease vs. build to fit?

In a ground lease, the occupant leases the hidden land instead of the residential or commercial property. In a construct to fit lease arrangement, the landlord owns the land and the occupant leases the structure built on the land.

What does construct to suit domestic suggest?

Usually, build to match refers to industrial residential or commercial properties. However, it is possible to participate in a build to fit contract for a multifamily house. Then, the occupant subleases the units to subtenants.

What is a reverse build to fit?

A reverse develop to fit is when the tenant manages the building of the residential or commercial property. Reverse BTS is useful when the renter has special expertise in building the type of residential or commercial property involved. Typically, the property manager funds the reverse BTS deal.

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

It might make good sense for property managers who have vacant land they wish to develop. The BTS arrangement reduces the danger of establishing the land because the lease is locked-in. Tenants protect capital through a BTS lease contract.
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Recent BTS News

If you have an interest in news posts about recent BTS advancements, you can read about this $75 million build-to-suit investment or this construct to fit satisfaction center for Amazon. Additionally, you can inspect out this build-to-suit industrial structure in Janesville or these office tenants requiring construct to fit leases.