Build to Suit (BTS) is an option for companies that want 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 suit is a plan in which a landlord constructs a building for a sole tenant. The resulting free-standing building meets the particular requirements of the renter.

Typically, organizations of all sizes organize BTS real estate contracts to effectively obtain and manage customized facilities. In fact, many industrial buildings and retail residential or commercial properties are BTS, although any kind of business genuine estate is possible.

How Do Build to Suit Leases Work?

A construct to fit lease is a long-term commitment in between a proprietor and an occupant.

How To Start a BTS Real Estate Project

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

- A potential renter can seek out a property owner to build a structure according to the occupant's specs. Thereafter, the occupant enters into a long-term lease with the landlord.
- A landowner might advertise land that it will build out to support a BTS lease. An interested business can get in touch with the landowner to arrange a build to suit lease agreement.
- In a reverse BTS, the potential tenant constructs the building. Typically, the landlord funds the job, however the tenant runs the task. Then, the renter takes occupancy of the structure as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes good sense when the renter has particular building and construction knowledge 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 construct to suit contract permits the property manager to re-let the residential or commercial property to a different renter.

Components of a Build to Suit Lease Arrangement

Essentially, a BTS plan consists of 2 parts:

Development Agreement: The developer agrees to construct or get and redevelop a structure on behalf of the occupant. The contract arises from the tenant releasing an ask for proposal (RFP) to one or more designers. The development agreement defines the relationship in between the landlord and the renter. That is, the arrangement specifies the design of the residential or commercial property, who will develop it and who will finance it. Typically, the renter will take sole tenancy of the residential or commercial property, however sometimes other tenants will share the structure. The building and construction element is the chief and most complex issue in a BTS agreement.
Lease Agreement: The BTS lease specifies the terms of tenancy once the designer completes building. Sometimes, the lease itself will specify the building arrangements straight or through an accompanying work letter.

The Roles of BTS Participants

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

Landlord: The property owner should evaluate the renter's credit reliability. Also, it should comprehend the requirements of the occupant as a guide to style and building and construction. Frequently, the property manager needs an assurance and cash security from the occupant. The proprietor needs to define whether it or the renter will lead the building job. Furthermore, the landlord will desire a long-enough lease term so that it can recoup its investment.
Tenant: The tenant establishes the RFP. It needs to assess whether the property owner has the technical proficiency and monetary resources to provide on time. The assessment will include the property owner's previous BTS property experience, credibility, and structure. The occupant needs to decide whether it wishes to direct the construction of the structure or leave it to the landlord. It may also need warranties and/or a letter of credit to assure the financing of the building and construction component.

Both celebrations will want to offer input regarding the choice of designers, engineers, and professionals.

BTS Ask For Proposal

The tenant creates the demand for proposal and disperses it to several developers. Typically, the RFP will deal with:

- The uses of the residential or commercial property
- The space needed
- A calendar timeline for building and construction and occupancy
- The lease variety that the renter will accept
- Design parameters and information

Usually, the occupant disperses the RFP to multiple residential or commercial property owners/developers. It becomes more complex if the renter desires a particular site for the building. In that case, the landowner might be the sole recipient of the RFP. Naturally, the landowner has more impact if the occupant desires to build on the owner's land.

What is Build-to-Suit Financing?

A. Negotiating the Deal

Once the occupant chooses the winning RFP respondent, serious settlements can begin. Normally, the procedure includes submissions from the property owner's designers that specify the style plans.

In return, the renter's area coordinators and experts review the strategy and negotiate modifications. A natural stress is inevitable. On the one hand, the occupant desires a space completely matched to its needs. On the other hand, the proprietor requires to balance the tenant's requirements with the accessibility of project funding. The landlord should likewise consider how quickly it can re-let the residential or commercial property once the initial lease expires.

Eventually, the construct to fit lease agreement emerges from the settlement procedure. It specifies as much detail as possible about the structure construction, the duties of each party, and the lease terms. For instance, the arrangement might need the property manager to build a structure shell that the occupant completes.

Alternatively, the landlord might have to fit out a turn-key residential or commercial property in move-in condition. If the landlord delivers just a shell, the agreement needs to define how the two teams user interface at the turnover time. The occupant can avoid this problem by agreeing to utilize the property manager's designer for the completing stage.

B. Timetable and Deliverables

Naturally, the develop to fit agreement need to define a task timetable and turn-over duration. Specifically, the agreement will mention the shipment information and move-in date.

The expiration of the renter's existing lease might produce the requirement for a set move-in date. For that factor, the celebrations need to work backward from the required move-in date to set the schedule and milestones. Typical turning points consist of securing the financing, breaking ground, pouring concrete for the foundation and putting up the structural steel.

Potential Delays

Delays can be extremely expensive. The tenant might reserve the right to abandon the deal if delays exceed a set date. For example, the property owner might find it tough to finance the task, postponing its start. Other sources of hold-ups include obtaining permits, zone differences, and evaluations.

Perhaps an unanticipated catastrophe will make it difficult to acquire building materials when required. Or a labor action by the building crew may shut down the task. Moreover, ecological groups might submit suits that halt building.

Indeed, the opportunities for delay are enormous, and the BTS agreement ought to deal with remedies in advance. The arrangement may specify penalties that will greatly stimulate on the developer. The occupant might find brand-new methods to motivate the proprietor.

C. Rent

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

Sometimes the contract will enable modifications to the rate if construction expenses surpass expectations. The occupant might ask for change orders that include to the expense of building and construction and increase the final lease. If the renter plays hardball on any rent increases, the project spending plan and scope must be very detailed.

The arrangement needs to specify the modification order procedure and the property manager's right to approve. The property owner might resist any changes that include construction expenses without a matching lease increase.

Alternatively, the arrangement may define that the occupant spends for any accepted modification orders. The arrangement must also alleviate the landlord of penalties due to hold-ups originating from change orders.

D. Other Lease Considerations

Certain other issues need factor to consider when working out a BTS lease:

Commencement Date vs Construction Date: The landlord might desire the BTS lease to define a commencement date for the occupant to begin paying rent. However, the tenant might firmly insist on delaying any lease payments until building is total.
Right to Purchase: Some renters might desire the alternative to purchase the residential or commercial property during the lease duration. At the least, the occupant might desire the right of very first offer to a proposed sale. Moreover, the tenant may ask for the right to match any purchase quote. The property owner might consent to these renter rights as long as it does not minimize the best selling rate.
Space Migration: In many cases, the BTS residential or commercial property belongs to a business park. The occupant may be concerned about expanding the quantity of space it inhabits later on. Therefore, the agreement may include a choice for a new construction stage. Alternatively, if the occupant has too much area, the lease must attend to subletting the residential or commercial property.
Warranties: The agreement must attend to the warrantied expense of building flaws and shortages. The lease needs to specify the guarantee responsibilities for defective style, construction or materials.
What is Build-to-Suit Financing?

Build to Suit Lease Accounting

The Financial Account Standards Board (FASB) just recently provided brand-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 property throughout the building phase before lease beginning, it is the asset owner. Upon conclusion of building and construction, the renter sells the residential or commercial property to the proprietor and rents it back. The lessee owns the residential or commercial property if any of the following hold true:

- The lessee has the right to buy the residential or commercial property throughout building.
- The lessor (property owner) deserves to collect payment for work carried out 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 possessions under construction.
- The lessee controls the land and does not lease it to the lessor or another party before building and construction starts.
- A lessee leases the land for a period that reflects the significant economic life of the residential or commercial property enhancement. The lessee does not sublease the land before building and construction starts and before gaining the residential or commercial property's economic life.

Under these scenarios, the lessee is the asset's considered owner during construction. Therefore, it needs to represent construction-in-progress using ASC 360 - Residential Or Commercial Property, Plant and Equipment. The guideline requires the lessee to presume obligation for the building costs through a deemed loan from the lessor. When building ends, the lessee follows the sale and leaseback accounting guidelines.

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

For comprehensive information about build to match lease accounting, look for guidance from your accounting and legal consultants.

Benefits and drawbacks of BTS Real Estate

The pros of develop to suit leasing frequently outweigh the cons.

Pros of BTS Real Estate

Capital: The occupant need not designate the capital essential to build the residential or commercial property itself. The landlord gets to put its capital to operate in return for long-lasting lease income.
Location: The occupant can pick its location instead of picking from available stock. It can pick a location in a high-growth location with simple gain access to. The property manager makes use of the land it owns with no risk that a brand-new residential or commercial property will sit uninhabited.
Efficiency: The renter specifies the structure size so that it's ideal for its requirements. Furthermore, it can require high energy efficiency through modern equipment and innovation. The landlord can use its participation with a green job to burnish its credibility.
Branding: The occupant might take advantage of a structure that shows its character and image. The occupant can pick the architectural style, surfaces and colors to magnify its image.
Risk: The tenant may be able to leave the lease if the building 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 occupant's lease payments are completely deductible over the life of the lease.
Cons of BTS Real Estate

Commitment: The tenant incurs a long-term commitment that is challenging to exit before the term ends. Typical lease periods run 10 years or longer.
Financing: Typically, the lessee needs to demonstrate it is sufficiently creditworthy to deal with a long-term lease commitment.
Cost: It's less expensive for the occupant to find and rent vacant area. Many companies can not afford to pay for develop to suit real estate.
Time: It takes longer to construct a building than to lease space from an existing one.
How Assets America ® Can Help

Assets America ® can organize funding for your BTS project starting at $10 million, without any upper limit. We invite you to call us for more details for our complete monetary services.

We can assist make your BTS task possible through our network of private investors and banks. For the finest in BTS funding, Assets America ® is the wise option.

What is a ground lease vs. construct to suit?

In a ground lease, the occupant rents the underlying land instead of the residential or commercial property. In a develop to suit lease contract, the property owner owns the land and the occupant rents the building constructed on the land.

What does build to suit property suggest?

Usually, develop to suit describes industrial residential or commercial properties. However, it is possible to get in into a develop to match arrangement for a multifamily home. Then, the renter subleases the systems to subtenants.

What is a reverse build to suit?

A reverse construct to suit is when the renter oversees the building and construction of the residential or commercial property. Reverse BTS is beneficial when the tenant has special knowledge in constructing the type of residential or commercial property included. Typically, the proprietor finances the reverse BTS deal.

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

It might make good sense for proprietors who have uninhabited land they desire to establish. The BTS contract reduces the risk of establishing the land since the lease is locked-in. Tenants protect capital through a BTS lease arrangement.

Recent BTS News

If you have an interest in news short articles about recent BTS advancements, you can check out about this $75 million build-to-suit financial investment or this develop to fit fulfillment center for Amazon. Additionally, you can have a look at this build-to-suit commercial building in Janesville or these office renters requiring construct to suit leases.