Build to Suit (BTS) is a solution for companies that desire to inhabit purpose-built residential or commercial property without owning it. In this short article, 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 match is an arrangement in which a property manager constructs a building for a sole renter. The resulting free-standing building satisfies the particular requirements of the occupant.

Typically, services of all sizes set up BTS property agreements to effectively acquire and manage customized facilities. In truth, numerous industrial buildings and retail residential or commercial properties are BTS, although any type of industrial real estate is possible.

How Do Build to Suit Leases Work?

A develop to match lease is a long-term commitment in between a proprietor and a tenant.

How To Start a BTS Real Estate Project

The BTS procedure can start in a few methods. For example, these include:

- A prospective occupant can look for a property manager to build a structure according to the occupant's specifications. Thereafter, the occupant enters into a long-lasting lease with the landlord.
- A landowner might promote land that it will build out to support a BTS lease. An interested business can get in touch with the landowner to organize a develop to fit lease agreement.
- In a reverse BTS, the potential renter constructs the structure. Typically, the landlord funds the task, but the occupant runs the task. Then, the renter takes occupancy of the building as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes sense when the tenant has particular construction knowledge in the sort 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 allows the property owner 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 developer agrees to construct or acquire and redevelop a building on behalf of the renter. The agreement arises from the occupant issuing an ask for proposal (RFP) to several developers. The development contract specifies the relationship in between the landlord and the renter. That is, the arrangement defines the design of the residential or commercial property, who will construct it and who will finance it. Typically, the tenant will take sole tenancy of the residential or commercial property, but often other tenants will share the building. The construction part is the chief and most complicated problem in a BTS contract.
Lease Agreement: The BTS lease defines the terms of occupancy once the developer finishes building. Sometimes, the lease itself will define the building provisions straight or through an accompanying work letter.

The Roles of BTS Participants

A construct to fit lease is a major undertaking for the proprietor and tenant. Clearly, they will be handling each other over a prolonged duration. Therefore, the BTS plan must thoroughly consider each individual's obligations:

Landlord: The property manager must assess the occupant's creditworthiness. Also, it should understand the needs of the occupant as a guide to style and building and construction. Frequently, the property manager requires a guarantee and money security from the renter. The proprietor should specify whether it or the renter will lead the construction job. Furthermore, the property owner will desire a long-enough lease term so that it can recoup its financial investment.
Tenant: The occupant establishes the RFP. It must evaluate whether the property manager has the technical proficiency and financial resources to deliver on time. The evaluation will include the property manager's previous BTS real estate experience, credibility, and structure. The renter should decide whether it desires to direct the building and construction of the building or leave it to the property owner. It might also need assurances and/or a letter of credit to assure the financing of the building and construction component.

Both celebrations will desire to provide input relating to the choice of designers, engineers, and contractors.

BTS Request for Proposal

The occupant develops the ask for proposition and distributes it to one or more designers. Typically, the RFP will attend to:

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

Usually, the tenant disperses the RFP to numerous residential or commercial property owners/developers. It becomes more complicated if the tenant wants a particular 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 selects the winning RFP participant, major settlements can begin. Normally, the process includes submissions from the proprietor's architects that define the design strategies.

In return, the occupant's area planners and specialists evaluate the plan and work out changes. A natural tension is unavoidable. On the one hand, the occupant desires an area perfectly suited to its requirements. On the other hand, the landlord requires to stabilize the renter's needs with the accessibility of task funding. The landlord should also consider how quickly it can re-let the residential or commercial property once the initial lease ends.

Eventually, the construct to match lease arrangement emerges from the settlement procedure. It specifies as much detail as possible about the building construction, the duties of each party, and the lease terms. For instance, the contract may require the landlord to construct a building 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 landlord provides only a shell, the contract must define how the 2 groups user interface at the turnover time. The occupant can prevent this concern by agreeing to utilize the landlord's developer for the completing stage.

B. Timetable and Deliverables

Naturally, the develop to suit contract need to define a project schedule and turn-over period. Specifically, the agreement will specify the shipment information and move-in date.

The expiration of the occupant's existing lease might produce the need for a set move-in date. For that factor, the celebrations need to work backwards from the required move-in date to set the timetable and milestones. Typical milestones consist of protecting the financing, breaking ground, pouring concrete for the structure and putting up the structural steel.

Potential Delays

Delays can be really pricey. The renter might book the right to abandon the offer if delays go beyond a set date. For instance, the proprietor may find it challenging to finance the job, postponing its start. Other sources of hold-ups include acquiring licenses, zone differences, and inspections.

Perhaps an unexpected catastrophe will make it difficult to obtain structure materials when needed. Or a labor action by the construction team might shut down the job. Moreover, ecological groups might submit lawsuits that stop building.

Indeed, the opportunities for delay are immense, and the BTS agreement need to deal with remedies upfront. The contract might define penalties that will considerably stimulate on the designer. The tenant might discover brand-new ways to motivate the landlord.

C. Rent

The develop to suit lease contract will define the occupant's fundamental rental rate. The basic rate depend upon the land worth, the cost of construction, and the proprietor's required rate of return.

Sometimes the agreement will enable adjustments to the rate if building expenses exceed expectations. The tenant may ask for change orders that contribute to the expense of building and increase the final lease. If the tenant plays hardball on any lease increases, the job budget plan and scope should be very detailed.

The contract needs to define the change order process and the property manager's right to approve. The landlord might resist any changes that add building costs without a matching lease boost.

Alternatively, the agreement might define that the renter spends for any accepted change orders. The arrangement must also alleviate the proprietor of charges due to delays originating from change orders.

D. Other Lease Considerations

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

Commencement Date vs Construction Date: The proprietor might want the BTS lease to define a beginning date for the renter to begin paying lease. However, the tenant may insist on postponing any lease payments until construction is complete.
Right to Purchase: Some occupants may desire the choice to acquire the residential or commercial property during the lease duration. At the least, the tenant may desire the right of first deal to a proposed sale. Moreover, the renter might ask for the right to match any purchase quote. The property manager might agree to these renter rights as long as it doesn't decrease the finest market price.
Space Migration: In some cases, the BTS residential or commercial property becomes part of a commercial park. The occupant may be worried about broadening the quantity of area it occupies later. Therefore, the arrangement may consist of an alternative for a new construction stage. Alternatively, if the tenant has too much area, the lease ought to resolve subletting the residential or commercial property.
Warranties: The arrangement ought to attend to the warrantied cost of building and construction flaws and shortages. The lease needs to define the service warranty commitments for defective style, building and 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 standards for leases (Topic 842). The new requirements cover BTS leases, which sometimes utilize sale-and-leaseback accounting.

If the renter (lessee) manages the property throughout the building stage before lease commencement, it is the property owner. Upon completion of building, the occupant offers the residential or commercial property to the property owner and leases 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 throughout construction.
- The lessor (property owner) deserves to collect payment for work carried out 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 manages the land and doesn't rent it to the lessor or another party before construction starts.
- A lessee leases the land for a duration that shows the considerable economic life of the residential or commercial property enhancement. The lessee does not sublease the land before building and construction starts and before enjoying the residential or commercial property's economic life.

Under these circumstances, the lessee is the possession's deemed owner during 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 obligation for the construction costs through a considered loan from the lessor. When building and construction ends, the lessee follows the sale and leaseback accounting rules.

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

For in-depth info about construct to suit lease accounting, seek guidance from your accounting and legal consultants.

Benefits and drawbacks of BTS Real Estate

The pros of build to match leasing typically exceed the cons.

Pros of BTS Real Estate

Capital: The renter need not allocate the capital necessary to build the residential or commercial property itself. The property manager gets to put its capital to operate in return for long-lasting lease income.
Location: The occupant can pick its area instead of picking from readily available stock. It can pick a place in a high-growth location with simple access. The property owner exploits the land it owns with no threat that a new residential or commercial property will sit uninhabited.
Efficiency: The occupant defines the building size so that it's best for its requirements. Furthermore, it can require high energy effectiveness through modern devices and technology. The property manager can use its participation with a green task to burnish its reputation.
Branding: The renter may gain from a building that reflects its character and image. The occupant can choose the architectural design, finishes and colors to magnify its image.
Risk: The occupant might be able to walk away from the lease if the construction falls considerably behind. The proprietor gain from a locked-in long-lasting lease once 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 tenant sustains a long-lasting dedication that is challenging to exit before the term expires. Typical lease durations run ten years or longer.
Financing: Typically, the lessee requires to demonstrate it is adequately creditworthy to deal with a long-lasting lease dedication.
Cost: It's more affordable for the renter to find and rent uninhabited space. Many companies can not manage to spend for construct to fit genuine estate.
Time: It takes longer to build a structure than to lease space from an existing one.
How Assets America ® Can Help

Assets America ® can organize funding for your BTS job beginning at $10 million, with no upper limit. We invite you to call us for additional information for our complete monetary services.

We can assist make your BTS job possible through our network of personal financiers and banks. For the very best in BTS financing, Assets America ® is the smart choice.

What is a ground lease vs. construct to match?

In a ground lease, the occupant rents the hidden land rather than the residential or commercial property. In a develop to fit lease contract, the property manager owns the land and the occupant rents the building constructed on the land.

What does build to fit property mean?

Often, construct to fit refers to commercial residential or commercial properties. However, it is possible to enter into a develop to suit arrangement for a multifamily house. Then, the renter subleases the units to subtenants.

What is a reverse develop to fit?

A reverse build to match is when the occupant oversees the building and construction of the residential or commercial property. Reverse BTS works when the occupant has unique knowledge in constructing the kind of residential or commercial property included. Typically, the property owner finances the reverse BTS offer.

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

It might make good sense for proprietors who have vacant land they wish to develop. The BTS agreement reduces the risk of establishing the land because the lease is locked-in. Tenants protect capital through a BTS lease agreement.

Recent BTS News

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