Build to Suit (BTS) is a solution for companies that wish to occupy 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 )
- Pros and Cons
- How to Arrange Financing
- Frequently Asked Questions
- Recent News & Related Articles

What Does Build to Suit Mean?

Build to match is a plan 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, organizations of all sizes arrange BTS real estate contracts to efficiently get and control custom facilities. In reality, numerous industrial buildings and retail residential or commercial properties are BTS, although any kind of commercial real estate is possible.

How Do Build to Suit Leases Work?

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

How To Start a BTS Real Estate Project

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

- A potential tenant can seek out a landlord to build a building according to the renter's specifications. Thereafter, the renter participates in a long-term lease with the property owner.
- A landowner might advertise land that it will develop out to support a BTS lease. An interested company can contact the landowner to arrange a develop to suit lease contract.
- In a reverse BTS, the potential tenant constructs the building. Typically, the property owner finances the job, however the renter runs the job. Then, the renter takes occupancy of the structure as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes sense when the occupant has specific building 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 construct to suit arrangement enables the proprietor 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 parts:

Development Agreement: The designer accepts construct or acquire and redevelop a building on behalf of the tenant. The contract arises from the renter releasing a request for proposal (RFP) to one or more designers. The advancement agreement specifies the relationship in between the landlord and the occupant. That is, the agreement specifies the design of the residential or commercial property, who will develop it and who will finance it. Typically, the tenant will take sole tenancy of the residential or commercial property, however in some cases other tenants will share the structure. The construction component is the chief and most complex issue in a BTS contract.
Lease Agreement: The BTS lease specifies the terms of tenancy once the developer completes building. Sometimes, the lease itself will define the building and construction 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 period. Therefore, the BTS arrangement must carefully think about each participant's duties:

Landlord: The property manager needs to examine the occupant's credit reliability. Also, it needs to comprehend the requirements of the occupant as a guide to design and building and construction. Frequently, the property owner requires a warranty and money security from the occupant. The proprietor should define whether it or the occupant will lead the building and construction project. Furthermore, the landlord will desire a long-enough lease term so that it can recoup its financial investment.
Tenant: The tenant develops the RFP. It should evaluate whether the property manager has the technical expertise and funds to deliver on time. The assessment will consist of the property owner's previous BTS property experience, reputation, and structure. The renter needs to choose whether it wishes to direct the construction of the structure or leave it to the property manager. It may likewise need guarantees and/or a letter of credit to guarantee the funding of the building part.

Both parties will wish to offer input regarding the selection of designers, engineers, and professionals.

BTS Ask For Proposal

The renter develops the ask for proposal and distributes it to one or more developers. Typically, the RFP will attend to:

- The uses of the residential or commercial property
- The space required
- A calendar timeline for construction and tenancy
- The rent variety that the renter will accept
- Design criteria and information

Usually, the renter distributes the RFP to multiple residential or commercial property owners/developers. It becomes more complex if the tenant desires a particular website 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 desires to build on the owner's land.

What is Build-to-Suit Financing?

A. Negotiating the Deal

Once the tenant selects the winning RFP participant, serious settlements can begin. Normally, the procedure involves submissions from the landlord's designers that specify the design plans.

In return, the renter's area coordinators and specialists evaluate the strategy and negotiate changes. A natural stress is inescapable. On the one hand, the occupant desires an area completely matched to its needs. On the other hand, the proprietor needs to stabilize the renter's needs with the accessibility of task financing. The proprietor must likewise consider how quickly it can re-let the residential or commercial property once the initial lease ends.

Eventually, the develop to fit lease arrangement emerges from the negotiation process. It specifies as much information as possible about the structure construction, the responsibilities of each celebration, and the lease terms. For instance, the contract might need the property owner to build a structure shell that the occupant completes.

Alternatively, the property manager might need to fit out a turn-key residential or commercial property in move-in condition. If the property owner delivers only a shell, the agreement ought to specify how the two groups interface at the turnover time. The renter can prevent this problem by accepting use the property owner's designer for the finishing stage.

B. Timetable and Deliverables

Of course, the develop to fit agreement must specify a job timetable and turn-over period. Specifically, the arrangement will mention the shipment information and move-in date.

The expiration of the renter's existing lease might create the need 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 milestones. Typical turning points consist of protecting the funding, breaking ground, putting concrete for the structure and erecting the structural steel.

Potential Delays

Delays can be very costly. The renter may reserve the right to abandon the deal if delays surpass a set date. For instance, the proprietor may find it difficult to fund the task, postponing its start. Other sources of hold-ups include procuring permits, zone differences, and inspections.

Perhaps an unanticipated disaster will make it impossible to acquire building products when required. Or a labor action by the building crew might shut down the project. Moreover, environmental groups may submit lawsuits that stop construction.

Indeed, the opportunities for hold-up are tremendous, and the BTS contract should attend to remedies upfront. The contract may specify penalties that will considerably spur on the developer. The renter may find brand-new ways to motivate the landlord.

C. Rent

The construct to match lease agreement will define the tenant's fundamental rental rate. The basic rate hinges on the land value, the cost of construction, and the landlord's needed rate of return.

Sometimes the contract will allow adjustments to the rate if building expenses go beyond expectations. The renter might ask for modification orders that add to the expense of building and construction and increase the last lease. If the renter plays hardball on any rent increases, the task budget and scope ought to be exceptionally detailed.

The agreement ought to specify the modification order process and the property owner's right to approve. The proprietor may withstand any modifications that include construction costs without a corresponding lease increase.

Alternatively, the agreement may define that the renter pays for any approved change orders. The agreement must also eliminate the proprietor of penalties due to delays originating from change orders.

D. Other Lease Considerations

Certain other issues need consideration when negotiating a BTS lease:

Commencement Date vs Construction Date: The landlord might want the BTS lease to specify a beginning date for the occupant to start paying lease. However, the occupant might demand delaying any lease payments till construction is complete.
Right to Purchase: Some occupants may desire the alternative to buy the residential or commercial property during the lease period. At the least, the renter may want the right of first offer to a proposed sale. Moreover, the occupant might request the right to match any purchase bid. The proprietor might agree to these tenant rights as long as it does not minimize the very best asking price.
Space Migration: In many cases, the BTS residential or commercial property belongs to a commercial park. The tenant might be worried about broadening the quantity of area it inhabits later. Therefore, the arrangement may include an alternative for a brand-new building stage. Alternatively, if the occupant has excessive space, the lease must attend to subletting the residential or commercial property.
Warranties: The contract must deal with the warrantied expense of construction problems and deficiencies. The lease needs to specify the guarantee obligations for malfunctioning design, building and construction or products.
What is Build-to-Suit Financing?

Build to Suit Lease Accounting

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

If the tenant (lessee) manages the asset throughout the construction stage before lease beginning, it is the property owner. Upon conclusion of building and construction, the renter offers the residential or commercial property to the property manager 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 purchase the residential or commercial property during construction.
- The lessor (proprietor) can collect 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 and construction.
- The lessee controls the land and doesn't rent it to the lessor or another celebration before building starts.
- A lessee rents the land for a period that reflects 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 financial life.

Under these scenarios, the lessee is the possession's considered owner during building. Therefore, it should account for construction-in-progress using ASC 360 - Residential Or Commercial Property, Plant and Equipment. The rule requires the lessee to assume duty for the building and construction costs by means of a deemed 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 asset throughout building, it does not use sale and leaseback treatment. Instead, it treats payments it makes to use the property as lease payments.

For comprehensive info about develop to match lease accounting, seek guidance from your accounting and legal advisors.

Advantages and disadvantages of BTS Real Estate

The pros of construct to fit leasing frequently exceed the cons.

Pros of BTS Real Estate

Capital: The occupant need not designate the capital needed to construct the residential or commercial property itself. The property owner gets to put its capital to operate in return for long-lasting lease income.
Location: The renter can choose its area rather than picking from available stock. It can choose a location in a high-growth area with easy gain access to. The property owner exploits the land it owns without any risk that a new residential or commercial property will sit vacant.
Efficiency: The tenant specifies the structure size so that it's best for its requirements. Furthermore, it can demand high energy effectiveness through modern-day devices and technology. The landlord can use its participation with a green project to burnish its reputation.
Branding: The tenant may take advantage of a building that shows its personality and image. The renter can pick the architectural design, finishes and colors to magnify its image.
Risk: The occupant might be able to leave the lease if the building and construction falls substantially behind. The property manager gain from a locked-in long-term lease once building is total.
Taxes: The renter's lease payments are fully deductible over the life of the lease.
Cons of BTS Real Estate

Commitment: The tenant incurs a long-term dedication that is hard to leave before the term ends. Typical lease periods run 10 years or longer.
Financing: Typically, the lessee requires to demonstrate it is adequately creditworthy to manage a long-lasting lease dedication.
Cost: It's more affordable for the occupant to discover and lease vacant space. Many business can not pay for to spend for build to suit realty.
Time: It takes longer to construct a building than to lease area from an existing one.
How Assets America ® Can Help

Assets America ® can arrange financing for your BTS job starting at $10 million, with no upper limit. We invite you to call us for more info for our total monetary services.

We can assist make your BTS project possible through our network of personal financiers and banks. For the finest in BTS financing, Assets America ® is the wise choice.

What is a ground lease vs. develop to fit?

In a ground lease, the tenant rents the underlying land instead of the residential or commercial property. In a develop to suit lease arrangement, the property manager owns the land and the tenant rents the structure built on the land.

What does construct to match property suggest?

Generally, develop to suit refers to commercial residential or commercial properties. However, it is possible to get in into a develop to suit agreement for a multifamily house. Then, the tenant subleases the systems to subtenants.

What is a reverse build to match?

A reverse construct to fit is when the tenant supervises the building and construction of the residential or commercial property. Reverse BTS is helpful when the tenant has special knowledge in building the type of residential or commercial property involved. Typically, the proprietor finances the reverse BTS offer.

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

It might make sense for property owners who have vacant land they wish to develop. The BTS agreement reduces the risk of developing 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 recent BTS advancements, you can check out this $75 million build-to-suit financial investment or this develop to match fulfillment center for Amazon. Additionally, you can examine out this build-to-suit industrial building in Janesville or these workplace renters requiring develop to match leases.