Build to Suit (BTS) is an option for organizations that wish to occupy purpose-built residential or commercial property without owning it. In this article, 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 match is a plan in which a landlord constructs a structure for a sole occupant. The resulting free-standing building fulfills the specific requirements of the occupant.

Typically, companies of all sizes set up BTS real estate contracts to effectively obtain and manage custom centers. In reality, numerous industrial structures and retail residential or commercial properties are BTS, although any type of commercial genuine estate is possible.

How Do Build to Suit Leases Work?

A develop to suit lease is a long-term dedication between a property owner and an occupant.

How To Start a BTS Real Estate Project

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

- A potential tenant can look for a property manager to construct a structure according to the tenant's specs. Thereafter, the tenant gets in into a long-lasting lease with the proprietor.
- A landowner might market 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 prospective tenant constructs the building. Typically, the proprietor funds the job, however the tenant runs the project. 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 renter has particular building 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 construct to fit contract enables 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 arrangement consists of 2 elements:

Development Agreement: The developer consents to construct or obtain and redevelop a structure on behalf of the occupant. The agreement results from the tenant releasing a demand for proposal (RFP) to one or more designers. The advancement contract specifies the relationship in between the property manager and the occupant. That is, the arrangement defines the style 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 sometimes other occupants will share the building. The construction element is the chief and most intricate concern in a BTS contract.
Lease Agreement: The BTS lease defines the regards to tenancy once the designer finishes construction. Sometimes, the lease itself will define the construction provisions directly or through an accompanying work letter.

The Roles of BTS Participants

A develop to fit lease is a significant endeavor for the property owner and tenant. Clearly, they will be dealing with each other over an extended duration. Therefore, the BTS arrangement should carefully consider each participant's obligations:

Landlord: The property owner should evaluate the occupant's creditworthiness. Also, it must comprehend the needs of the renter as a guide to style and building. Frequently, the proprietor requires an assurance and money security from the tenant. The landlord should specify whether it or the occupant will lead the building job. Furthermore, the landlord will want a long-enough lease term so that it can recoup its investment.
Tenant: The tenant establishes the RFP. It needs to examine whether the proprietor has the technical competence and financial resources to deliver on time. The assessment will include the landlord's previous BTS realty experience, track record, and structure. The renter must decide whether it wishes to direct the building and construction of the building or leave it to the property manager. It might also need assurances and/or a letter of credit to guarantee the financing of the construction component.

Both celebrations will wish to supply input concerning the selection of designers, engineers, and contractors.

BTS Ask For Proposal

The tenant produces the demand for proposition and distributes it to several designers. Typically, the RFP will resolve:

- The uses of the residential or commercial property
- The space needed
- A calendar timeline for construction and occupancy
- The rent variety that the occupant will accept
- Design parameters and details

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

What is Build-to-Suit Financing?

A. Negotiating the Deal

Once the renter chooses the winning RFP respondent, major settlements can start. Normally, the procedure involves submissions from the landlord's architects that define the style plans.

In return, the renter's space coordinators and specialists review the strategy and work out modifications. A natural tension is inescapable. On the one hand, the tenant desires a space completely suited to its requirements. On the other hand, the proprietor needs to balance the renter's requirements with the schedule of task funding. The property manager needs to likewise consider how quickly it can re-let the residential or commercial property once the initial lease ends.

Eventually, the build to suit lease arrangement emerges from the settlement process. It specifies as much detail as possible about the building construction, the duties of each party, and the lease terms. For instance, the contract might require the proprietor to build a building shell that the renter completes.

Alternatively, the proprietor might need to fit out a turn-key residential or commercial property in move-in condition. If the property manager provides only a shell, the agreement needs to specify how the two teams user interface at the turnover time. The occupant can prevent this concern by accepting utilize the property manager's designer for the completing stage.

B. Timetable and Deliverables

Obviously, the develop to fit contract need to specify a job schedule and turn-over duration. Specifically, the contract will state the shipment details and move-in date.

The expiration of the tenant's existing lease may develop the requirement for a set move-in date. Because of that, the celebrations need to work backwards from the required move-in date to set the timetable and turning points. Typical turning points consist of protecting the funding, beginning, pouring concrete for the structure and setting up the structural steel.

Potential Delays

Delays can be extremely pricey. The renter might reserve the right to desert the offer if hold-ups go beyond a set date. For instance, the property manager might find it difficult to finance the task, delaying its start. Other sources of hold-ups include procuring permits, zone variations, and assessments.

Perhaps an unforeseen catastrophe will make it impossible to acquire structure materials when required. Or a labor action by the building and construction team may shut down the project. Moreover, environmental groups may file claims that stop construction.

Indeed, the chances for hold-up are enormous, and the BTS arrangement should deal with treatments upfront. The agreement might define charges that will significantly spur on the designer. The renter might discover new methods to encourage the proprietor.

C. Rent

The build to fit lease agreement will define the occupant's standard rental rate. The basic rate hinges on the land value, the cost of building and construction, and the landlord's required rate of return.

Sometimes the arrangement will enable adjustments to the rate if building expenses surpass expectations. The tenant may request change orders that include to the cost of building and increase the final rent. If the renter plays hardball on any lease increases, the task spending plan and scope need to be very detailed.

The arrangement needs to define the modification order procedure and the property manager's right to authorize. The property manager might resist any changes that add building and construction expenses without a corresponding rent boost.

Alternatively, the contract may specify that the tenant spends for any approved change orders. The arrangement should also ease the landlord of charges due to delays stemming 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 proprietor may want the BTS lease to specify a commencement date for the occupant to start paying lease. However, the renter may demand delaying any rent payments till building and construction is complete.
Right to Purchase: Some renters might want the alternative to purchase the residential or commercial property throughout the lease duration. At the least, the occupant might want the right of first deal to a proposed sale. Moreover, the occupant may ask for the right to match any purchase quote. The property owner may accept these occupant rights as long as it doesn't minimize the very best selling price.
Space Migration: In many cases, the BTS residential or commercial property belongs to an industrial park. The tenant may be concerned about broadening the quantity of space it inhabits later. Therefore, the arrangement might include an alternative for a brand-new building phase. Alternatively, if the renter has excessive area, the lease must address subletting the residential or commercial property.
Warranties: The contract should resolve the warrantied expense of construction problems and shortages. The lease should define the guarantee obligations for faulty design, building or products.
What is Build-to-Suit Financing?

Build to Suit Lease Accounting

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

If the occupant (lessee) manages the property throughout the building and construction phase before lease commencement, it is the property owner. Upon completion of construction, the occupant sells 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 deserves to buy the residential or commercial property during construction.
- The lessor (landlord) deserves to 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 improvements, or the non-real-estate assets under construction.
- The lessee controls the land and does not rent it to the lessor or another celebration before building begins.
- A lessee rents the land for a period that reflects the substantial financial life of the residential or commercial property improvement. The lessee doesn't sublease the land before building begins and before reaping the residential or commercial property's economic life.

Under these circumstances, the lessee is the possession's considered owner during construction. Therefore, it needs to account for construction-in-progress using ASC 360 - Residential Or Commercial Property, Plant and Equipment. The rule needs the lessee to presume obligation for the building and construction costs via a deemed 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 possession throughout building and construction, it does not apply sale and leaseback treatment. Instead, it deals with payments it makes to utilize the asset as lease payments.

For in-depth information about build to match lease accounting, look for assistance from your accounting and legal advisors.

Advantages and disadvantages of BTS Real Estate

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

Pros of BTS Real Estate

Capital: The occupant need not assign the capital essential to construct the residential or commercial property itself. The landlord gets to put its capital to operate in return for long-lasting lease income.
Location: The renter can select its area instead of picking from readily available stock. It can choose a location in a high-growth area with easy access. The property owner exploits the land it owns without any threat that a brand-new residential or commercial property will sit vacant.
Efficiency: The renter specifies the structure size so that it's perfect for its requirements. Furthermore, it can demand high energy performance through contemporary equipment and technology. The landlord can use its participation with a green job to burnish its reputation.
Branding: The renter may gain from a building that reflects its character and image. The occupant can pick the architectural style, finishes and colors to magnify its image.
Risk: The occupant may be able to stroll away from the lease if the building and construction falls significantly behind. The proprietor gain from a locked-in long-lasting lease when building is complete.
Taxes: The occupant's lease payments are fully deductible over the life of the lease.
Cons of BTS Real Estate

Commitment: The renter incurs a long-lasting commitment that is not easy to exit before the term expires. Typical lease durations run 10 years or longer.
Financing: Typically, the lessee requires to show it is sufficiently creditworthy to deal with a long-term lease commitment.
Cost: It's more affordable for the occupant to find and lease uninhabited area. Many companies can not pay for to spend for build to fit property.
Time: It takes longer to build a building than to rent area from an existing one.
How Assets America ® Can Help

Assets America ® can set up financing for your BTS job beginning at $10 million, with no ceiling. We invite you to call us for additional information for our total financial services.

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

What is a ground lease vs. construct to match?

In a ground lease, the renter rents the hidden land rather than the residential or commercial property. In a build to match lease arrangement, the property manager owns the land and the tenant rents the building constructed on the land.

What does develop to match property mean?

Generally, develop to match refers to business residential or commercial properties. However, it is possible to enter into a develop to suit arrangement for a multifamily home. Then, the tenant subleases the units to subtenants.

What is a reverse develop to suit?

A reverse develop to fit is when the tenant oversees the construction of the residential or commercial property. Reverse BTS works when the tenant has special proficiency 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 agreement right for me?

It may make sense for landlords who have vacant land they desire to establish. The BTS arrangement lowers the threat of establishing the land because the lease is locked-in. Tenants maintain capital through a BTS lease agreement.

Recent BTS News

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