THE BUILD-TO-SUIT PROCESS A build-to-suit is a facility specifically constructed to meet the location and design requirements of a single user. This option should be considered when appropriate space is unavailable, the market is tight, the company has specialized requirements and/or prefers a long-term commitment.
Formats
The user acquires land, hires a general contractor and finances the project. Ownership can be retained or the property can be sold to an investor and leased back. This is known as a sale-leaseback transaction.
A developer assumes responsibility for planning, construction, ownership risk and potential profit.
A combination of the two includes shared equity and joint venture arrangements.
Cost Factors
Tenant Credit: Stronger credit ratings translate to more favorable rental rates.
Lease Term: Longer term lease generally allows the developer to achieve more favorable financing, translating into a reduction in rental rate. Reducing the lender's and developer's rollover risk allows the lender to amortize the loan over a longer time period.
Location & Construction: Upon lease expiration, the property must be released. Risk is minimized if the property is well located and not constructed as a single-use structure.
Space Requirements: Lenders typically require that a percentage of the structure - fifty to sixty percent - be occupied by the user. Higher occupancy (percentage) reduces leasing risks on the balance of space and leads to more favorable financing.
Lease Structures
There are various ways a lease can be structured to achieve the user's needs.
Full-Service: A full service lease means that the lease rate includes all operating expenses of the building and requires no additional payment from the tenant. A hybrid of this lease requires the tenant to pay their prorata share of any increases in expenses from the time of occupancy.
Triple-Net: A triple-net lease (NNN) means that the rental rate does not include building expenses. All prorata operating expenses and taxes for the property will be paid by the tenant. However, the landlord is responsible for any structural and capital repairs.
Absolute-Net (Bondable): An absolute-net lease is similar to a triple-net lease, but the tenant is responsible for all expenses of the property including capital items. In addition, the rental rate may be affected by changes in the financial condition of the tenant. The tenant assumes certain lease responsibilities and signs certain corporate covenants resulting in the lease being regarded by lenders and investors more as a corporate bond than a real estate loan. The result is a financing cost at or near the corporate bond rate.
Synthetic Lease: This lease is structured as an operating lease for GAAP purposes and a capital lease for tax purposes. The synthetic lease allows the tenant to finance its occupancy cost at a lower rate and still achieve the benefits of off balance sheet financing due to certain reversion risks at the end of the lease term. This somewhat controversial structure can be fairly costly to create and has considerable technicalities, but can greatly reduce the rental costs. It was derived for use in real estate after a proven track record in the equipment leasing area. One potential risk of using the synthetic lease is that it may be subject to a re-evaluation by the Financial Accounting Standards Board at some point in the future.
There are many other creative lease structures including leveraged, joint venture and equity leases.
Project Management
Beck Commercial Properties, Inc., will advise clients on all possible land and building sites available, current market conditions, comparable rental rates and the financial impact of a build-to-suit as contrasted to other alternatives. We will provide financial perspectives - the user's and developer's - to assist in negotiating and financing the project, as well as in planning its potential sale to an investor.
The negotiation and documentation of a build-to-suit transaction will take significant time and planning, being considerably more complex than the negotiation of a typical lease. In a build-to-suit lease transaction, provisions relating to transaction structure, rental pricing, project control, construction issues, performance standards, environmental issues, title, non-disturbance and subordination all play a very major role. Tenant concerns relating to early termination, renewal, expansion and contraction are also frequently found in a build-to-suit lease. Beck Commercial Properties, Inc., will assist in ensuring all these items are addressed to our client's advantage.
Advantages
A build-to-suit can offer several advantages to a relocating tenant. It allows the tenant to achieve maximum space efficiency since the space is designed specifically for the tenant. New construction allows a developer to incorporate the most cost-effective energy systems in the project, reducing operating and occupancy costs. The building will be designed to project the company's image. Lastly, a build-to-suit can provide for future expansion.
Disadvantages
A build-to-suit is not a short term solution. A long-term commitment is necessary to acquire financing. The transactions take time. The entire process may take several years to complete. Build-to-suits are generally considered more expensive than leasing existing (vacant) space. However, the difference may be offset by savings in space efficiency, reduced operating costs and improved company image.