Build To Suit Lease
What is a Build to Suit Lease?
There are many options for business owners looking to rent or buy a building that can be used for their operations. An existing commercial property could be leased or bought. You can also build your own. You can also choose a lease arrangement called a build-to suit.
When businesses are looking for a freestanding property that can be built to their specifications, but don't have the capital to do so themselves, a build-to-suit leasing arrangement is an option. This overview will explain what build-to suit leases are and how they compare to other options.
What is a Build-to-Suit Lease?
A build-to-suit leasing agreement is a form of commercial realty leasing agreement in which the landlord or developer agrees to construct the property to the lessee's specifications and the lessee agrees that he/she will lease the property to the developer after it is completed.
The developer funds the entire cost of a commercial property built-to-suit. Instead of building the property with the intention of selling it, as many commercial developers do. Instead, the property was constructed to generate income. After the construction of the building is complete, the developer becomes the landlord. He receives a steady stream rent payments. See more at What Is Build To Suit Site.
What is a built-to suit lease?
Tenants usually commit to renting a build-to-suit property for a set period of time (often between 10 and 20 years). They often have the option to extend their lease beyond the initial term. Many build-to-suit properties can be rented out as a freestanding property. This means that there is only one tenant. triple net leases are common in build-to-suit leasing. The tenant is responsible property taxes and building insurance for the term of the lease.
The process begins with the tenant choosing a location for their property. This is usually done in collaboration with a developer. Developers often have a selection of land available for tenants who want to build-to-suit. Or, the business owner may be able to find a piece of land.
Next, the business owner will negotiate terms with the commercial realty developer, including the length of the lease and how much rent it will cost. The developer will usually determine the rent by applying a percentage return to the project's costs. These costs include costs for land, utilities, site improvements, grading, etc., as well as costs associated with the actual building. It is important that the tenant knows these costs because they will affect the rent.
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Let's take, for example, the cost of a building to be built by a developer at $2 million. Current market conditions are expected to yield 7%. This would mean that rent would be $140,000 per annum or $11,667 per monthly. You should note that the rent could be higher or lower due to other factors than market conditions.
If a tenant has a high or low credit score, their rent may be substantially lower or higher than the average market rate. It is not unusual for tenants to receive a lower rent in return for a longer lease term.
After the landlord-tenant relationship has been clearly established and agreed upon, the developer will prepare building plans, get permits and begin construction. The lessee typically waits until the construction is completed before they start paying lease payments.
Benefits of a build to suit lease
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A build-to-suit leasing arrangement could be advantageous for tenants. A build-to-suit leasing arrangement results in a unique and new property that doesn't require any capital investment from the tenant. A build-to-suit leasing arrangement has a unique tax advantage over real-estate ownership.
Customization
This is the greatest advantage to a build-to suit lease arrangement. For businesses with specific real estate requirements, a build-to-suit property can be a strong advantage. Tenant can request that the developer build the property they desire in the exact dimensions and layout that will allow them to run their business efficiently.
It's capital-lighting for the tenant
A build-to-suit leasing can make it more affordable for businesses that need a property built to their specifications. You can also develop customized properties without owning it long-term. This is called a sales-leaseback transaction. This involves developing the property and selling it to a landlord once construction is complete. However, this requires more upfront capital than a make-to-suit lease. This allows the tenant to have more money for its business instead of being held in real estate.
Tax benefits
A business can deduct 100% of lease payments as business expenses. However, the only part of a mortgage payment that a property owner makes is deductible. While there are many tax benefits to being a property owner, such as deduction, this often works in the lessee's favor.
A brand new facility
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A build-to-suit lease is, by definition, a new property. This can be a better option for businesses than a building that's been around for a long time. You can choose the colors and materials that you prefer, you can pick the location for your business rather than relying on existing inventory. The property will also have the most modern equipment, such as the HVAC system, in good condition.
This last point is especially important, as most build-to-suit leases require tenants to pay maintenance costs. A brand-new business can have fewer maintenance problems and more certainty when it comes to repairs.
What is the bottom line for build-to-suit leasing?
Business owners may prefer a build-to-suit leasing arrangement. It allows for a new, custom-designed facility and requires very little upfront capital. This gives the business more money to invest in its success.
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