Build to Suit Properties
Are you facing difficulty in finding a suitable business space in your market? Is your business space market so tight that only a few small spaces are available? Or do you have special office needs, which no other building in the market can meet now? If so, consider build to suit properties.
What is a Build-to-Suit Lease?
A build-to-suit lease is a long term lease agreement whereby the landlord (the owner) constructs a free-standing building to meet the needs of a particular client (business or company), who then becomes the sole occupant of the property. It enables a company to acquire and have control over a custom made facility for meeting its specific needs. The best aspect is that it can be used by all kinds of business, ranging from the smallest to the larger corporations. With a build to suit, a company or tenant designs and builds a building in partnership with a real estate developer. The facility is then leased from the developer to a qualified tenant and ultimately remains the property of the developer.
Major Advantages of Build-to-Suit Lease
If your current space no longer addresses the needs of your growing or evolving company, a build to suit lease is the best alternative, as it always is designed, keeping your business operation needs in mind. A building constructed under a build to suit lease can boost up a company’s brand image by reflecting its aesthetic and ethos. Enhanced spaces can also give you the added benefit of attracting quality employees and winning the faith of the customers. As the rent it fully deductible over a period of lease, it will allow a company to reduce its after tax costs. All these benefits can make a build to suit lease a highly productive option for businesses looking forward to relocate and maximize efficiency.
Who is the Seller & Buyer of Build to Suit?
Generally speaking, build to suit is owned usually by real estate developers, asset management companies, real estate management companies, REIT (real estate investment trust) or the other party. They key to successful build to suit is to work effectively with developers. It means getting properly involved in the building specifications early on and throughout the planning process, on the condition that the facility’s complexity or use warrants such attention. Working well with the real estate developer is essential, because the developer may sell the building to a REIT or other party, shortly after occupancy, but the lessee or tenant for whom it was built may have to be there for many long years.
Important Steps for Creating Successful Build-to-Suit Facility
For those intending to do a build-to-suit exchange, planning ahead is essential. Factors such as costs of the structure for build- to-suit project, credit rating of the tenant, lease terms, location and space requirements and the consultation with an expert real estate advisor are all crucial for the success of a build-to-suit project. Here we discuss some factors, which help you make lucrative investments ahead:
Cost of Build to Suit Project- Before building the structure of a build-to-suit, the user (company) must analyze the pre-tax, after-tax and the likely profit and loss impact on the project. Determining the real costs involved in build to suit is necessary for successful completion of this real estate project.
Credit Rating of the Tenant-As the landlord, you need to look into the credit of tenant (company), income, credit history, etc. Obviously, the stronger the credit rating of the tenant, the more favorable rental income a company can obtain due to the lesser risk assumed by the investor as well as lender.
Lease Terms-The third most crucial thing is to look into lease terms carefully. Deciding the length of the lease very important. Remember, the longer the lease term, it is more favorable for the developer, as he/she can achieve more favorable financing, thus leading to a reduction in rental rate. It allows the lender to amortize the loan over a longer time period. The longer lease term also reduces the real estate and property-related risk of the transaction with special focus on the credit risk of the tenant.
Location & Construction -This means determining location and costs of the construction. From foundation to brick laying to finishing of the building, it involves all fees. However, the cost of the project depends on the credit of tenant and underlying property. The developer assumes the risk of releasing property, but it is minimized if the property is well-located and is not built as single-use asset.
Space Requirements- Most build-to-suits require the tenant to occupy a minimum of sixty percent or more of the property. A higher occupancy percentage minimizes the risk of leasing the vacant space to additional tenants and thereby allows more favorable financing for the use in the expansion and growth of the business. However, in many real estate markets with limited vacancy, a small percentage of unoccupied space also enables the developer to maximize his/her income by charging higher rent on vacant portions. As a user, you need to determine how much space you will require.
Real Estate Advisor- Finally, hire an experienced property advisor, who will help you with staffing and determine location and manpower needs. The real estate advisor will advise the corporation on all possible land and building sites available, market conditions, comparable rental rates, pros and cons of build-to-suit project, and the financial impact of a build-to-suit compared to other alternatives. Your advisor would also be able to calculate after-tax, profit & loss of property.
Conclusion
Build-to-suits are the best option for companies in today’s complex commercial real estate environment. Many executives requiring space for their companies find this option more advantageous compared to traditional approaches of meeting space needs. Build-to-suits make more sense, when a company needs a long-term commitment to a property, can handle the initial costs. It is viable when the firm is seeking to maximize its business efficiency and possible expansion potential.
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