Build to Suit in Montana | How Does That Work?
Have you ever noticed that almost all Walgreens and standalone Starbucks buildings look the same, no matter where you are? It’s because these buildings are most commonly built for a specific corporate tenant in a delivery method commonly known as build to suit. In Montana, we’re seeing more land offerings with build to suit listed as a feature. But what is build to suit?
Find out how that works with Nick Chaussee of Sterling CRE Advisors.
To oversimplify, BTS means that a commercial tenant makes an agreement with a landowner to construct a new, custom-built facility. Once completed, the tenant will lease the building.
The tenant gets a brand new facility that meets their exact business needs and the landowner has a secure, long term tenant. It’s certainly a more complex process than a simple lease for an existing space. BTS development usually involves the negotiation of a lease and a construction contract simultaneously.
Each build to suit deal is going to be different with varying needs and circumstances. Sometimes, we partner with tenants to shop their deal to commercial developers, while some tenants take the sale leaseback route. In this case, tenants take on the role of developer themselves. They get financing, buy the land and hire a contractor to build the facility. Ultimately, we help them find an investor to buy the land and building to recoup their costs.
Why do some tenants use the BTS option, even if it means waiting longer to move into a new facility? For one, if a company yields more than 10 – 12% on capital deployed inside the business, they are likely to make more money as a BTS tenant than as an owner-occupier. Some companies are more focused on growing the business versus acquiring real estate. And for other companies, a custom built space is a need, not a want. If no other commercial space in the market meets their needs, the company will wait for construction of a BTS space.
And that’s one downside of a BTS project that’s pretty obvious: the tenant has to wait for the construction process. With construction costs rising and a tight labor pool across Montana, it can be pricey to undertake a BTS. Another drawback is that any tenant for a build to suit project must have very strong credit for financing purposes. The tenant must have accurate growth forecasts and be willing to commit to a long term lease.
BTS options aren’t always the right fit, but for some businesses, they make great sense. Biotech firms, corporate retail, and other tenants with specific needs are looking more for BTS options as Montana’s population grows. Thanks for tuning in to How Does That Work.
Like and follow Sterling CRE for more videos like this. Contact Matt Mellott for more info on BTS projects.