Have you ever driven around Missoula, Bozeman or Flathead and seen a “build-to-suit” sign on a piece of land and wondered what it meant? Or why you should care?
By: Nick Chaussee, Sterling CRE Advisor
Well, that depends.
Have you been searching for the right commercial space for your business with no luck? You should care.
Is excess capital to custom-build a new building for your business hard to come by? You should care.
Does your capital make more than 10-12% by working inside of your business? You should care.
Do you have up 15-24 months before you need new space? You should care.
Now that you care, what is a build-to-suit?
A Build to Suit (BTS) is where a commercial property tenant enters into an agreement with a developer or landowner to construct a new, custom-built facility for lease. Once completed, the tenant typically becomes the sole occupant. This type of agreement allows for optimally efficient use of both the land and the building as the future occupant specifies how they want it to be designed to meet their business needs.
When you see a Walgreens, standalone Starbucks, or many single-occupant office or warehouse buildings, those are often done as BTS projects. If companies as big as Starbucks, Amazon and Walgreen’s are doing BTS projects, there’s probably a pretty good reason for it. Read on to find out why.
How does it work?
BTS development is a dynamic process involving the negotiation of a lease and a construction contract simultaneously. Before we take a more in-depth look into some of the advantages and disadvantages of this type of arrangement, lets first create the structure and timeline of how they typically work, as each deal is going to be different with varying needs and circumstances.
BTS developments usually come packaged in two forms:
1) Developer Route: The growing company elects to engage a commercial broker to “shop” their deal to commercial developers. The developer that offers the best deal then takes on the burden of acquisition of the land, construction of the building and management of the property. The Tenant (Company) then leases the property from the developer upon completion, usually for 10 years or more.
2) Sale-Leaseback Route: In this case, the tenant assumes the initial burden of land acquisition, financing liability, and the hiring of the general contractor to plan and construct the building. Upon completion, an investor purchases the building with the single-tenant remaining as the occupant. By doing so, the tenant gets all their acquisition capital back out of the building to re-invest into business as they see fit.
What is a typical Build-to-Suit Timeline?
What are some advantages of Build-to-Suit?
- The developer usually secures the equity and debt for the project, which frees up capital for the tenant to use in the growth of their business.
- The design of the building will be tailored to the exact needs of the tenant with existing needs and future growth options in mind.
- If your company yields better than 10-12% on its capital deployed inside the business, you will likely make more money by being a BTS tenant than as an owner-occupier with capital tied up in a building.
- Rent for the tenant is fully tax-deductible*. *in most cases, consult your attorney and CPA
What are some Disadvantages of Build-to-Suit?
- The overall timeframe of a BTS can reach out as far as 15-24 months, or longer in some cases.
- Tenants may view long-term lease deals as a drawback if adequate growth and contraction options aren’t available.
- New construction is expensive. BTS construction is no exception, you just pay for it in a higher lease rate.
- Creditworthiness is a must for tenants in a BTS arrangement.
- Mandatory that the tenant has accurate forecasts of future and expected growth, assuring that their future needs are met in the design and construction of the new property.
Examples of Build-to-Suit in Missoula
Build-to-Suit development is dynamic undertaking, but one that can solve a wide variety of space problems for a commercial tenant. As soon as your company begins to consider its real estate expansion needs, it is important to consult an experienced commercial real estate broker to identify potential Build-to-Suit options. Engaging an industry professional will allow you to focus on your core business, leaving the often-complex process of development to an experienced project management team.