Build to Suit (BTS) is a solution for organizations that wish to occupy purpose-built residential or commercial property without owning it. In this short article, we cover:
remax.com
- What is a Build-to-Suit Lease?

• How Do BTS Leases Work?
• New Build to Suit Accounting Rules (2016 )
• Pros and Cons
• How to Arrange Financing
• Frequently Asked Questions
• Recent News & Related Articles
  
  What Does Build to Suit Mean?
  
  Build to fit is an arrangement in which a landlord constructs a building for a sole tenant. The resulting free-standing building satisfies the specific requirements of the renter.
  
  Typically, services of all sizes arrange BTS property arrangements to efficiently get and manage customized centers. In fact, many industrial buildings and retail residential or commercial properties are BTS, although any type of industrial genuine estate is possible.
  
  How Do Build to Suit Leases Work?
  
  A build to match lease is a long-lasting commitment between a property owner and an occupant.
  
  How To Start a BTS Real Estate Project
  
  The BTS process can begin in a few ways. For instance, these include:
  
  - A potential occupant can look for a landlord to build a structure according to the tenant's specs. Thereafter, the occupant participates in a long-lasting lease with the property manager.
• A landowner might advertise land that it will construct out to support a BTS lease. An interested company can contact the landowner to arrange a construct to match lease arrangement.
• In a reverse BTS, the prospective renter constructs the building. Typically, the proprietor funds the project, but the renter runs the job. Then, the tenant takes occupancy of the structure as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes sense when the occupant has particular construction knowledge in the kind of facility it desires.
  
  Typically, the landlord owns the land or has a ground lease on it. Upon lease expiration, the build to fit contract allows the property owner to re-let the residential or commercial property to a different tenant.
  
  Components of a Build to Suit Lease Arrangement
  
  Essentially, a BTS plan consists of 2 parts:
  
  Development Agreement: The developer accepts build or obtain and redevelop a building on behalf of the tenant. The arrangement results from the occupant providing an ask for proposition (RFP) to several developers. The advancement agreement specifies the relationship in between the property manager and the renter. That is, the contract defines the style of the residential or commercial property, who will develop it and who will finance it. Typically, the occupant will take sole tenancy of the residential or commercial property, however often other renters will share the structure. The construction part is the chief and most intricate issue in a BTS contract. Lease Agreement: The BTS lease specifies the regards to tenancy once the developer finishes building and construction. Sometimes, the lease itself will define the building and construction arrangements directly or through an accompanying work letter.
  
  The Roles of BTS Participants
  
  A build to match lease is a significant undertaking for the landlord and tenant. Clearly, they will be handling each other over an extended period. Therefore, the BTS arrangement need to carefully consider each individual's obligations:
  
  Landlord: The property owner must evaluate the occupant's credit reliability. Also, it should understand the needs of the renter as a guide to style and building. Frequently, the property owner requires a warranty and cash security from the renter. The property owner needs to define whether it or the occupant will lead the building project. Furthermore, the landlord will want a long-enough lease term so that it can recoup its financial investment. Tenant: The tenant establishes the RFP. It should assess whether the proprietor has the technical competence and monetary resources to provide on time. The evaluation will include the property owner's previous BTS realty experience, track record, and structure. The tenant must decide whether it desires to direct the building and construction of the structure or leave it to the landlord. It might likewise need warranties and/or a letter of credit to ensure the funding of the building and construction element.
  
  Both celebrations will want to provide input relating to the choice of designers, engineers, and specialists.
  
  BTS Ask For Proposal
  
  The tenant produces the request for proposition and distributes it to one or more developers. Typically, the RFP will attend to:
  
  - Usings the residential or commercial property
• The space required
• A calendar timeline for construction and occupancy
• The lease variety that the renter will accept
• Design specifications and details
  
  Usually, the occupant distributes the RFP to several residential or commercial property owners/developers. It becomes more complex if the renter wants a specific site for the building. Because case, the landowner may be the sole recipient of the RFP. Naturally, the landowner has more influence if the tenant wants to develop on the owner's land.
  
  What is Build-to-Suit Financing?
  
  A. Negotiating the Deal
  
  Once the occupant chooses the winning RFP respondent, severe settlements can start. Normally, the process includes submissions from the property owner's designers that specify the design strategies.
  
  In return, the tenant's space coordinators and experts evaluate the plan and negotiate modifications. A natural stress is inevitable. On the one hand, the renter wants an area perfectly suited to its needs. On the other hand, the landlord needs to stabilize the tenant's requirements with the schedule of project financing. The property manager needs to also think about how quickly it can re-let the residential or commercial property once the preliminary lease expires.
  
  Eventually, the construct to suit lease agreement emerges from the settlement procedure. It specifies as much detail as possible about the building construction, the tasks of each celebration, and the lease terms. For instance, the arrangement might need the property manager to construct a building shell that the occupant completes.
  
  Alternatively, the property owner may need to fit out a turn-key residential or commercial property in move-in condition. If the property owner delivers just a shell, the contract should specify how the 2 teams user interface at the turnover time. The occupant can avoid this problem by accepting utilize the property owner's developer for the ending up phase.
  
  B. Timetable and Deliverables
  
  Obviously, the develop to match arrangement need to specify a job timetable and turn-over period. Specifically, the agreement will state the shipment details and move-in date.
  
  The expiration of the occupant's existing lease might develop the requirement for a set move-in date. For that factor, the celebrations must work backward from the needed move-in date to set the schedule and turning points. Typical turning points include securing the financing, breaking ground, pouring concrete for the structure and setting up the structural steel.
  
  Potential Delays
  
  Delays can be really pricey. The renter may schedule the right to abandon the offer if hold-ups exceed a set date. For example, the landlord may find it challenging to finance the project, delaying its start. Other sources of delays include acquiring permits, zone variations, and evaluations.
  
  Perhaps an unanticipated catastrophe will make it difficult to acquire structure products when required. Or a labor action by the construction crew might close down the project. Moreover, ecological groups may file suits that stop building.
  
  Indeed, the opportunities for delay are enormous, and the BTS arrangement must address solutions in advance. The agreement may define penalties that will considerably stimulate on the developer. The occupant might discover new methods to encourage the property owner.
  
  C. Rent
  
  The construct to suit lease arrangement will specify the occupant's fundamental rental rate. The fundamental rate depend upon the land value, the cost of building and construction, and the property owner's needed rate of return.
  
  Sometimes the agreement will allow adjustments to the rate if construction costs exceed expectations. The occupant might ask for modification orders that contribute to the expense of building and increase the final lease. If the occupant plays hardball on any rent increases, the job budget plan and scope should be extremely detailed.
  
  The arrangement should define the modification order process and the landlord's right to approve. The landlord might resist any changes that include construction expenses without a matching lease increase.
  
  Alternatively, the agreement may specify that the tenant pays for any accepted modification orders. The agreement needs to also alleviate the landlord of charges due to hold-ups stemming from modification orders.
  
  D. Other Lease Considerations
  
  Certain other concerns need factor to consider when negotiating a BTS lease:
  
  Commencement Date vs Construction Date: The proprietor might desire the BTS lease to define a start date for the tenant to start paying lease. However, the renter may demand postponing any lease payments up until building and construction is complete. Right to Purchase: Some occupants may want the alternative to acquire the residential or commercial property throughout the lease period. At the least, the occupant may want the right of first deal to a proposed sale. Moreover, the occupant may request the right to match any purchase bid. The landlord may accept these renter rights as long as it doesn't reduce the very best asking price. Space Migration: Sometimes, the BTS residential or commercial property becomes part of a commercial park. The tenant may be worried about broadening the quantity of space it inhabits later on. Therefore, the contract may include a choice for a brand-new building stage. Alternatively, if the occupant has excessive space, the lease must attend to subletting the residential or commercial property. Warranties: The arrangement must attend to the warrantied expense of building defects and shortages. The lease ought to specify the guarantee obligations for defective design, building or products. What is Build-to-Suit Financing?
  
  Build to Suit Lease Accounting
  
  The Financial Account Standards Board (FASB) just recently provided new accounting requirements for leases (Topic 842). The new standards cover BTS leases, which often use sale-and-leaseback accounting.
  
  If the renter (lessee) manages the possession throughout the building stage before lease start, it is the property owner. Upon conclusion of building and construction, the occupant sells the residential or commercial property to the proprietor and rents it back. The lessee owns the residential or commercial property if any of the following hold true:
  
  - The lessee has the right to purchase the residential or commercial property during construction.
• The lessor (property manager) deserves to collect payment for work carried out and has no other use for the residential or commercial property.
• Lessee owns either the land and residential or commercial property improvements, or the non-real-estate properties under construction.
• The lessee controls the land and doesn't lease it to the lessor or another celebration before construction begins.
• A lessee rents the land for a duration that shows the significant financial life of the residential or commercial property improvement. The lessee does not sublease the land before construction starts and before enjoying the residential or commercial property's economic life.
  
  Under these situations, the lessee is the possession's deemed owner during building. Therefore, it must account for construction-in-progress using ASC 360 - Residential Or Commercial Property, Plant and Equipment. The guideline needs the lessee to assume duty for the building and construction costs through a deemed loan from the lessor. When building and construction ends, the lessee follows the sale and leaseback accounting guidelines.
  
  On the other hand, if the lessee is not the considered owner of the property during construction, it does not use sale and leaseback treatment. Instead, it deals with payments it makes to use the possession as lease payments.
  
  For in-depth details about build to match lease accounting, seek guidance from your accounting and legal advisors.
  
  Benefits and drawbacks of BTS Real Estate
  
  The pros of construct to match leasing typically exceed the cons.
  
  Pros of BTS Real Estate
  
  Capital: The tenant need not designate the capital necessary to construct the residential or commercial property itself. The landlord gets to put its capital to operate in return for long-lasting lease income. Location: The renter can choose its place instead of selecting from readily available stock. It can choose an area in a high-growth location with easy gain access to. The proprietor makes use of the land it owns without any danger that a brand-new residential or commercial property will sit vacant. Efficiency: The renter defines the building size so that it's ideal for its requirements. Furthermore, it can require high energy performance through modern-day equipment and innovation. The property manager can use its involvement with a green project to burnish its reputation. Branding: The occupant might benefit from a building that reflects its personality and image. The occupant can choose the architectural design, finishes and colors to magnify its image. Risk: The renter may be able to leave the lease if the building falls considerably behind. The landlord advantages from a locked-in long-lasting lease once building and construction is complete. Taxes: The tenant's lease payments are fully deductible over the life of the lease. Cons of BTS Real Estate
  
  Commitment: The occupant sustains a long-term commitment that is difficult to leave before the term expires. Typical lease durations run ten years or longer. Financing: Typically, the lessee requires to show it is adequately creditworthy to handle a long-term lease commitment. Cost: It's cheaper for the tenant to find and lease vacant space. Many can not manage to pay for develop to suit realty. Time: It takes longer to build a structure than to rent space from an existing one. How Assets America ® Can Help
  
  Assets America ® can set up financing for your BTS job starting at $10 million, without any upper limit. We invite you to contact us for more details for our complete financial services.
  
  We can help make your BTS project possible through our network of personal investors and banks. For the finest in BTS funding, Assets America ® is the clever choice.
  
  What is a ground lease vs. develop to match?
  
  In a ground lease, the renter leases the underlying land rather than the residential or commercial property. In a construct to suit lease arrangement, the proprietor owns the land and the occupant rents the structure constructed on the land.
  
  What does construct to match domestic indicate?
  
  Generally, construct to suit describes commercial residential or commercial properties. However, it is possible to get in into a build to suit contract for a multifamily house. Then, the renter subleases the systems to subtenants.
  
  What is a reverse build to suit?
  
  A reverse construct to fit is when the tenant oversees the construction of the residential or commercial property. Reverse BTS is helpful when the occupant has unique know-how in constructing the kind of residential or commercial property involved. Typically, the landlord finances the reverse BTS deal.
  
  Is a build-to-suit lease contract right for me?
  
  It may make sense for proprietors who have vacant land they wish to develop. The BTS arrangement minimizes the danger of establishing the land since the lease is locked-in. Tenants preserve capital through a BTS lease agreement.
  
  Recent BTS News
  
  If you have an interest in news posts about current BTS developments, you can check out about this $75 million build-to-suit investment or this develop to match fulfillment center for Amazon. Additionally, you can have a look at this build-to-suit industrial building in Janesville or these workplace occupants demanding develop to fit leases.