Although it may hold less risk than other types of commercial development, a single-tenant net lease development is a venture that can still get cloudy at one point or another during the project life cycle.
Here’s a breakdown of the risks to be mindful of during each milestone in the build to suit development before that “Open” sign can be lit up.
Upon determination of needing an additional location, a tenant may elect to go the more customized build to suit route. But before the concrete can be poured, there’s a lot of legwork that needs to be done to reach the predevelopment phase.
So, before diving into selecting the site, it’s imperative to understand the following items:
Difference of responsibilities in Double Net (NN) and Triple Net (NNN) leases
Cost of all the possible occupancy variables
Realistic commencement and completion dates
Our Advice: Performing an occupancy cost analysis will be your best defense in keeping expenditures under control. It’s no doubt that rising occupancy costs directly impact a company’s earnings, share value, and overall performance. Partnering with a developer provides an advantageous block against much of the risk in these complex commercial real estate commitments.
Risk Level: HIGHEST
In this early chapter of the build to suit project’s life, the risk is high. Although the money hasn’t gone hard yet, this stage will either steer the project to proceed as it deemed a solid opportunity or squash the deal before any negative discoveries take a toll.
Working with a developer would greatly mitigate the risks by providing thorough research with these preliminary activities:
Due Diligence: Site Investigation Report (SIR)
Hiring architects, engineers and consultants for initial plans
Our Advice: Before exhausting all options within your site selection endeavor, don’t forget to take advantage of any applicable incentives such as permit/impact fee waivers and rent abatement.
Generally considered to be within the riskiest stage in the development cycle, the entitlement process is a time-consuming, costly one that should never be underestimated. The main concerns are circled around project approvals and permits, budget overruns, safety, and site conditions.
This milestone can take anywhere from three to 12 months to complete these extensive duties and more:
Our Advice: To hit this tricky milestone before the deposit becomes non-refundable, consider the route of entrusting a preferred developer to handle entitlements, approvals, building permits and any issues that may arise, so you can focus on your business.
Risk Level: MEDIUM
Assuming the analyzed development site has passed through to this stage, the close of escrow and signing of the lease by the tenant take place. Now that the pre-development tasks surrounding the single-tenant opportunity have been handled, the risk at this middle stage has been reduced -- yet it is still evident.
The pre-development activities kick off with the pre-construction coordination and General Contractor mobilizing, which include but are not limited to:
Planning for potential delays such as unfavorable weather conditions and scheduling of long-lead items
Survey staking, earthwork, foundation setting, etc.
Our Advice: During this construction planning stage, you’ll want to be cognizant of any unexpected costs related to build to suits so you can be prepared. Commercial developers bear the burden of cost overruns in excess of the allotted budget.
Risk Level: LOWEST
What marks the final stage of the development process is just the beginning of the building’s life. The risk from the first and second milestones has been eliminated, and now building construction and the commencement of operations are underway.
A handful of the objectives include:
Final inspections of subcontractors’ completed work
Tenant signs SNDA for lender and Certificate of Occupancy
Our Advice: Pay special attention to the quality control measure during construction close-out: the punch list. It’s used to address any unresolved tasks/issues before final occupancy. On the legal side, this is important for showing the terms and conditions of the construction contract were fulfilled and requires each contractor to request a preliminary inspection when completed.
It’s necessary to understand a high-level of all the risks associated with the main milestones of the project life cycle. On paper it may seem like a pretty straight-forward process, but executing this process undoubtedly does not come without plenty of your own research, a significant amount of funding, and the right team to back you.