What do Dollar General, Olive Garden, Starbucks and McDonald’s all have in common? When you drive past each one, it doesn’t take more than one second to recognize its brand.
They each have a signature design when it comes to their exterior and interior build. And for these Fortune 500 companies, this isn’t only accomplished by fixing up an old, existing building.
As a tenant looking to expand your footprint, you have the option to either occupy an existing space and renovate or take the custom build to suit route.
Build to suit development offers the highest level of customization for the tenant to achieve the exact brand-compliant consistency they require. The owner/developer constructs a building to meet the specifications of the tenant who signed the build to suit lease.
In addition to the ultimate personalization, here are a few more advantages for tenants to go this route.
Partnering with a developer means a more personalized approach tailored to meet your unique requirements. But also, because change happens — especially in healthy, growing companies — the tenant has flexibility to relocate without the contingency of having to sell the property.
Some common instances that may call for a reassessment of your space are concept changes, outgrowing the square footage with more employees, exceeding business growth projections, business model changes, and demographic changes in that area.
While build to suit leases are generally long-term, it is not as illiquid as actually owning the real estate.
When a tenant reaches out to a developer with the specifications it desires, the developer assumes all the risk of locating the appropriate site, purchasing the land, and constructing the building. It is then leased back to the tenant, taking the burden of risk off the business owner.
This is a popular route that businesses of all sizes choose as there’s no risk of having to pay for cost overruns because it would fall under the developer’s responsibility.
In this type of lease structure, the lessee has the advantage of being able to deduct the rent amount from their annual taxes. On that note of taxes, it’s important to understand the types of build to suit leases because it will affect the amount of property taxes for which you may be responsible.
100% of the tenant’s rent payments are tax-deductible.
Because not every tenant’s expertise or goal is investing in real estate, build to suits exist to help preserve their capital for other areas. Businesses, large or small, often find it to be more logical to invest in what they know best instead: their company.
Build to suit leases allow you to save or reinvest capital in business operations instead.
Higher Rate of Return
The rate of return on capital that is productively invested in operations and growth can often be greater than the rate of return invested in real estate. Typically, investing in real estate produces single-digit returns, while investing in your business has double-digit returns. Again, since you’re leasing, you have more capital to invest in your business and achieve higher returns.
If you're opening locations with 20%-40% ROI, it makes more sense to lease. It allows you to grow and take advantage of the market.
Aside from having the brand recognition, consistency, and customization benefit of a build to suit development, keep these other tenant advantages in mind that are wrapped up in build to suit leases.