As we recently discussed in this blog post, a build to suit lease has various definitions. There are a number of different lease structures and unique elements that separate a build to suit lease from a standard commercial lease.
The construction element is truly the backbone of the build to suit lease. But sometimes it isn't always a simple "developer builds, tenant occupies" scenario. While we’re accustomed to a standard build to suit, there are other options. Let’s take a quick look at what those are.
Build to Suit
The build to suit process entails all the steps necessary to select, acquire, finance, and lease a property that is custom built to the specifications of the occupant. With a build to suit lease, the landlord retains greater control over the development of its property and uses its existing knowledge of the site and local construction practices.
Essentially, a standard build to suit lease contains two agreements in one document: a lease agreement and a construction agreement. So, the focus of the entire build to suit development process is on issues related to the lease negotiations as well as construction. The construction aspect is usually the key issue and the most complicated, warranting close attention to the landlord’s and the tenant’s responsibilities in this regard. To simplify it, the landlord/developer will be responsible for constructing the building and the tenant will occupy and pay rent on the said building.
The rent is based on a stated rate of return on imputed land value, plus a reasonable estimate of hard and soft costs of construction. In some cases, the basic rental rate may be subject to adjustment based on actual construction costs.
Reverse Build to Suit
In a reverse build to suit development, the tenant essentially acts as the developer. The tenant will construct its building upon the landlord's approval and at the landlord’s expense. This method is sometimes preferred by a tenant who has their own real estate and/or construction department but still prefers to lease rather than own real estate. The landlord is typically protected from additional costs, permitting, etc.
With the reverse build to suit lease, both parties benefit from the tenant's experience in constructing virtually the same building in many locations. The tenant has complete control over the construction process and the facility is custom-designed by the user.
A third option might be to use a combination of the build to suit and reverse build to suit options. Typically this method involves the landlord performing the site work and the tenant constructing the building. This option combines the landlord's familiarity with the site with the tenant's familiarity with its prototype building.
Build to suit development represents an advantageous, yet sometimes complex commercial real estate endeavor. So, when it comes to addressing this type of commercial development, it’s important to understand all of your options and ask the right questions.