The provisions regarding construction are normally captured in the work letter of the build to suit lease. With a coordinated team of expert consultants and with a little leverage, a tenant should be able to establish a well-rounded, effective work letter.
This should allow the tenant to maximize its potential savings in the construction of the improvements. The tenant should always carefully negotiate the terms of the work letter to ensure timely completion of the expected quality of tenant improvements.
Elements of a work letter
Work letters cover issues such as the description of the work to be done in sufficient detail, processes for resolving construction disputes and delays, schedules and timetables, a methodology for determining the cost of construction, and much more.
In particular, build to suit leases have the potential to bind the landlord and tenant for an extended period of time. The design-build process is typically lengthy and includes a variety of important elements. They also require commitments of capital, time, and effort by each of the parties from the beginning.
Some of the most important elements include:
A build to suit project typically starts with an RFP in which a tenant sets forth its projected needs and seeks presentations from a number of developers. The RFP will usually detail the specification of the work to be done. Given that the design specifications and parameters are of critical importance in establishing the cost of the project, the rent, and the timing for completion, it’s important to provide as much detail in the build to suit agreements as to the known aspects of the design and the work to be completed.
Appointment of representatives
The landlord and tenant should have designated representatives for both the design process and the construction process. The question as to the exact role that each party will play warrants more than a superficial evaluation. A landlord will need to carefully evaluate the creditworthiness of the tenant. He or she must also be cognizant of the nature of the tenant’s business and its specific needs to help guide the design and construction of the building.
A timetable for approving each step of the design process leading to the “final plans”
Timing for performance is a critical issue in a build to suit lease and a timetable with clearly identified deliverables is imperative and must be built into the agreements. Parties will usually establish a fixed move-in date from which all stakeholders involved must work backward and coordinate their portion of the project. A timetable will likely include milestones for the design, construction, and occupancy phases around which a schedule will be built. This includes securing of financing and permits, groundbreaking, pouring of the foundation, and completion of the structural steel.
Since so much hinges on whether the project can be completed on time, the parties must consider there is responsibility as it relates to construction. From a tenant’s perspective, it’s important to have the right to walk away from the project if it becomes apparent that the project is not financeable, that obtaining permits is problematic, or that the project will otherwise be significantly off schedule.
Why is a work letter important?
A work letter establishes both a process for resolving disputes and a methodology for determining the cost of construction. The work letter is basically an abbreviated construction contract.
Given the interplay of traditional lease issues with design, construction, timing, and financing concerns associated with making a project a reality, build to suit leases present a unique set of obstacles that parties must face, and which require careful attention and drafting.
All of those elements of taking a plot of dirt and turning it into a customized, successful commercial development can be found within the work letter of a build to suit lease. It is the figurative framework for your build to suit development.