Build to Suit (BTS) is an option for companies that desire to occupy purpose-built residential or commercial property without owning it. In this post, we cover:
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- What is a Build-to-Suit Lease?

• How Do BTS Leases Work?
• New Build to Suit Accounting Rules (2016 )
• Benefits and drawbacks
• How to Arrange Financing
• Frequently Asked
• Recent News & Related Articles
  
  What Does Build to Suit Mean?
  
  Build to suit is an arrangement in which a landlord constructs a building for a sole occupant. The resulting free-standing structure satisfies the specific requirements of the renter.
  
  Typically, organizations of all sizes set up BTS real estate agreements to effectively obtain and control customized facilities. In reality, lots of commercial buildings and retail residential or commercial properties are BTS, although any kind of business property is possible.
  
  How Do Build to Suit Leases Work?
  
  A develop to fit lease is a long-lasting commitment in between a landlord and an occupant.
  
  How To Start a BTS Real Estate Project
  
  The BTS procedure can begin in a few methods. For example, these include:
  
  - A prospective occupant can look for out a property owner to build a structure according to the renter's specifications. Thereafter, the renter gets in into a long-term lease with the landlord.
• A landowner may advertise land that it will construct out to support a BTS lease. An interested company can contact the landowner to set up a build to suit lease arrangement.
• In a reverse BTS, the potential tenant constructs the building. Typically, the property owner funds the project, however the tenant runs the task. Then, the renter takes tenancy of the building as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes sense when the occupant has particular building and construction expertise in the type of center it desires.
  
  Typically, the property owner owns the land or has a ground lease on it. Upon lease expiration, the build to suit agreement allows the landlord to re-let the residential or commercial property to a various tenant.
  
  Components of a Build to Suit Lease Arrangement
  
  Essentially, a BTS arrangement includes 2 elements:
  
  Development Agreement: The designer concurs to construct or acquire and redevelop a building on behalf of the renter. The arrangement results from the occupant issuing an ask for proposal (RFP) to one or more developers. The advancement contract specifies the relationship between the proprietor and the renter. That is, the contract specifies the style of the residential or commercial property, who will build it and who will fund it. Typically, the renter will take sole occupancy of the residential or commercial property, however often other occupants will share the structure. The building component is the chief and most complicated problem in a BTS arrangement. Lease Agreement: The BTS lease defines the regards to tenancy once the designer finishes building. Sometimes, the lease itself will specify the building provisions directly or through an accompanying work letter.
  
  The Roles of BTS Participants
  
  A build to fit lease is a significant undertaking for the property owner and renter. Clearly, they will be dealing with each other over an extended period. Therefore, the BTS arrangement need to thoroughly think about each participant's responsibilities:
  
  Landlord: The property owner must assess the renter's credit reliability. Also, it should understand the needs of the occupant as a guide to design and construction. Frequently, the property manager requires a guarantee and cash security from the occupant. The property manager must define whether it or the renter will lead the building and construction project. Furthermore, the proprietor will desire a long-enough lease term so that it can recover its investment. Tenant: The tenant establishes the RFP. It needs to examine whether the proprietor has the technical know-how and funds to deliver on time. The assessment will consist of the property owner's previous BTS property experience, credibility, and structure. The occupant must decide whether it wishes to direct the construction of the building or leave it to the property owner. It may also require assurances and/or a letter of credit to ensure the funding of the building and construction component.
  
  Both parties will want to supply input relating to the selection of architects, engineers, and contractors.
  
  BTS Ask For Proposal
  
  The tenant produces the request for proposal and disperses it to one or more designers. Typically, the RFP will address:
  
  - Usings the residential or commercial property
• The space needed
• A calendar timeline for construction and occupancy
• The lease variety that the tenant will accept - Design parameters and details
  
  Usually, the occupant disperses the RFP to numerous residential or commercial property owners/developers. It becomes more complicated if the occupant wants a particular site for the building. Because case, the landowner might be the sole recipient of the RFP. Naturally, the landowner has more impact if the occupant desires to build on the owner's land.
  
  What is Build-to-Suit Financing?
  
  A. Negotiating the Deal
  
  Once the tenant picks the winning RFP respondent, major negotiations can start. Normally, the procedure involves submissions from the landlord's designers that specify the design plans.
  
  In return, the occupant's space planners and specialists evaluate the strategy and work out modifications. A natural tension is inevitable. On the one hand, the occupant desires a space perfectly suited to its requirements. On the other hand, the proprietor requires to stabilize the tenant's needs with the accessibility of task funding. The property manager must also consider how easily it can re-let the residential or commercial property once the preliminary lease expires.
  
  Eventually, the build to fit lease arrangement emerges from the negotiation procedure. It specifies as much detail as possible about the building construction, the duties of each celebration, and the lease terms. For example, the arrangement may require the property owner to build a structure shell that the occupant finishes.
  
  Alternatively, the property manager might have to fit out a turn-key residential or commercial property in move-in condition. If the property manager delivers only a shell, the arrangement ought to define how the 2 groups user interface at the turnover time. The occupant can prevent this problem by consenting to use the landlord's designer for the completing phase.
  
  B. Timetable and Deliverables
  
  Obviously, the develop to fit arrangement need to specify a project timetable and turn-over duration. Specifically, the contract will specify the delivery information and move-in date.
  
  The expiration of the occupant's existing lease may produce the need for a set move-in date. Because of that, the celebrations should work backward from the needed move-in date to set the timetable and turning points. Typical milestones consist of protecting the financing, breaking ground, putting concrete for the structure and erecting the structural steel.
  
  Potential Delays
  
  Delays can be extremely expensive. The occupant may book the right to desert the offer if delays surpass a set date. For instance, the property manager may find it difficult to fund the project, delaying its start. Other sources of hold-ups include procuring permits, zone differences, and evaluations.
  
  Perhaps an unanticipated catastrophe will make it difficult to get structure products when required. Or a labor action by the building crew may shut down the job. Moreover, ecological groups may submit suits that halt building and construction.
  
  Indeed, the chances for hold-up are immense, and the BTS contract must address solutions in advance. The arrangement might specify penalties that will significantly spur on the designer. The renter might discover new ways to inspire the property owner.
  
  C. Rent
  
  The construct to suit lease arrangement will specify the renter's standard rental rate. The fundamental rate hinges on the land value, the cost of construction, and the proprietor's required rate of return.
  
  Sometimes the arrangement will permit changes to the rate if construction expenses surpass expectations. The renter might request modification orders that add to the expense of construction and increase the final lease. If the renter plays hardball on any rent increases, the task spending plan and scope should be extremely detailed.
  
  The arrangement must specify the change order procedure and the landlord's right to authorize. The property owner may withstand any changes that add construction expenses without a matching lease increase.
  
  Alternatively, the agreement may specify that the tenant spends for any approved change orders. The arrangement should also eliminate the property owner of penalties due to delays coming from modification orders.
  
  D. Other Lease Considerations
  
  Certain other concerns require factor to consider when negotiating a BTS lease:
  
  Commencement Date vs Construction Date: The property owner might want the BTS lease to define a beginning date for the tenant to begin paying lease. However, the occupant might demand delaying any lease payments up until building is complete. Right to Purchase: Some renters might desire the alternative to acquire the residential or commercial property throughout the lease period. At the least, the tenant might desire the right of first offer to a proposed sale. Moreover, the renter might ask for the right to match any purchase quote. The property manager may concur to these renter rights as long as it does not reduce the best asking price. Space Migration: In many cases, the BTS residential or commercial property is part of a business park. The tenant might be concerned about expanding the quantity of space it inhabits later. Therefore, the agreement may include an alternative for a new building and construction phase. Alternatively, if the renter has excessive space, the lease should address subletting the residential or commercial property. Warranties: The agreement must deal with the warrantied expense of building and construction flaws and deficiencies. The lease must define the warranty commitments for faulty style, construction or materials. What is Build-to-Suit Financing?
  
  Build to Suit Lease Accounting
  
  The Financial Account Standards Board (FASB) recently provided brand-new accounting standards for leases (Topic 842). The new standards cover BTS leases, which sometimes utilize sale-and-leaseback accounting.
  
  If the renter (lessee) controls the property throughout the building stage before lease commencement, it is the asset owner. Upon conclusion of construction, the occupant offers the residential or commercial property to the property owner and leases it back. The lessee owns the residential or commercial property if any of the following hold true:
  
  - The lessee can purchase the residential or commercial property throughout building and construction.
• The lessor (proprietor) has the right 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 enhancements, or the non-real-estate properties under building and construction.
• The lessee controls the land and does not lease it to the lessor or another celebration before construction begins.
• A lessee rents the land for a duration that reflects the considerable financial life of the residential or commercial property enhancement. The lessee doesn't sublease the land before construction begins and before enjoying the residential or commercial property's financial life.
  
  Under these scenarios, the lessee is the property's considered owner throughout construction. Therefore, it must represent construction-in-progress utilizing ASC 360 - Residential Or Commercial Property, Plant and Equipment. The rule needs the lessee to presume obligation for the building 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 deemed owner of the property throughout building and construction, it does not apply sale and leaseback treatment. Instead, it treats payments it makes to use the property as lease payments.
  
  For detailed information about build to suit lease accounting, seek guidance from your accounting and legal advisors.
  
  Pros and Cons of BTS Real Estate
  
  The pros of construct to suit leasing typically surpass the cons.
  
  Pros of BTS Real Estate
  
  Capital: The occupant need not designate the capital essential to build the residential or commercial property itself. The proprietor gets to put its capital to work in return for long-lasting lease earnings. Location: The occupant can select its place instead of selecting from offered stock. It can pick a place in a high-growth location with simple access. The proprietor makes use of the land it owns with no risk that a new residential or commercial property will sit uninhabited. Efficiency: The tenant defines the structure size so that it's perfect for its needs. Furthermore, it can demand high energy performance through modern-day devices and innovation. The property manager can use its involvement with a green task to burnish its track record. Branding: The renter may gain from a structure that reflects its personality and image. The renter can select the architectural style, surfaces and colors to amplify its image. Risk: The tenant might be able to ignore the lease if the building falls considerably behind. The proprietor take advantage of a locked-in long-lasting lease once building is complete. Taxes: The tenant's lease payments are totally deductible over the life of the lease. Cons of BTS Real Estate
  
  Commitment: The occupant incurs a long-lasting commitment that is not easy to leave before the term ends. Typical lease periods run ten years or longer. Financing: Typically, the lessee needs to demonstrate it is adequately creditworthy to handle a long-lasting lease dedication. Cost: It's cheaper for the tenant to find and rent vacant space. Many business can not manage to spend for build to suit genuine estate. Time: It takes longer to build a structure than to rent area from an existing one. How Assets America ® Can Help
  
  Assets America ® can organize funding for your BTS job starting at $10 million, with no upper limitation. We invite you to contact us to find out more for our complete financial services.
  
  We can assist make your BTS job possible through our network of private financiers and banks. For the very best in BTS financing, Assets America ® is the wise option.
  
  What is a ground lease vs. construct to suit?
  
  In a ground lease, the tenant rents the hidden land instead of the residential or commercial property. In a build to match lease arrangement, the landlord owns the land and the tenant rents the structure built on the land.
  
  What does develop to match residential suggest?
  
  Almost constantly, construct to fit refers to business residential or commercial properties. However, it is possible to participate in a build to suit agreement for a multifamily house. Then, the renter subleases the systems to subtenants.
  
  What is a reverse construct to suit?
  
  A reverse construct to match is when the tenant oversees the building and construction of the residential or commercial property. Reverse BTS works when the tenant has unique competence in constructing the type of residential or commercial property involved. Typically, the landlord finances the reverse BTS offer.
  
  Is a build-to-suit lease agreement right for me?
  
  It may make sense for property managers who have vacant land they desire to develop. The BTS agreement lowers the risk of establishing the land since the lease is locked-in. Tenants preserve capital through a BTS lease contract.
  
  Recent BTS News
  
  If you have an interest in news articles about current BTS advancements, you can check out this $75 million build-to-suit financial investment or this construct to match satisfaction center for Amazon. Additionally, you can have a look at this build-to-suit industrial building in Janesville or these office renters requiring develop to suit leases.
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