A Build-to-Suit (BTS) project refers to tailoring a private or commercial property from its inception, specifically to cater to the unique needs of the client's organization. One may wonder why some tenants lean towards build-to-suit commercial spaces, how these commercial leases function, and the dynamics of the design process. This piece aims to address those questions. So, what exactly constitutes a build-to-suit project?
What Is a Build-to-Suit?
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A commercial "build to suit" is a structure designed and built to the exact specifications of a single tenant. These changes can manifest in a sale-leaseback arrangement, where the tenant buys the land, takes on the debt service and interest payments, and contracts with a general contractor to design and build the structure. The renter may then sell the property to a third-party investor and lease it back to themselves.
A tenant will contact a commercial developer to meet the company's requirements. The developer will pay for, take title to, and bear any construction risks associated with the land. After that, the tenant will sign a lease with the building's developer or owner. Since the structure is tailored to the tenant's needs, the lease for such a property is normally longer.
Why Should You Consider a Built-to-Suit?
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Compared to other types of development, new builds to suit projects typically have a lower risk profile and lower cost of entry, not necessarily total cost, just cost of entry. The buildings are consistent and uniform; the tenant is likely working from some sort of standard.
When you compare build to suit vs. build to spec, tenants are allowed to choose to either own or lease the building. The developer or owner also faces less risk in terms of lease agreements. The tenant has been found, and a lease has been signed. The primary benefit of build-to-suit development is that the property is tailored to the needs of the tenant. As a result, the tenant has a major say in the buildout process.
Why Is It Beneficial to Hire a Commercial Developer?
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Using a commercial developer to meet build-to-suit requirements can shield tenants from the risks associated with developing independently. The project's developer will be responsible for all development costs. Therefore, tenants can expand their businesses with the money they would have put into slowly appreciating real estate.
Tenants save time and money, allowing for more growth, and are provided with a space where they may reach their full potential. Deploying capital into development projects isn't always a good idea because most tenants look for double-digit returns, yet CAP and return rates are typically in the single digits.
How Does the Design Process Work?
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The goal of a build-to-suit is to build a commercial structure to the exact requirements of a tenant. During the design phase, engineers, the tenant, the consultant, the architect, and the commercial developer all work together.
Tenants usually have extensive say in a building's aesthetics so that it complies with business guidelines. The developer, however, will play a crucial part in the structure's design, as they have a vested interest in the project and possess the necessary knowledge and understanding of the site and local building codes.
It is crucial to design with market norms in mind. Investors and potential occupants may be less interested in a building that deviates too far from the "market standard" or the average quality of similar structures.
How Much Does It Cost to Build-to-Suit?
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Estimating the cost of a construction project might be one of the most important aspects of budgeting for a building or renovation. While it depends on a variety of aspects, in general, building-to-suit developments can be more expensive than, say, leasing an existing building. However, the expenses may be justified by the extra room and operational savings built-to-suit projects offer. The final price tag on a built-to-suit job depends on several variables, including location, project size, and more.
What to Consider Before Building to Suit
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Before commencing a build-to-suit project, there are a few things to keep in mind to streamline the project. Here are a few things to check before breaking ground;
1) Location
Since building-to-suit involves highly personalized designs, the projects may end up going against a lot of area building codes. Choosing where to have a built-to-suit project matters since certain areas have strict building codes that have to be adhered to. Restrictions such as how tall a building should be, what materials to use, what color your house should be, sound insulation requirements, and more are things to always look out for when scouting for a location. Different cities have zoned areas for commercial or residential uses.
2) Building type
A commercial property's approach to building is different from that of a residential property. Furthermore, different permits and laws apply to different building types.
3) Square footage
Just like any other building project, square footage must be one factor when undertaking a build-to-suit project.
4) Lease term
The lease term outlines the freedoms, responsibilities, expectations, and obligations between the client and the builder throughout the building and lease period. A built-to-suit lease may differ from other leases since the project is built to a tenant's specifications.
5) Design Considerations
Since a build-to-suit tenant typically has specific requirements, architects, designers, and everyone working on the project must develop a comprehensive design and solutions to suit the tenant's needs. Build-to-suit projects have the most unique designs, which can bring along unique problems. Look for similar designs, the potential problems, and how to solve them.
6) Contractor
Finding a contractor who specializes in build-to-suit projects has a higher success rate than working with a contractor who is working on a build-to-suit project for the first time.
7) Sustainability
A built-to-suit commercial property or residential project should include sustainable and environmentally friendly solutions, as most tenants are environmentally conscious.
8) Local government requirements
When working on a build-to-suit project, especially a commercial building, following the building code requirements in the letter will save you a lot of money and time. If you go against the laws set in place by the local government, your project might stall.
9) Financing and Budget
Once you have determined the project cost, you can consider different financing options, including mortgages and loans.
10) Tenant Requirements
In a build-to-suit project, a tenant's requirements are going to be the main consideration throughout the project. Some tenants end up with a reverse build-to-suit project because of how much control they have in the project.
11) Timeline
A build-to-suit project should have a clear timeline with trackable milestones. Most building projects pay by the hour and are costlier the longer the project takes.
12) Adaptable Design
A design should accommodate potential changes by the client. A non-flexible project has no space for future adaptability for different uses in the future. The design should be up to the market standards and be able to accommodate not only the original tenant but also other tenants who may be interested in the property.
13) Clear Communication
Since a build-to-suit project has specific requirements, there should be clear communication between the tenant and the designer, architect, and project manager. If the design is to be incorporated into an existing space rather than a new building, the property owner or landlord should be aware of the changes to avoid lawsuits and spending more money on repairs. Clear communication safeguards your time on the property, as the owner is likely to keep you once the initial lease term ends.
Types of Build-To-Suit Projects
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Before signing a long-term lease agreement, there are different BTS projects to keep in mind, as they might affect the type of BTS leases to be signed. Here are some types of BTS designs.
a) Office BTS
Office spaces are the most common build-to-suit commercial property projects, as companies occupy most commercial spaces. Corporate tenants may require the installation of technology infrastructure, customized amenities, and branding elements.
b) Manufacturing/ Industrial BTS
A lot of BTS leases are for manufacturing spaces. Rarely will you find industrial prospective tenants asking for similar designs. Industrial BTS may need to accommodate machinery and manufacturing and assembling systems. An industrial BTS may further require a different ceiling height, floor plan, loading bay, and more.
c) Retail BTS
These are constructed to suit retail prospective tenant requirements. The design may include a display area, retail layout,
d) Medical Build-To-Suit
Clinics and medical offices have to be constructed to meet different client needs. Patient rooms, operation rooms, kid play areas, and other medical spaces have to be built to meet healthcare regulation requirements.
e) Mixed-Use BTS
These are projects that may have different properties with varied uses, including residential spaces and commercial spaces. There are more types of BTS properties, including;
- Hospitality
- Educational
- Research and development
- Datacenter
- Warehouse etc.
How Do Build-to-Suit Lease Work?
Net leases, in which the tenant is responsible for paying for the building's upkeep, are typical for build-to-suit projects. The length of the build-to-suit lease may be greater than usual. This long-term lease is because each built-to-suit property is tailored to the needs of its tenant. Most developers and landlords require leases of at least 10 years to ensure a healthy return on their investment. Developers may typically secure cheaper financing with a longer BTS lease period, resulting in a lower rental rate.
Endnote
For businesses wishing to expand and establish themselves, BTS development presents one of the most exciting and rewarding opportunities in commercial real estate. It is crucial to locate a developer early on in the process of build-to-suit development before any other steps like design or site selection have been taken.
