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Build to Suit (BTS) is a solution for businesses that desire to occupy purpose-built residential or commercial property without owning it. In this article, we cover:

- What is a Build-to-Suit Lease?

How Do BTS Leases Work?
New Build to Suit Accounting Rules (2016 )
Pros and Cons
How to Arrange Financing
Frequently Asked Questions
Recent News & Related Articles

What Does Build to Suit Mean?

Build to fit is a plan in which a landlord constructs a structure for a sole renter. The resulting free-standing structure satisfies the particular requirements of the renter.

Typically, organizations of all sizes arrange BTS property agreements to efficiently acquire and manage custom-made centers. In reality, lots of commercial buildings and retail residential or commercial properties are BTS, although any type of business property is possible.

How Do Build to Suit Leases Work?

A build to fit lease is a long-lasting commitment between a landlord and a tenant.

How To Start a BTS Real Estate Project

The BTS process can start in a few methods. For example, these include:

- A potential occupant can seek out a proprietor to construct a building according to the renter's specifications. Thereafter, the occupant gets in into a long-lasting lease with the proprietor.
A landowner may promote land that it will construct out to support a BTS lease. An interested company can contact the landowner to set up a develop to match lease arrangement.
In a reverse BTS, the prospective occupant constructs the building. Typically, the property manager funds the job, but the occupant runs the job. Then, the occupant takes tenancy of the building as a lessee to the residential or commercial property owner. Normally, a reverse BTS makes good sense when the renter has specific building know-how 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 fit contract permits the property manager to re-let the residential or commercial property to a various renter.

Components of a Build to Suit Lease Arrangement

Essentially, a BTS plan includes 2 components:

Development Agreement: The developer consents to build or get and redevelop a building on behalf of the renter. The agreement arises from the occupant issuing a request for proposal (RFP) to one or more developers. The development arrangement specifies the relationship in between the landlord and the tenant. That is, the arrangement defines the design of the residential or commercial property, who will develop it and who will fund it. Typically, the occupant will take sole occupancy of the residential or commercial property, but in some cases other tenants will share the structure. The building part is the chief and most complicated problem in a BTS contract. Lease Agreement: The BTS lease specifies the regards to tenancy once the designer finishes building and construction. Sometimes, the lease itself will specify the construction provisions directly or through an accompanying work letter.

The Roles of BTS Participants

A build to suit lease is a major endeavor for the property owner and occupant. Clearly, they will be dealing with each other over a prolonged period. Therefore, the BTS plan must carefully think about each participant's obligations:

Landlord: The landlord needs to examine the occupant's creditworthiness. Also, it needs to comprehend the needs of the renter as a guide to design and construction. Frequently, the proprietor requires a guarantee and cash security from the tenant. The property manager must specify whether it or the renter will lead the building and construction project. Furthermore, the property owner will desire a long-enough lease term so that it can recover its financial investment. Tenant: The renter develops the RFP. It must assess whether the property manager has the technical competence and monetary resources to deliver on time. The assessment will include the property owner's previous BTS property experience, credibility, and structure. The tenant must choose whether it desires to direct the building and construction of the structure or leave it to the proprietor. It might likewise require assurances and/or a letter of credit to guarantee the funding of the building component.

Both celebrations will wish to offer input relating to the choice of designers, engineers, and professionals.

BTS Ask For Proposal

The renter produces the ask for proposal and disperses it to one or more designers. Typically, the RFP will resolve:

- The uses of the residential or commercial property
The area required
A calendar timeline for building and occupancy
The lease variety that the occupant will accept
Design parameters and details

Usually, the occupant distributes the RFP to several residential or commercial property owners/developers. It becomes more complex if the renter wants a particular site for the building. Because case, the landowner may be the sole recipient of the RFP. Naturally, the landowner has more impact if the occupant wishes to build on the owner's land.

What is Build-to-Suit Financing?

A. Negotiating the Deal

Once the occupant chooses the winning RFP participant, severe settlements can begin. Normally, the process includes submissions from the landlord's architects that define the design plans.

In return, the renter's area organizers and experts evaluate the strategy and work out changes. A natural stress is inescapable. On the one hand, the renter desires an area perfectly matched to its needs. On the other hand, the landlord needs to balance the tenant's needs with the availability of project funding. The property owner should also think about how quickly it can re-let the residential or commercial property once the preliminary lease expires.

Eventually, the build to suit lease agreement emerges from the negotiation procedure. It specifies as much information as possible about the building construction, the responsibilities of each celebration, and the lease terms. For example, the arrangement may require the proprietor to construct a structure shell that the renter completes.

Alternatively, the property manager may need to fit out a turn-key residential or commercial property in move-in condition. If the landlord delivers just a shell, the agreement should specify how the two groups user interface at the turnover time. The occupant can avoid this issue by accepting utilize the property owner's developer for the finishing phase.

B. Timetable and Deliverables

Naturally, the build to match contract should specify a job timetable and turn-over duration. Specifically, the arrangement will mention the delivery information and move-in date.

The expiration of the tenant's existing lease might develop the need for a set move-in date. For that reason, the parties must work backward from the required move-in date to set the timetable and milestones. Typical turning points include protecting the financing, breaking ground, pouring concrete for the structure and erecting the structural steel.

Potential Delays

Delays can be very expensive. The renter might schedule the right to abandon the offer if delays surpass a set date. For example, the proprietor might discover it challenging to fund the job, postponing its start. Other sources of delays consist of procuring permits, zone differences, and assessments.

Perhaps an unanticipated catastrophe will make it impossible to acquire building materials when required. Or a labor action by the building and construction crew might close down the project. Moreover, environmental groups may file suits that halt building.

Indeed, the opportunities for delay are enormous, and the BTS arrangement must resolve treatments upfront. The contract may specify penalties that will significantly spur on the designer. The renter might discover brand-new ways to inspire the property manager.

C. Rent

The construct to match lease contract will define the renter's fundamental rental rate. The basic rate depend upon the land value, the expense of building and construction, and the property owner's required rate of return.

Sometimes the arrangement will permit adjustments to the rate if construction expenses surpass expectations. The renter may ask for modification orders that contribute to the cost of construction and increase the last rent. If the occupant plays hardball on any lease increases, the task budget and scope must be very detailed.

The agreement ought to specify the change order procedure and the property manager's right to authorize. The property owner might resist any modifications that add construction expenses without a matching lease increase.

Alternatively, the agreement might specify that the renter pays for any approved change orders. The contract needs to also ease the landlord of penalties due to delays originating from modification orders.

D. Other Lease Considerations

Certain other issues need factor to consider when negotiating a BTS lease:

Commencement Date vs Construction Date: The property owner might desire the BTS lease to define a beginning date for the renter to begin paying rent. However, the renter might insist on delaying any lease payments until construction is total. Right to Purchase: Some occupants might want the option to acquire the residential or commercial property throughout the lease duration. At the least, the renter may want the right of first deal to a proposed sale. Moreover, the occupant might ask for the right to match any purchase bid. The landlord may accept these tenant rights as long as it doesn't lower the very best asking price. Space Migration: Sometimes, the BTS residential or commercial property belongs to a business park. The occupant may be concerned about expanding the quantity of area it occupies later on. Therefore, the arrangement might include an option for a brand-new building and construction stage. Alternatively, if the renter has excessive space, the lease needs to address subletting the residential or commercial property. Warranties: The agreement needs to deal with the warrantied cost of building problems and deficiencies. The lease needs to define the warranty obligations for faulty style, building or materials. What is Build-to-Suit Financing?

Build to Suit Lease Accounting

The Financial Account Standards Board (FASB) just recently issued new accounting requirements for leases (Topic 842). The brand-new requirements cover BTS leases, which often use sale-and-leaseback accounting.

If the tenant (lessee) manages the asset during the building and construction stage before lease start, it is the property owner. Upon completion of building, the occupant offers the residential or commercial property to the proprietor and rents it back. The lessee owns the residential or commercial property if any of the following are true:

- The lessee deserves to buy the residential or commercial property throughout building.
The lessor (property manager) deserves to gather 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 improvements, or the non-real-estate possessions under building and construction.
The lessee manages the land and does not rent it to the lessor or another celebration before building and construction begins.
A lessee rents the land for a duration that shows the considerable financial life of the residential or commercial property improvement. The lessee doesn't sublease the land before construction begins and before gaining the residential or commercial property's economic life.

Under these situations, the lessee is the asset's deemed owner during construction. Therefore, it needs to represent construction-in-progress utilizing ASC 360 - Residential Or Commercial Property, Plant and Equipment. The rule needs the lessee to presume responsibility for the building costs via a considered loan from the lessor. When building ends, the lessee follows the sale and leaseback accounting guidelines.

On the other hand, if the lessee is not the considered owner of the possession during building, it does not apply sale and leaseback treatment. Instead, it deals with payments it makes to use the property as lease payments.

For comprehensive about develop to suit lease accounting, seek assistance from your accounting and legal advisors.

Advantages and disadvantages of BTS Real Estate

The pros of build to fit leasing frequently exceed the cons.

Pros of BTS Real Estate

Capital: The occupant need not designate the capital needed to build the residential or commercial property itself. The landlord gets to put its capital to operate in return for long-lasting lease earnings. Location: The renter can select its location instead of selecting from available stock. It can choose a location in a high-growth area with simple gain access to. The property owner makes use of the land it owns with no risk that a new residential or commercial property will sit uninhabited. Efficiency: The renter specifies the structure size so that it's ideal for its requirements. Furthermore, it can require high energy performance through contemporary equipment and innovation. The property owner can use its involvement with a green job to burnish its track record. Branding: The tenant might benefit from a structure that shows its personality and image. The renter can choose the architectural style, finishes and colors to magnify its image. Risk: The renter might be able to ignore the lease if the building and construction falls considerably behind. The property manager gain from a locked-in long-lasting lease once construction is complete. Taxes: The renter's lease payments are completely deductible over the life of the lease. Cons of BTS Real Estate

Commitment: The renter incurs a long-lasting dedication that is not easy to exit before the term ends. Typical lease periods run 10 years or longer. Financing: Typically, the lessee requires to demonstrate it is sufficiently creditworthy to manage a long-lasting lease dedication. Cost: It's less expensive for the renter to find and rent uninhabited space. Many companies can not manage to spend for develop to suit realty. Time: It takes longer to build a structure than to rent space from an existing one. How Assets America ® Can Help

Assets America ® can arrange funding for your BTS task starting at $10 million, without any upper limit. We invite you to call us for more details for our complete financial services.

We can help make your BTS job possible through our network of private investors and banks. For the very best in BTS funding, Assets America ® is the clever choice.

What is a ground lease vs. develop to fit?

In a ground lease, the tenant leases the hidden land rather than the residential or commercial property. In a construct to suit lease agreement, the proprietor owns the land and the renter leases the building constructed on the land.

What does build to fit property imply?

Often, construct to fit refers to business residential or commercial properties. However, it is possible to participate in a develop to suit contract for a multifamily home. Then, the renter subleases the systems to subtenants.

What is a reverse construct to suit?

A reverse develop to match is when the occupant oversees the building and construction of the residential or commercial property. Reverse BTS is beneficial when the tenant has special knowledge in constructing the kind of residential or commercial property involved. Typically, the landlord funds the reverse BTS offer.

Is a build-to-suit lease contract right for me?

It might make sense for property owners who have vacant land they wish to develop. The BTS agreement reduces the risk of establishing the land because the lease is locked-in. Tenants preserve capital through a BTS lease arrangement.

Recent BTS News

If you're interested in news posts about current BTS advancements, you can read about this $75 million build-to-suit financial investment or this build to fit satisfaction center for Amazon. Additionally, you can examine out this build-to-suit industrial building in Janesville or these workplace occupants requiring develop to suit leases.
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