Oftentimes, drugstores, fast food drive-throughs, medical facilities, and other similar businesses have an arrangement that goes beyond a basic sale or lease.
In commercial real estate, the concept of a “build-to-suit”, or BTS, lease is a strategic arrangement where a property is constructed specifically for a tenant according to their needs and specifications. This arrangement has become increasingly popular as businesses seek tailored spaces that align with their operational requirements and brand identity.
What is build-to-suit?
Build-to-suit is a real estate development model in which a developer constructs a building or facility to meet a tenant’s specific needs. Unlike traditional leasing, where tenants occupy pre-existing spaces, BTS projects are customized from the ground up. This involves a detailed planning process where the tenant’s operational needs, aesthetic preferences, and logistical requirements are integrated into the design and construction of the property.
How does the build-to-suit process work?
Step 1: Initial Agreements and Planning
The BTS process typically begins with a negotiation between the tenant and the developer. The tenant outlines their requirements, which may include the size of the space, layout, special features, and location on the property. Once both parties agree on the basic terms, including the lease duration and financial arrangements, they move to the design phase.
Step 2: Design and Development
In this phase, architects and engineers work closely with the tenant to develop detailed blueprints. This includes designing a layout that optimally supports the tenant’s business operations. For instance, a manufacturing company may require higher-than-average ceilings and specialized loading docks, while a tech firm might need more open office spaces and state-of-the-art technology infrastructure.
Step 3: Construction
After finalizing the design, construction begins. The developer is responsible for building the property according to the agreed-upon specifications. This phase is closely monitored by both parties to ensure that the construction aligns with the tenant’s requirements and the terms of the agreement, as well as catching and promptly addressing any issues.
Step 4: Lease Agreement
Once construction is complete, the tenant occupies the property under a long-term lease agreement. This lease typically includes provisions for rent, maintenance, and other responsibilities. The lease term often corresponds to the length of time needed for the tenant to amortize their investment in the space.
How does this arrangement benefit a tenant?
1. Customization: The primary advantage of a build-to-suit arrangement is the level of customization it offers. Tenants can design a space that perfectly fits their operational needs and enhances efficiency. This tailored approach can be particularly beneficial for businesses with unique requirements that cannot be met by existing properties – for instance, think about how specialized the Chick-fil-A drive-through process is.
2. Operational Efficiency: A space designed specifically for a tenant’s needs can significantly improve operational efficiency. For example, medical facilities have highly specific layouts and equipment needs, and a build-to-suit property allows them to design an efficient operation.
3. Branding and Image: Build-to-suit projects allow businesses to create a facility that aligns with their brand image. This is especially valuable for companies looking to make a strong impression that aligns with a brand. Think about the iconic design of Pizza Hut buildings in the early 2000’s – you still know that building once housed a Pizza Hut, even if another business has since moved in.
4. Long-Term Stability: Tenants often secure long-term leases with build-to-suit agreements, providing stability and predictability in terms of occupancy and operational costs. It also allows for scaled growth across a state or across the nation. Dollar General easily scales their growth thanks to developers who know their requirements for build-to-suit plans at each new location.
How does the arrangement benefit developers?
1. Pre-Leased Property: Developers benefit from having a tenant committed to occupying the property upon completion. This reduces the risk of vacancy and provides a guaranteed income stream for a longer term.
2. Higher Returns: Build-to-suit projects often come with higher rental rates compared to standard leases, reflecting the custom nature of the space and the tenant’s commitment.
3. Strong Tenant Relationships: Working so closely with tenants to design and build their ideal space can lead to strong, long-term relationships. This can result in additional projects and referrals.
4. Risk Mitigation: Developers may secure financing and investments in their project more easily with a pre-leased property, as lenders and investors view the arrangement as a lower-risk investment.
Conclusion
Build-to-suit projects are a valuable option in commercial real estate that provide tailored solutions for businesses while offering developers a more secure investment opportunity. By understanding the process and the benefits involved, both tenants and developers can make informed decisions that align with their long-term goals and operational requirements.
Considering a build-to-suit property for your next project? Our expert advisors have helped a number of developers AND tenants work through the arrangement. Contact us today to learn how a build-to-suit property could work for you.