Build to Suit
Build to Suit (BTS) is an agreement in real estate where a developer/landowner constructs a building to the specifications of a tenant and then leases the property to the tenant. This arrangement is beneficial for tenants seeking customized space without the capital investment associated with buying and developing the land. The landowner or developer finances the construction and retains ownership of the property while providing a long-term lease to the tenant.
Examples
- Restaurant Example: Beverly wants to open a restaurant. Instead of buying land and constructing the facility herself, she finds a landowner who agrees to build a restaurant according to her specifications. After the construction is complete, the landowner leases both the restaurant building and the land to Beverly.
- Corporate Office: A tech company looking for a state-of-the-art office may negotiate a build to suit arrangement in a new tech park. The tech park developer constructs the office according to the company’s needs and signs a long-term lease with the company.
Frequently Asked Questions
Q1. Why would a company choose a Build to Suit arrangement? A1. Companies often choose BTS to get a tailor-made facility that meets their specific requirements without the upfront costs of buying and developing land. It also allows for faster occupancy since the development timeline is pre-agreed.
Q2. What are the risks involved in a Build to Suit arrangement? A2. Risks include potential overruns in construction costs and delays, differences between the tenant’s expectations and the final build, and possible future difficulties in renegotiating lease terms.
Q3. Can Build to Suit agreements be modified after they have been signed? A3. While it is possible, modifying a BTS agreement can be complicated and often requires renegotiation between the parties involved. Detailed initial agreements help mitigate the need for modifications.
Q4. How long is a typical lease term in a Build to Suit contract? A4. Lease terms in BTS agreements are usually long-term, often ranging from 10 to 20 years, providing stability for both the tenant and the landowner.
Related Terms with Definitions
- Triple Net Lease (NNN): A lease agreement where the tenant is responsible for paying all operating expenses of the property, including taxes, insurance, and maintenance, in addition to rent.
- Land Lease: An agreement where a tenant is allowed to use land owned by another entity in exchange for rent.
- Tenant Improvements (TI): Alterations to the interior of a leased space to meet the tenant’s specifications.
- Ground Lease: A lease agreement where a tenant leases land for a long term and typically constructs a building on it.
Online Resources
- Investopedia - Build to Suit
- Commercial Real Estate Terms
- National Association of Realtors: Commercial
References
- “Real Estate Principles: A Value Approach” by David C. Ling and Wayne R. Archer.
- “Real Estate Finance and Investments” by William B. Brueggeman and Jeffrey D. Fisher.
- “The Complete Guide to Real Estate Finance for Investment Properties” by Steve Bergsman.
Suggested Books for Further Study
- “Real Estate Development: Principles and Process” by Mike E. Miles, Laurence M. Netherton, and Adrienne Schmitz: This book provides comprehensive insight into the real estate development process, including Build to Suit arrangements.
- “Commercial Real Estate Analysis and Investments” by David M. Geltner and Norman G. Miller: Focused on investment strategies in commercial real estate, this book includes a segment on lease agreements like BTS contracts.
- “Investing in REITs: Real Estate Investment Trusts” by Ralph L. Block: Though not exclusively about Build to Suit, this book provides useful context for understanding various real estate investment and finance concepts.
