Real estate is one of the fastest growing industries in the world. Most countries have hundreds, if not thousands of real estate companies and agents who work hard to offer only the best and top quality homes and properties to many people across the globe. But not a lot of common folk are familiar with the real estate industry and all of its facets and complexities. Build-to-Suit (BTS) is one of those terms that really only real estate professionals are familiar with. But anyone can get more information on BTS, so if you’re here, you’ll definitely be well-versed on the term by the end of this article.
What is Build-to-Suit Financing?
Build-to-suit financing is a term that describes a scenario where a developer or home/building owner provides the building to a tenant’s exact specifications. It is also the developer’s money that finances the project, and they are also usually responsible for designing the structure. They are the ones who oversee the construction of the building from initiation to completion. Once this building is completed, they will then lease it to tenants but remain as the owner of the entire property. A build-to-suit property can be anything from a collection of single units to multi-building facilities. An agreement is usually made between the tenant and the developer, although there are also instances where more than one tenant is involved.
There are two agreements between the developer and tenant. These are:
- A development or construction agreement: The result of request for proposal which defines the relationship between the tenant and the landlord from the design through construction.
- A lease agreement: States the terms of occupancy following construction. In other cases, the building or construction are included in the lease. However, this may also vary depending on the agreement between the two parties. These agreements are usually highly complex due to the fact that this encompasses the construction, design, time, and money. That is why they are carefully drafted and must be read carefully by the tenants and landlord, and therefore must be read and assessed carefully.
What are the Advantages of Build-to-Suit?
In many cases, a new BTS tends to be more cost-effective. It’s also often less risky compared to other types of development. This is because of the following reasons:
- Buildings are created uniformly. This means that the tenant has a standard unit design, so you know what to expect.
- The developer or owner has almost no or no leasing risk. This is because the tenants are identified first before they even sign a lease with the owner.
- The property is designed according to the specifications that will suit the tenants. This means that the tenant has their own input on the specifications of the building, and therefore knows exactly what they’re getting into. And because of this, tenants are able to maximize their space, efficiency, and reduce any long-term costs. Not only that, this also helps them avoid any structure that does not meet the needs of the tenants.
- It allows the tenant to choose their own ideal location rather than just waiting for the properties to be available.
- These buildings are usually equipped with the latest technology to suit the needs of the tenants, as well as help mitigate the operating costs for them.
- Tax is fully deductible when the lease reaches its full term.
Advantages of Using a Developer for Build-To-Suit
While it is desirable to be able to use your own money for a building, as a tenant who uses a developer for this, you can take advantage of the following that developers provide to you:
- They can meet the tenant’s needs and protect them from the disadvantages of handling their own development.
- It will be the developer who is responsible for financing the project, so no money will come out of the tenant’s pockets.
- Saves them time and money for future developments.
Disadvantages of Build-To-Suit
Build-to-suit financing this sounds like a good investment on the surface, but there are also some disadvantages to it. Here are a few that we have gathered:
- It usually requires a longer commitment. Many tenants are usually under a 10-year lease! This is a long time for “temporary” housing.
- Since tenants are required to sign longer lease terms, they must also be willing to commit. If they can’t, then BTS is not for them.
- They are more expensive compared to other types of housing because of all of the customization, and the tenant must have an excellent credit score in order to secure financing for this type of project.
- It can take several years to finish, so it will not be livable for quite some time.
- Tenants are assured to meet the company’s long-term needs, and must oblige with the terms of the lease as agreed upon.
Is Build-to-Suit Financing for You?
Yes and no. Why yes? Because this project does not require you to actually pay for the entire construction, as it is handled by the developer. All you have to do is to wait for them to complete the project and you can move in. Not only that, you get to give your input in the project and choose a location you would like to settle in so you know that the house or building is according to how you want it.
Why no? To put it in a simple way, this requires longer commitment and specific requirements that you need to meet in order to qualify. You must also wait for the project to be finished before moving in, and it may not align with your time-table if you are in a hurry.
BTS financing is one of the most advantageous commercial real estate development projects that you can get involved in if you want to grow and settle down in one location that you love. However, before you start leaning in the direction of this option, it’s best that you find a well-trusted development company that can help you with this. It is important that you are able to do your research first before deciding to proceed with a costly, extensive project like build-to-suit development. An expert and professional development agency can work wonders if you know who to approach!
If by chance you do decide you want in on a build-to-suit development, it is important that you know your company’s long-term goals and needs. Make sure that the construction materials, location, and design are all according to what you want. Remember, this is your time, commitment, and money on the line too, so you should make absolutely sure that everything is how it should be, and like you agreed upon with the development company. The flexibility of the plans are also important so you can allow growth and expansion in the future. Once you have everything and you are okay with the commitments outlined in the contract, then you can start getting involved in the process. Good luck!
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