Build to Suit – Is it for You?

Build-to-Suit for Commercial Real Estate

There is another approach to business space other than buying or leasing existing space.  For retail, office and most commercial enterprises, leasing is the chosen space acquisition method, but there are situations where leasing isn’t the best approach.  Let’s take a look at another approach that could be right for your business; built to suit.

What is build to suit?

A build to suit project is one in which the location, design and specifications of construction are all determined by one major occupant.  Though there may be more occupants once the space is constructed, everything about the building and its construction is specified by a single user.  An example might be a major user completing a build to suit project with additional space planned for leasing to future business tenants.

Why do build to suit?

A major motivator for a business to look into build to suit is a shortage of the type of space that is needed.  In some markets office space can be in very short supply, and what is available may be in undesirable areas.  Another reason to consider this approach is a specialized need or space requirement.  If something you do in your business requires a floor plan, facilities or equipment that cannot be accommodated by available space, build to suit may be the best way to go.  Perhaps your business is about to make a major long term commitment to a market area and it makes good financial sense to create the perfect business facility in a desirable location.  There are also tax considerations that can make build to suit a viable approach.

How is build to suit structured as a project?

There are three approaches to the build to suit project, and the one chosen is usually based on the experience and desired commitment of time and resources of the business seeking the space.

  1. The DIY approach:  This is the do-it-yourself developer method.  The business secures financing, acquires the land, hires the general contractor, and moves the project to completion.  Once completed, the business can simply continue ownership or can sell the property to an investor and lease it back.
  2. Hire a developer:  The user passes all responsibility for the project to a developer, construction as well as financing, and then leases the property for the business.  For more information see these articles about gross and net lease arrangements  and the structure of a triple net lease.
  3. Hybrid of the two:  This can be a joint venture with a developer, or an equity sharing arrangement resulting in some portion of ownership on completion.

There is a lot of flexibility in setting up a build to suit project, which can be the ultimate motivation to take this approach.

Advantages of build to suit:

There is no better way to acquire a business space that is totally designed and suited to your business operations.  It increases efficiency, lowers operating costs, and can enhance profitability.  Taking this approach can also help a business with their branding and image through design and layout.  Operating efficiency through new construction with the latest energy efficiency concepts will lower costs and increase profitability throughout the life of ownership.  Build to suit also allows the business to accommodate future expansion in the original construction.

Disadvantages of build to suit:

The first and a very important consideration is the long term nature of this decision.  There must be a long term commitment, which requires a careful assessment of the business, the market area, and any future expansion or business changes that may be required.  Unlike leasing an existing space, it can take years to move into a build to suit structure.  This is a more expensive approach than leasing existing space.  However, over the long haul it can recoup some of that extra expense through operational efficiency and the avoidance of future moves that may be forced upon the business by landlords.

Build to suit isn’t for every business.  However, if your research shows that the advantages outweigh the other issues, it can be a comfortable long term decision for your business.