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.

 

Classes of Office Buildings In Raleigh NC

In dealing with Raleigh Commercial Real Estate and Raleigh Office Space, Office buildings are put into classes.  Buildings are said to be Class A, B, C or D.  There’s quite a bit of confusion about building classification because the same terms, Class A and Class B are used in two different ways:

Construction Type:  Class A office construction is considered to be 1960’s or later, and Class B to be pre-1960 construction or thereabouts.

The main differences in pre-1960 construction and post, have to do with construction methods as well as heating, ventilating, and air conditioning, or HVAC.  Prior to the 1960’s, most buildings were constructed with a lot of masonry and a central heating system, but no central air conditioning or ventilating system.  They typically offered operable windows for ventilation.  Since the 1960’s, most larger buildings are built out of steel and glass and almost all buildings, regardless of the construction materials, don’t have windows that can be opened.  Instead, they’re mechanically heated, ventilated and air-conditioned.

Quality of Maintenance/Operations:  Classes A, B, C and D are also used in subjective sense to describe the quality of the product, Class A being the best.

It is common to find a Class B construction building (pre-1960 construction) that is run in a Class A manner.  Conversely, brokers and tenants relegate some post-1960 construction to Class B, C or D building status because it fails to live up to its Class A status with respect to how it is run and maintained.  It is important for you to be able to accurately explain these definitions to people and find out what they truly expect.  If a tenant or buyer tells you they want a Class A office building, you need to ask the right questions to determine whether or not they mean the quality of operation or the construction type.

Subcategories of Office Buildings in Raleigh NC

Three common subcategories of office buildings in dealing with Commercial Real Estate in Raleigh NC  are:

  • High-Rise
  • Mid-Rise
  • Low-Rise

High-rise and mid-rise buildings are typically found in high-density urban markets.  While high-density urban markets also contain mid-rise and low-rise buildings, they’re more commonly found in suburban markets and often comprise office parks.  What might be considered a high-rise in one market might well be a mid-rise in another, since the definition is somewhat relative.

Generally speaking, in major metros:

  • High-rises are considered to be 25 stories or higher
  • Mid-rise buildings are considered to be 7 to 24 stories
  • Low-rise usually describes buildings 1 to 6 stories.

Another subcategory of office space is ‘community commercial’ or ‘mixed use’.

Smaller mixed-use buildings are very prevalent in the older downtowns of small cities and towns.  They’ll typically be two, three or four stories of office space or multi-family, with either office space or urban street retail on the ground floor.  Because the properties are quaint and have become more appealing to many people, you’ll increasingly see newer developments that attempt to mirror these properties.  They’ll often include an office component, a retail component, apartments, condominiums, or even independent living facilities for the elderly.