What is a "Build to Suit" Office Lease?

Last Updated March 26, 2017

You have dreamed about a custom home, one with a shimmering pool in your tropical paradise backyard, a media room tricked out with the latest technology, and a double-height den for your hunting trophy displays. While you lie by that imaginary pool, cursing the economy and current stringent credit requirements, extend that customization dream to something just as appealing for your business--custom office space.

Build-to-suit office space has the allure of an office environment exactly suited to a business's needs. It is defined as a building specifically constructed to the design and physical specifications of one user, at the user's chosen location. This kind of arrangement broadens location choice, provides superior space efficiency, and allows the company to better build its brand.

When a company finds that its current space will not be adequate for future growth, it has four options.

1) The business owner might lease or sublease vacant space from available office space. This method is probably the least expensive and the least complicated option, but it limits the business to what is available in the current market.

2) The second possibility is to acquire and renovate an existing building, which is a good option for a business with good credit, presuming any of the existing buildings were a good match.

3) The company might buy land and build its own facility, an alternative that requires extensive capital. With this option, the business owner assumes all of the risk of owning the building.

4) Build-to-suit is another alternative, where a business owner approaches a developer with specifications for the ideal office space. The developer constructs the building and leases it back to the user. This takes the burden of risk off of the business owner and allows him or her to invest the capital saved back into the business.

Is Build-to-Suit Office Space for Me?

Building to suit is not for every company. While leasing existing office space might take six months to a year, depending on company needs, building to suit is a several year process, and therefore requires a long term commitment. Before building, available land must be found, a good developer selected, the design process and construction negotiations begun, and all of this before the foundation is poured. In addition, because the developer is constructing a customized building for one user, the lease term is usually a minimum of ten years in order to spread the risk over a longer period of time.

Pros and Cons

If a company is able to make such a long term commitment, however, build-to-suit leases can be an outstanding option with many advantages:

  • Location. Build-to-suit means the company can choose its location, rather than making do with what is available. These buildings are most often constructed in vibrant, high-growth areas with excellent access.
  • Space efficiency. Because the building is built to your specifications, it has just the right amount of open space to private office space. The flow of access between departments is ideal for the daily workings of the business. Being able design the office around your business creates maximum space efficiency.
  • Brand. Your company's image and personality should be reflected in your office space. Build-to-suit is uniquely suited to display your brand in the colors, finishes, and architectural design of your space.
  • New building systems. New buildings have the latest in modern systems, like HVAC, plumbing, electrical, and lighting. They completely avoid the questionable charm of cobbled together fixes and patches that come with older buildings.
  • Energy efficiency. With these new systems come cost-saving energy efficiencies. The latest technology for HVAC, lighting, and plumbing fixtures translate into less wasted water and electricity, and more dollars saved.
  • That new building smell. In the search for office space, every business owner has toured the unit with frayed carpet, stained ceilings, and odd and mysterious odors. A new building has none of these defects to distract the client from what you offer as a business.

The cons we've already discussed in part. Build-to-suit office space is a long-term commitment, and one that requires excellent credit to procure financing. It is significantly more expensive than finding and leasing vacant space, but companies may realize savings in efficiency, reduced operating costs, and an improved image among clients.

Wouldn't Owning the Building be Better?

At this point, you may wonder, why not just build your own building and own it, rather than contract with a middle man to construct it and lease it back? Constructing and owning the building is a good option for very large companies with plenty of up front capital and big borrowing power. Most companies would find it difficult to invest so much capital in the building, rather than back into the business, where they are sure to receive a better return on investment. In addition, business owners may not want the hassle of managing and operating real estate, or being tied to the building if the company outgrows it in any way.

Build-to-Suit: The Process

The first step in the build-to-suit process is for the tenant to send out request for proposals to various developers, seeking presentations. Once the proposal is selected, the lease negotiations begin.

Because the build-to-suit lease binds the landlord and tenant for an extended period of time, this part of the process is complicated and time consuming. The tenant will want to delineate all of its desires and specifications for the building--after all; this is the commercial iteration of a custom dream home. The landlord will in turn want to hold the tenant to those customizations that will both be financeable and later marketable when the tenant leaves the building.

Both landlord and tenant will want a say on who is to design, build, and engineer the building. In this design, describe, and allocate phase, as much detail as possible should be included in the lease documents.

The basic rental rate is fixed at this stage as well, calculated based on the rate of return on the land plus all forecasted costs of construction. The rent is often adjusted after construction, based on actual costs.

Once the construction starts, timing becomes critical, as the tenant may have a fixed move-in date. The lease often has provisions for the tenant to walk if delays are onerous. The landlord will want to limit this option to terminate the lease to narrow circumstances, so he or she doesn't get stuck with a half-finished project. Tenants in turn can ask for lease clauses that include liquidated damages for completion delays, which greatly motivate the landlord to keep things on-schedule.

Other lease considerations include the date of the first rent payment. The landlord will want the earliest possible rent date since he or she has invested a great deal of capital and will want some remuneration. The tenant will prefer to pay rent when the building is completely finished. All of these negotiations are important in the process of coming to a lease that is beneficial for both parties.

Moving In: The Payoff

Once the building is up and the paint is dry, you can move in to brand new, customized office space. While the process was long and sometimes exhausting, and costs were significantly higher than leasing existing space, it is hard to put a price tag on a perfect fit between your growing business and a customized, efficient, brand-building office space.

Sources

http://www.coydavidson.com/leasing-tips/the-build-to-suit-lease-alternative/

http://www.whmooreco.com/btsfaq.htm#definebts

http://www.larsencommercial.com/people/mark_larsen_articles3.html

http://www.lexology.com/library/detail.aspx?g=15502a60-34e7-4e98-b12b-85f3ccf66be1

Coy Davidson

Senior Vice President at Colliers International, based in Houston, Texas.