A built to suit commercial real estate project is a long-term contract in which a developer builds a property specifically for the use of one tenant. Generally, a tenant will locate a developer who is willing to purchase or ground lease land (or already owns land), and is willing to engage in a built-to-suit transaction. However, in some cases, a tenant will purchase land themselves. In this situation, they might finance the construction of a building, sell it to an investor and lease it back from them in a sale-leaseback transaction.

In most cases, the built-to-suit development process will begin with a RFP (request for proposal), in which a tenant requests bids from multiple contractors in order to compare and contrast their options. This will contain various details of the tenant’s desired building, including the size, design, desired move-in date, acceptable rental cost, and other, similar requirements.

In a built-to-suit development project, time is of the essence, as the tenant often needs to move out of their previous location, and will need to use the new building to operate their business. In addition to determining the projected move-in date, a built-to-suit lease will also need to detail the point at which a building is complete enough for the tenant to begin paying rent.

Leasing agreements may also include a lease renewal option, which may need to be exercised a certain number of months or years before the end of the initial lease. Finally, certain tenants may want their leasing contract to contain an option to buy the property before their lease is up.

Built to suit development has a variety of benefits for both tenants and investors/developers. For the tenant, built-to-suit transactions are ideal, because they transfer much of the development risk from the tenant to the developer, freeing up capital that the tenant can use to grow and operate their business. For investors/developers, built-to-suit deals reduce the cost and uncertainty of finding a tenant, as the tenant has already signed a long-term lease on the to-be-developed building.

In addition, leasing agreements may also include a lease renewal option, which may need to be exercised a certain number of months or years before the end of the initial lease. Finally, certain tenants may want their leasing contract to contain an option to buy the property before their lease is up.

Built to suit development has a variety of risks for both tenants and investors/developers. For the tenant, built-to-suit transactions involve transferring much of the development risk from the tenant to the developer, which can be a risky proposition if the developer is not experienced or reliable. For investors/developers, built-to-suit deals involve a significant amount of time and cost, as well as the risk of finding a tenant, as the tenant has already signed a long-term lease on the to-be-developed building. Additionally, there may be significant negotiations between the tenant and the developer as to how the building will be designed and constructed, which can lead to cost overruns if not managed properly. Finally, there is the risk that the building may not be able to be rented to other tenants after the original tenant’s lease expires, or if the original tenant defaults on their lease.

The steps involved in a built to suit commercial real estate project include:

• Determining the projected move-in date
• Including a lease renewal option in the leasing agreement
• Including an option to buy the property before the lease is up
• Having strong financials and great credit to qualify
• Negotiating the building design and construction
• Making change orders with the landlord/developer's approval

For a built to suit commercial real estate project, there are two main financing options: traditional commercial construction loans from more traditional sources, like a bank, life insurance company, or credit union; and specialized financing packages that include a construction component followed by a longer-term, permanent loan upon completion. Traditional commercial construction loans typically offer shorter amortizations and higher interest rates, while specialized financing packages may offer lower interest rates and longer amortizations, increasing cash flow and putting more money in developers’ pockets.

For more information, please see the following sources:

• Built to Suit in Commercial Real Estate
• How to Finance a Build-to-Suit Industrial Development