Build to suit is a term often referred to in real estate as a way of leasing a property – and is linked to working with a developer. It is a way of leasing a property, usually for commercial purposes, in which the developer/owner builds to a tenant’s specifications. The landowner pays for the construction of a free standing building (in reference to net lease), built to the exact specifications of the tenant, and the tenant then leases the land and building from the landowner, who retains ownership. It usually requires one major user (or tenant) that will dictate the specifications as to how the property should be built. Often times, a developer will work with one major tenant, and identify multiple opportunities in which they can do a build to suit asset for the tenant. An example might be a developer working with Wawa – they would learn the criteria for location and all building specs, and repeat the build to suit with all land acquisitions. The developer is then free to sell the newly built structure, with the occupying tenant, to net lease investors.
In the US economy, lenders often want to see more equity in the development state of single tenant net leased real estate, and you will often see joint ventures with development sites, as it requires more cash.
Developers are aggressively pursuing single-tenant projects that they can build-to-suit for a tenant looking to enter into a net lease.
Developers are known to establish strong relationships with brokers, for when an experienced and knowledgeable broker is consulted before a lease gets executed, the broker will provide invaluable information, including credit research on potential tenants (enabling developer to secure an investment grade tenant for a long lease term), comparable deal structures, current market information (cap rates and comparables), and the broker will provide detail on the best way to structure the lease. Knowing the market, the broker will recommend the best way to maximize the investment – shown in how the lease is structured (NN vs. NNN, or a modified version somewhere in between). For developers that tend to do build to suits for the same tenant, they will already know the tenant’s preferred lease structure and fully understand what they are targeting.
Business are often interested in acquiring their own property, and through a build-to-suit, are able to design space that offers efficient layouts, minimized operating costs, or solely for the public image. It is a long term investment. The flip side to being the tenant that owns its own building, is you have less flexibility. Your capital is tied up in real estate, and not available for company growth and infrastructure.
Knowing that tenant’s seek to be in a long-term space due to the efficiency and brand image, it is clear why net lease investors are drawn to build-to-suit investments. Generally, companies (tenants) that are able to do build to suits, are have proven financial track records and are quite stable, making them investment grade tenants. Buyers seek out real estate that on its own has a great location and construction, but when combined with a quality tenant, it’s a home run. Build to suit opportunities are definitely something to keep an eye out for when looking to invest in the net lease market.Build To Suit