Summary:
Still confused about the complexity of lease structure and its unique elements? Build to suit is a lucrative but challenging commercial real estate venture. When it comes to commercial development, it’s crucial to know your alternatives and ask the correct questions.
A built to suit lease can be defined in several different ways, as we previously covered in this blog post. A build to suit lease differs from a typical commercial lease in various ways, including multiple lease arrangements and unique features.
The build to suit lease is anchored by its construction component. However, the situation isn’t always as straightforward as “developer creates, tenant occupies.” There are more possibilities than the typical build to suit that we’re used to. Let’s quickly review what those are.
Built to Order
Choosing, acquiring, financing, and leasing a home that is constructed explicitly to the occupant’s needs are known as “build to suit.” A build to suit lease gives the landlord more control over the construction of its property and allows it to take advantage of its extensive knowledge of the locality and regional building customs.
A basic build-to-suit lease combines a lease and a construction agreement into one document. Therefore, the construction and lease negotiating difficulties are the main focus of the entire build to suit the development process. The building component is typically the most complicated and vital issue. Therefore, both the landlord’s and the tenant’s responsibilities in this regard need to be carefully considered. Simply put, the landlord/developer will be responsible for creating the construction. At the same time, the tenant will reside and pay rent on said structure.
A realistic estimate of construction’s hard and soft costs is added to a stated rate of return on the imputed land value to determine the rent. The base rental fee could occasionally change depending on the actual cost of construction.
Backward Build to Suit
The renter essentially serves as the developer in a reverse build to suit development. The tenant will erect its structure upon approval and at the landlord’s expense. When a renter has its own real estate and/or construction department but still prefers to rent rather than buy real estate, they may choose this strategy. Usually, the landlord is shielded from extra fees, permits, etc.
Both sides gain from the tenant’s expertise in creating the same structure in numerous places with a reverse build to suit lease. The facility is made to order by the user, and the tenant has complete control over the building process.
Combination
Combining the build to suit and reverse build to suit options could be a third choice. Typically, this strategy entails tenant construction while the landlord performs site preparation. This choice combines the tenant’s familiarity with the prototype building with the landlord’s familiarity with the location.
Build-to-suit construction is a profitable but occasionally challenging commercial real estate venture. When dealing with this type of commercial development, it is critical to be aware of your options and to make the necessary queries.
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