Single-tenant net lease developments may be less risky than other types of commercial development, but they nevertheless have the potential to go sour at some time during the course of the project.
Here is a list of the dangers to be aware of at each level of the build to fit process before the “Open” sign can be lit up.
Tenant Planning
If a renter decides they need another space, they might choose the more specialized build to suit option. To get to the predevelopment stage, however, much work must be done before the concrete can be poured.
Therefore, it’s crucial to comprehend the following points before choosing a site:
- Responsibility differences between Double Net (NN) and Triple Net (NNN) leases.
- Cost of each potential occupancy factor.
- Commencement and completion dates that are reasonable.
Our Recommendation: Your greatest line of defense in keeping costs in check is to perform an occupancy cost analysis. There’s no denying that escalating occupancy expenses directly influence a business’s profits, share price, and overall success. Working with a developer offers a beneficial barrier against many of the risks in these intricate commercial real estate agreements.
Highest Level of Risk:
Pre-purchase
The danger is significant at this build stage to fit the project’s life. Even though the funding hasn’t started flowing in yet, this phase will either encourage the project to move forward since it’s seen as a good opportunity or kill the agreement before any unfavorable findings can hurt.
By conducting a thorough study and performing the following first actions, working with a developer would significantly reduce the risks:
- Site selection.
- Site investigation report as part of due diligence (SIR)
- Employing consultants, engineers, and architects to create early plans
Our Recommendation: Before you look at all possible sites for your business, don’t forget to take advantage of any available incentives, such as free permits or impact fees and lower rent.
Entitlement
The entitlement process is often thought to be within the riskiest stage of the development cycle, is time-consuming and expensive and shouldn’t ever be taken lightly. The primary issues are around site conditions, budget overruns, safety, and project approvals and permits.
To finish these major tasks and more, this milestone can take three to twelve months:
- Municipal/community analysis
- Finish the budget
- Obtain permits.
Our Recommendation: In order to complete this challenging task before the deposit becomes non-refundable, think about entrusting a trusted developer with handling entitlements, approvals, building permits, and any potential complications so you can concentrate on running your business.
Medium Level of Risk:
Pre-development/Pre-construction
The closing of escrow and the tenant’s signature on the lease occur if the development site under analysis has made it to this point. The risk at this middle stage has decreased now that the predevelopment duties associated with the single-tenant opportunity have been taken care of, but it is still present.
The predevelopment activities begin with the mobilization of the general contractor and pre-construction coordination, which may involve but is not limited to:
- Preparing for potential delays, such as arranging long-lead items and poor weather.
- Cooperation of utilities.
- Stake-outs for surveys, excavation, laying of foundations, etc.
Our Recommendation: To be ready for any unforeseen expenditures associated with build to suites, you should be aware of them during this building planning stage. Commercial developers are responsible for paying any costs that exceed the allocated budget.
Lowest Level of Risk:
Construction
The construction process is now over, but the building’s lifespan has only begun. Building construction and operations have started after the risk associated with the first and second milestones were removed.
Several of the goals are as follows:
- Final examinations of work finished by subcontractors.
- Closing processes.
- Tenant signs the SNDA and the Certificate of Occupancy for the lender.
Our Recommendation: Pay strict attention to the punch list, which is used as a quality control measure during construction close-out. Before final occupancy, it’s utilized to address any outstanding responsibilities or problems. Each contractor is required to ask for a preliminary inspection after completion, which is necessary from a legal standpoint to demonstrate that the terms and conditions of the construction contract were met.
It’s important to know everything there is to know about the risks that come with the major project life cycle milestones. On paper, it can appear to be a relatively simple process, but putting it into practice unquestionably requires much of your research, big funding, and the proper team to support you.
Summary:
All risks associated with the project’s major milestones must be understood. Implementing it may seem simple, but it requires research, resources, and the appropriate team. Read more for a summary of the risks at each build-to-suit milestone.
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