You must first negotiate a favorable build to suit lease to establish a solid foundation of terms before the development team is prepared to begin creating the basis for your build to suit location.
The most popular type of lease is a triple net (NNN) lease, where the owner pays for roof and structural repairs. At the same time, the tenant usually is responsible for paying basic rent, property taxes, insurance, and upkeep.
Following that, keep the following in mind as you negotiate the specifics of a built to suit lease with your landlord.
Base Rent
Don’t make the error of underestimating the whole expenditures; more seasoned build to fit tenants know better than to succumb to a cheaper base rent without studying the extra numbers that go along with it.
Rent is determined by the rate of return applied to the project expenditures, the type of building, the current market conditions, and the tenant’s credit standing.
Negotiating-BTS-Lease
Additionally, remember that for a net lease to make financial sense, the price must differ from a gross lease by enough to cover unforeseen expenses like maintenance, taxes, and insurance. Be aware that your property costs will probably change from year to year.
Time Period
A long-term lease of at least ten years will often be one of the critical aspects of a build to suit. If you find this intimidating, keep in mind that the rental price decreases with the length of the lease.
Additionally, it’s typical to have renewal options with set or formula rates during this lengthier lease term. Because it specifies the length of time you can renew for, the amount of notice needed, and the renewal rate, these can occasionally be just as significant a component as the lease itself. You must still find out how it is defined if it is agreed that it would be decided by fair market value.
*Tip: It’s a best practice measure to include language to acquire a third-party arbitration should a dispute with the landlord emerge when an option is to be determined by fair market rate.
Rent Escalations
The lease bump terms, which may be either a flat rate, percent rate, or variable increase depending on the Consumer Price Index, are another aspect of the bargaining process to not neglect (CPI).
Ensure your rent escalator is set to the right CPI because the Bureau of Labor Statistics releases several CPIs based on geography, consumer type, good and service kinds, and base index period.
The more specialized option of a build to suit can have several benefits. However, be sure to thoroughly negotiate the details of your build to suit lease with your developer and keep these recommendations in mind before beginning construction on your following location.
Summary
Before the development team can start building your build to suit, you must negotiate a favorable lease. Build-to-suit offers many benefits. Be sure to negotiate the parameters of your build-to-suit lease with your developer and follow these standards before breaking ground.
******************************
Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.