The Ins and Outs of Build-to-Suits

What is a build-to-suit?

A build-to-suit is a real estate solution where a company secures a custom-built facility without the upfront capital investment. In a build-to-suit, a developer or investor funds and manages the construction of a new facility or expansion of an existing one to meet the specifications of a prospective or existing tenant. Upon completion, the company enters into a long-term lease, similar to a sale-leaseback.

For companies in need of a new, purpose-built facility, a build-to-suit is an efficient and capital-saving alternative to buying or retrofitting an existing building.

What are the key benefits of a build-to-suit?

• Custom-built facility in the company’s preferred location
• No upfront capital required, enabling the company to preserve capital for business growth
• Operational control of the facility post construction
• Potential for future expansions, renovations or energy retrofits through an investor partnership

Who should consider a build-to-suit?

• Build-to-suits are best suited for companies that:

• Have specialized layouts, equipment or other design requirements
• Prefer a new property instead of retrofitting an older building
• Want to preserve capital rather than tie up funds in real estate development
• Can commit to a long-term lease (typically 10-30 years)

How does the build-to-suit process work?

Companies can pursue a build-to-suit through three main approaches:

• Developer-led build-to-suit: Based on the building specifications, a tenant will hire a commercial developer. The developer will take on the responsibilities (and risk) of land acquisition and building construction. Often, they will work with an investor, like W. P. Carey, as a capital partner to either finance the construction or acquire the building upon completion. The tenant will then lease the property, typically on a long-term basis, from the owner.
• Reverse build-to-suit / sale-leaseback: In this scenario, the tenant takes on the initial responsibilities of land acquisition, financing and hiring a general contractor for construction. Upon completion, an investor like W. P. Carey acquires the building. This allows the tenant to recoup the acquisition cost and reinvest that capital into their business.
• Investor-led build-to-suit: With this option, a tenant can bypass the developer and work directly with an investor like W. P. Carey that offers in-house project management services. The investor would work hand-in-hand with the tenant on site selection, land acquisition, design and construction, delivering a building that meets the tenant’s unique needs with no upfront capital required. The investor would own the building and lease it to the tenant on a long-term basis upon completion.

How long does a build-to-suit take?

Build-to-suits can take anywhere from 12-36 months depending on the size, location, permitting and other specifications. Rent payments typically do not begin until the building is substantially complete and operational. The lease term of a build-to-suit property is also usually longer than those of a typical commercial lease, ranging anywhere from 10-30 years.  

Conclusion: Is a build-to-suit right for your business?

While build-to-suits may seem intimidating for companies who have never pursued one, they are a great solution for custom-built real estate with little to no upfront capital involved. W. P. Carey has extensive experience working with tenants and developers to structure customized build-to-suit financing programs that meet their specific needs – whether it be traditional construction funding, financing upon completion or a full scope of in-house project management services.

Considering a custom-built property for your company? Reach out to our team today!