Build-to-Suit
A build-to-suit (BTS) is a development arrangement in which a property is custom-designed and constructed to meet the specific requirements of a particular tenant, who commits to a long-term lease before or during construction.
Build-to-suit projects are common in industrial, medical, and corporate office sectors where tenants have specialized space requirements that cannot be met by existing buildings. A logistics company might need a warehouse with specific clear heights, dock configurations, and trailer parking; a hospital system might need a medical office with particular layouts and infrastructure; or a corporate headquarters might require unique floor plates and building systems. BTS solves this by creating exactly the space the tenant needs.
The economics of a BTS deal differ from a typical speculative development because the tenant's lease commitment eliminates the primary risk: lease-up. The developer knows they will have a tenant paying rent from day one, which allows for more favorable construction financing and, in many cases, a pre-arranged permanent loan or build-to-suit sale. As a result, BTS projects typically achieve lower development yields than speculative projects, reflecting their lower risk.
For investors, BTS properties are attractive because they combine the security of a long-term, NNN lease (typically 10-20 years) with a modern building designed for the tenant's specific needs, reducing the risk of vacancy. The primary risk factors are tenant credit quality, the degree to which the building could be re-leased to another user if the original tenant departs (known as functional obsolescence risk), and the remaining lease term at the time of acquisition.
Related Terms
Triple Net Lease
A triple net lease (NNN) is a lease structure in which the tenant is responsible for paying all three major operating expense categories -- property taxes, insurance, and maintenance -- in addition to base rent. This shifts the majority of operating risk from the landlord to the tenant.
Ground Lease
A ground lease is a long-term lease in which a tenant leases the land from the landowner and typically constructs and operates a building on it. At lease expiration, ownership of the improvements usually reverts to the landowner.
Letter of Intent (LOI)
A letter of intent is a non-binding document that outlines the key business terms of a proposed real estate transaction, including price, due diligence period, closing timeline, and major contingencies. It serves as the starting point for purchase agreement negotiation.
Core Investment
A core investment is a low-risk commercial real estate strategy that targets stabilized, high-quality properties in prime locations with strong tenants and long-term leases. Core assets are the institutional equivalent of blue-chip stocks.
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