The Build To Suit Commercial Lease
There are many ways to structure commercial real estate transactions so real estate investors, landlords and developers can respond to the needs of potential occupants in the commercial real estate market. A build to suit lease is one such example.
What Does Build To Suit Mean?
A Build to suit commercial property is commercial real estate that has been built to the specifications of a commercial occupant. The build to suit property may be offered for sale or for lease. When the property is leased to a tenant, it is termed a build to suit lease. Build to suit commercial real estate commonly involves retail or industrial properties, but can be any type of real estate.
Why Chose A Build To Suit Lease?
A build to suit lease is suited for tenants who have specific real estate needs that are not fulfilled in the market where they need to be located yet need the advantages of leasing a property. In new developments or undeveloped areas, the market may not have real estate product yet available. Commercial property in other markets may be obsolete or out of line with the needs of certain tenants.
In other situations, prospective tenants needs may be so specific, that commercial property will have to be custom built to their specifications to work for their business. A common example is a fast food chain restaurant that has a specific business and marketing strategy to differentiate themselves from their competitors.
Landlords will offer a build to suit lease for a variety of reasons. A site may be particularly suited for a build to suit property transaction. Landlords or developers may also wish to reduce risk and speculative capital outlays before being able to find a tenant. Building on speculation involves more risk. A landlord will build to suit to secure a tenant before embarking on the building process.
What Is A Reverse Build To Suit?
In certain situations, a prospective commercial tenant's capability in designing and constructing a building that suits their needs exceeds that of anyone else. In that event, the prospective tenant may design and manage the construction themselves. However, the prospective tenant wants to ultimately lease the premises from the landlord. When the landlord finances the improvement of the property, but the improvements are conducted by the prospective tenant, a reverse build to suit occurs.
What Is A Build To Suit Exchange?
A Build To Suit 1031 Exchange sales transaction offers a solution to buyers that would like to defer capital gains tax on the sale of an asset, but require the equity in the previous property be placed in a property built to suit their needs. If they perform improvements on the target property after the purchase, they lose the advantage of the capital gains deferral.
The solution can be a Build To Suit 1031 Exchange in which the improvements are made by the seller or as part of the 1031 Exchange. However, the build to suit exchange is still subject to the time frames and requirements of the 1031 exchange process. Only a professional can advise on the issues involving built do suit exchanges.