For some businesses, renting property can become a challenge because a company requires highly-specific facilities. Other times, there isn’t anything on the market in the desired operating area that meets the needs of the company. In those situations, a build-to-suit lease could offer the flexibility of renting with the custom amenities of purchasing.
Build-to-suit leases involve commercial tenants working with landlords to develop a property to their exact specifications. The landlord manages the construction process, and the tenant pays for the cost to create their operating space through their monthly rent.
Entrepreneurs starting new companies and professionals managing growing businesses may need to weigh the benefits and drawbacks of a build-to-suit lease before making a decision about how to acquire commercial space.
Potential benefits of build-to-suit arrangements
A build-to-suit arrangement gives the business leader seeking operational space control over every detail about the property. Especially in scenarios where business regulations or a franchise agreement impose highly-specific standards on specific aspects of the facilities, a build-to-suit lease helps ensure compliance.
Additionally, tenants can avoid the hassle of obtaining purchase financing, which can be difficult for startups or businesses growing rapidly. There are also tax benefits, as the amount paid in rent is often fully tax-deductible.
Potential drawbacks of build-to-suit leases
Any construction project is at risk of delays due to issues with labor, raw materials or permits. While the landlord manages the project, there is never a guaranteed project completion date. Particularly when businesses want to establish a toehold in the local market promptly, a build-to-suit lease might leave them in limbo for months while competitors establish themselves.
Build-to-suit leases can be relatively costly when compared with leases for existing spaces that the tenant customizes, and qualifying for them can be more difficult. Landlord may also demand a long-term commitment to the space to offset the investment they must make in erecting or modifying improvements on the property.
The needs of a business and the demands of a landlord offering build-to-suit opportunities are among the issues that a potential commercial tenant should consider carefully. Reviewing proposed lease paperwork and facility requirements for a company with a skilled legal team can help business leaders to better ensure that they make smart decisions before moving forward with a commercial real estate transaction.