A Powerful Approach to Achieving Success
In a traditional build-to-suit (BTS) lease, the landowner takes responsibility for constructing and financing a property based on the tenant’s requirements, and the tenant rents the property once construction is finished. However, there are cases where tenants and landowners prefer a reverse build-to-suit approach. The reverse build-to-suit strategy has become popular among tenants and landlords nationwide, allowing tenants to play a much more instrumental role in construction.
What is a Reverse Build-to-Suit?
A reverse build-to-suit is when the tenant takes on the developer role and leads the construction and development of a piece of real estate. In this case, the landlord is only in charge of financing the project, while the tenant gets to decide the building’s overall appearance, layout, size, and any other additional features.
This type of lease can be highly advantageous if a tenant possesses the knowledge and ability to construct a building or has construction resources. As such, tenants who own their own real estate or construction companies are more likely to prefer the reverse build-to-suit method, as they already have the capacity.
Several Tenants are now opting for this method because they can construct a new building that fits their exact needs and specifications.
Reverse build-to-suits are also advantageous for landlords. While landlords bear the responsibility of covering all construction expenses, these costs are ultimately recuperated through regular lease payments. The budget is usually determined through negotiations between the landlord and the tenant. Additionally, the landlord is not responsible for overseeing their property’s construction and does not have to worry about additional costs that are not agreed upon.
How to Leverage a Reverse Build-to-Suit?
A reverse build-to-suit can provide various benefits to both the lessee and landlord if handled correctly.
Personalized Branding and Identity
A reverse build-to-suit allows businesses to design a space representing their brand and personality. The tenant has authority over the whole look and feel of the facility, from the exterior aesthetics to the interior design aspects. This personalization improves brand visibility and produces a one-of-a-kind and unforgettable experience for employees, clients, and visitors.
Reverse build-to-suit leases typically involve long-term commitments, providing tenant and landlord stability. Tenants can be confident in their ability to construct and occupy the property over an extended period, while landlords can rely on consistent rental income for the long term.
New Building and Resources
Opting for a reverse build-to-suit lease guarantees the benefits of new construction, reducing the burden of maintenance costs associated with older structures. The tenant is responsible for maintenance since both build-to-suit and reverse build-to-suit leases are typically triple net leases.
Disadvantages of a Reverse Build-to-Suit
Tenants lacking construction or development experience may be wary before choosing the reverse build-suit method. Though it comes with several advantages, a few risks come hand in hand with this strategy.
Necessitates a Certain Level of Knowledge and Expertise
Tenants who lack experience in construction or development, or those without connections to construction companies, may prefer a traditional build-to-suit lease over a reverse build-to-suit arrangement. Please note that tenants are solely responsible for the project. There won’t be external assistance if things do not go according to plan. Without the necessary skills and knowledge in construction, embarking on a reverse build-to-suit lease can lead to significant challenges and complications.
Increased Tenant Responsibility
As the tenant assumes the developer’s position, they take on total responsibility for the construction process, minus the finances. This includes overseeing the project from start to completion, monitoring timelines, communicating with contractors, and managing the project from start to end. This extra obligation can be intimidating for tenants who have other prior commitments or investments to keep an eye on.
Tenant consequences if the project experiences significant delays:
- Increased Costs: These costs may include extended lease payments, temporary relocation expenses, or increased expenses associated with operating in a different location while waiting for the completion of the build-to-suit project.
- Business Disruption: The tenant’s business operations may be disrupted if the project faces significant timeline delays. This disruption can have a negative impact on the tenant’s revenue, customer base, and overall business performance.
Is Reverse-to-Suit Arrangement the Right Choice?
When considering a reverse build-to-suit lease, assessing if it aligns with your needs and goals is essential. This type of lease involves a long-term commitment, often over a decade or more. It is crucial to carefully evaluate if a reverse build-to-suit arrangement is suitable for your specific circumstances and if you are fully confident in your plans for the long term.