Avoid the Sand Traps in Build-to-Suit Leases

Working effectively with developers in build-to-suit lease arrangements means being heavily involved in the building specifications early on and throughout the planning process, provided the facility’s complexity and intended use warrants such attention. After all, the developer is likely to sell the building, probably to a REIT, shortly after occupancy, but the lessee for whom it was built could be there for many years. “A build-to-suit for lease, versus owning, may make more sense when acquiring a facility in a robust real estate market, when you consider an exit strategy and the probability of a lower capital gain,” says Rodger E. Willoughby, Senior Real Estate Associate at Michelin North America, Greenville, South Carolina.

The development community is back in a position of strength relative to the early years of the decade. And by virtue of developers’ active land purchase strategies, key business locations by and large are in their hands. “A big factor is the degree to which sites are controlled by developers,” says George T. Heery, a principal at the Brookwood Group, an architectural consulting and design firm in Atlanta. “Many times, companies are virtually forced into a build-to-suit lease, because the right location is in the hands of the developer who doesn’t want to sell the land,” he stresses. “He wants to build something on it and lease it.” Brookwood Group works with companies of all sizes in the structuring and implementation of build-to-suit leases, among other projects.

Heery says most companies realize that a build-to-suit lease is essentially a financing vehicle — one that keeps the asset off the balance sheet — and that the suitability of the completed facility is just as important in a build-to-suit arrangement as it would be if the company owned the building. “But most companies will follow that recognition through almost superficially,” he observes. “They don’t understand how different their interests are from those of the developers.”

“The biggest problems for the lessee have not come from the legal aspects of their lease,” Heery relates. “Most companies hire a real estate lawyer and get that part right. Almost all the problems come from shortcomings in the facility itself. And it is usually because the companies haven’t really controlled the planning and the construction to the degree they would have if they owned the building. But they virtually do own it.”

— Mark Arend is Senior Editor of Site Selection

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