By Scott Merkle, Managing Partner, SLB Capital Advisors
Companies expanding their physical footprints today face a difficult equation. Construction costs remain elevated, financing is more expensive than it was a few years ago, and the pressure to preserve capital for the core business has rarely been greater. At the same time, onshoring, supply chain repositioning and sustained demand for modern industrial and operating space are pushing companies to build new, purpose-built facilities at precisely the moment when capital discipline matters most.
For many of these companies, the traditional developer-led build-to-suit is no longer the only answer. A growing number are turning to a structure that flips the conventional model on its head: the reverse build-to-suit.
The Limits of the Traditional Build-to-Suit
In a conventional build-to-suit, a developer controls the site, constructs the building to the future tenant’s specifications, and then leases it back to the company under a long-term agreement. It is a well-understood structure, and for many companies it works.
But it carries two inherent constraints. First, the developer’s profit is embedded in the economics, ultimately financed by the tenant through the rent it pays for years or decades. Second, the company is generally limited to sites the developer owns or can tie up. That can mean compromising on the factors that matter most in a location decision: labor availability, logistics, utilities and power, and access to state and local incentives.
How a Reverse Build-to-Suit Works
A reverse build-to-suit puts the company back in control of the process while still moving the real estate off its balance sheet.
In this structure, the company leads its own site selection and controls the design and construction of the facility, just as it would if it intended to own the building outright. Typically, the company engages a general contractor or program manager to bring the development and construction to life, managing the project through to delivery. An investor, rather than a developer, acquires the land and funds 100% of project costs as construction progresses. The investor retains ownership, and a long-term lease commences upon completion, typically at certificate of occupancy.
During the construction period, the funding mechanics resemble a construction loan with a draw schedule. The investor funds project costs over time, and a yield accrues on the amounts funded. That accrued yield is capitalized into the lease basis, so the company’s eventual rent reflects total project costs plus the investor’s return through completion. In effect, it is a sale leaseback structured before the building exists.
Why Companies Choose This Route
Two advantages stand out, and both speak directly to the priorities of corporate real estate and site selection professionals.
The first is economics. Because there is no developer in the transaction, there is no developer profit margin baked into the cost of the facility. The company effectively builds at cost and finances that cost through a single, long-term lease.
The second is site freedom. The company is not limited to land a developer happens to control. It can pursue the optimal location for its operations — weighing labor markets, transportation access, power and utility capacity, and the incentive packages offered by competing jurisdictions — then bring an investor to that site rather than the other way around. For companies negotiating with economic development organizations, this is a meaningful difference: The company, not a third-party developer, sits at the table and controls the project.
Beyond these, the structure provides 100% financing of both land and construction. The company avoids the need for a construction loan and avoids deploying its own equity into bricks and mortar, freeing that capital for the operations that actually drive returns. And because the company manages design and construction, it gets exactly the facility it wants, built to its own specifications.
The Investor Perspective and Pricing
As with a traditional sale leaseback, the investor’s underwriting focuses primarily on the credit quality of the tenant rather than on near-term real estate appreciation. Investors are buying a long-duration, predictable income stream backed by an operating company, and they evaluate business performance, industry position and balance sheet strength accordingly.
This credit-driven approach has a practical benefit for companies. Facilities in secondary or tertiary markets, or those with specialized configurations, can still attract competitive capital when the underlying tenant is strong. For most companies, pricing on a reverse build-to-suit generally falls in the upper-6% to mid-8% range, with the specific rate driven by tenant credit, lease term, location and facility characteristics.
Addressing the Question of Control
A common concern with any sale leaseback is the perceived loss of control that comes with no longer owning the real estate. In a reverse build-to-suit, that concern is arguably less pronounced than in a developer-led deal.
The company controls site selection, design and construction from the outset, so the facility is built to its standards rather than a developer’s. Long-term lease terms (frequently 20 years) paired with multiple tenant-controlled renewal options can provide effective control of the location for several decades. The result is operational continuity comparable to ownership, without the capital tied up in the asset.
A Structure Worth Understanding
For companies weighing a major facility decision, the reverse build-to-suit is not a replacement for traditional financing so much as an additional, and often underappreciated, tool in the corporate capital toolkit. Evaluated alongside conventional build-to-suit, ownership, and on-balance-sheet financing, it can deliver a purpose-built facility at the company’s chosen location, fully financed, without a developer’s margin, while moving the real estate off the balance sheet.
As with any sale leaseback, the value of engaging an experienced, dedicated advisor early in the process is significant. The right advisor brings a clear view of achievable pricing, the ability to identify and qualify the right investors, and the corporate finance perspective to structure terms that align with long-term strategy. For companies that are already committed to building, understanding the reverse build-to-suit early can be the difference between simply financing a facility and optimizing the entire decision.
Scott Merkle is the Managing Partner of SLB Capital Advisors, which advises corporates and private equity sponsors on a wide range of sale leaseback transactions. Mr. Merkle has 25+ years of real estate experience across a wide range of areas including sale leasebacks, build-to-suit capital raising, capital markets, strategic advisory, principal investment and development.