Build-to-Suit Lease

December 3, 2012 | Savvas Kotsopoulos

A build-to-suit (or design-build) lease is essentially a landlord/developer’s agreement to

construct a purpose built building, usually for a single tenant. The landlord will typically own
or ground lease the lands (and once constructed, the building) and has the option of re-letting
the building to a new tenant upon the expiry of the term of the build-to-suit lease to the
original tenant. Build-to-suit leases typically are for a longer term than a normal lease in
order to permit the landlord to recoup its investment over the duration of the lease term.

A build-to-suit arrangement is essentially comprised of two agreements: (i) a development

or construction agreement, the result of a request for proposal (“RFP”) process, which defines
the relationship between the landlord and tenant from the design through to the construction
of the building; and (ii) a lease agreement, which stipulates the terms of the occupancy post-
construction. In some cases, the provisions regarding the construction of the building are
included in the lease itself or captured in an accompanying “work letter”. The construction
aspect of this arrangement is usually the key issue and the most complicated, warranting close
attention to the landlord’s and the tenant’s responsibilities in this regard.

Given the interplay of traditional lease issues with design, construction, timing and financing
concerns associated with making a project a reality, build-to-suit leases present a unique set
of obstacles that parties must face and which require careful drafting and attention. This
article highlights some of the key issues to be considered in this respect.

1. The Players

A build-to-suit lease has the potential to bind the landlord and tenant for an extended period
of time and the design-build process is typically a lengthy process requiring significant
commitments of capital, time and effort by each of the parties at the outset. Accordingly, the
question as to the exact role each party will play warrants more than a superficial evaluation.
A landlord will need to carefully evaluate the credit-worthiness of the tenant and be cognizant
of the nature of the tenant’s business and its specific needs to help guide the design and
construction of the building. Quite often such analysis will result in the landlord requiring a
parent guarantee and/or cash security for the tenant’s obligations under the build-to-suit
agreements. From a tenant’s perspective (and as part of the RFP response process), it should
assess whether the landlord has the expertise and financial wherewithal to deliver the building
within the required time period and as specified. Much of this will be contingent upon
evaluating the landlord’s previous build-to-suit experience, local and industry reputation and
organizational structure. In some cases (where, for instance, there is a significant tenant
improvement allowance payable by the landlord or where the landlord is a special purpose
entity), it may be appropriate for the tenant to require the guarantee of a parent entity, the
securitization of an amount owing via a letter of credit and/or self-help/set-off remedies. Who
will finance the project and on what terms also merits some analysis. A construction lender
will likely have its own requirements with respect to the project and will introduce its own
parties, such as inspectors, insurers and guarantors, into the mix.

The landlord and tenant will also each want to weigh in on the selection of the architects,
contractors, and engineers for the project and competing priorities will need to be balanced.
A landlord will want to ensure that the design of the building allows for a lease to a new
tenant upon the expiry of the term, while a tenant will want the design to best suit its particular
needs. The choice of contractor is also important, with factors such as experience, existing
relationships with the developer, reputation, and the bid amount weighing differently for the
landlord and the tenant.

2. Designing, Describing and Allocating the Work

A build-to-suit project typically starts with an RFP in which the tenant sets forth its projected
needs and seeks presentations from a number of developers. The RFP will usually set out the
types of uses, amount of space required, timeline for occupancy, range of acceptable rent,
general design parameters and other specifics that the tenant wants addressed in the RFP
response. Once the successful proposal is selected, the lease negotiations begin in earnest and
the landlord and its architects will begin to exchange design plans and specifications with the
tenant’s space planners and construction consultants. The landlord and tenant may very well
envision the finished project differently, in that the tenant will want the design to perfectly
suit its needs, while the landlord will try to balance the tenant’s requirements with the
necessity of designing a building where the construction costs are financeable and such that
the building is capable of being leased to as wide a market as possible once the initial tenancy
has ended. Given that the design specifications and parameters are of critical importance in
establishing the cost of the project, the rent and the timing for completion thereof, it is
important to provide as much detail as possible in the build-to-suit agreements as to the
known aspects of the design and the work to be completed. Similarly, there also should be a
detailed description of the parties’ construction duties and approval requirements concerning
the premises to be built and the allocation of obligations (for example, will the landlord fit-
out the premises to a “turn-key” specification or is the landlord simply providing a “cold dark
shell”?).

A commonly-encountered issue in a build-to-suit lease is the natural tension between

multiple contractors in the same building. Most timetables will require that the tenant
improvement contractor is working in the building at the same time as the general contractor
is putting the finishing touches on the base building. The practical concern centres around
meeting the needs of two contractors simultaneously and balancing their demands for the
overall benefit and completion of the project in a timely manner. To address this, many
landlords will suggest that the tenant avoid this issue altogether by contracting with the
landlord for the construction of the tenant improvements or with its contractor directly.

3. Timing

Timing for performance is a critical issue in a build-to-suit lease and a timetable with clearly
identified deliverables is imperative and must be incorporated into the agreements. Usually
the parties will establish a fixed move-in date (often motivated by the tenant’s need to move
out of its existing premises by a date certain) from which all players involved must work
backward and harmonize their deliverables. The timeline will likely include milestones for
the design, construction, and occupancy phases around which a schedule will be built, such
as securing of financing and permits, ground breaking, pouring of the foundation and
completion of the structural steel.

Since so much hinges on whether the project can be completed on time, the parties must
consider what will happen if there are delays. From a tenant’s perspective, it is important to
have the right to walk away from the project if it becomes apparent that the project is not
financeable, that obtaining permits is unduly problematic, or that the project will otherwise
be significantly off-schedule. Conversely, the landlord will seek to limit this right to narrow
circumstances, particularly after construction has reached a critical point. One approach to
balance these competing concerns is to tie the termination right to delays in meeting certain
critical milestone dates in the project schedule, including an outside date for the substantial
completion of the project itself. Nevertheless, after a certain point, walking away from the
project will not be a practical or satisfactory remedy for a tenant where it is faced with the
prospect of very few, if any, suitable occupancy alternatives and significant business
interruption losses as a result of the delays. As a result, tenants will often seek to fix liquidated
damages amounts for delays that will make any delay very uncomfortable for the landlord
and incentivize timely completion. The enforceability of liquidated damages can be a thorny
issue and accordingly where the actual damages are very difficult to estimate, the parties will
need to carefully consider the quantum and the factors influencing same. In addition, the
tenant may seek the right to take over the work itself (including an assignment of construction
contracts) and set-off the costs of completion against the rent that would be due under the
lease, although the practical application of this remedy has significant real world limitations.
The practical inadequacy of these remedies for the tenant underscores the importance of
undertaking a thorough program of legal and business due diligence very early on (and
ideally as part of the RFP response analysis) so as to assess as thoroughly as possible any
risk factors that could impact the project timelines.

Another key timing concept is establishing the date on which the building is sufficiently
complete so as to trigger, amongst other things, the commencement of the payment of rent
(or rent free periods, as the case may be). This date is typically described in build-to-suit
leases as the date of “substantial completion” or “substantial performance”, frequently with
reference to the provisions for determining substantial performance set out in
the Construction Lien Act (Ontario). While the landlord will want a definition broad enough
to oblige the tenant to move in and start paying rent despite some incomplete details, the
tenant will want to ensure that such details are minor and will not interfere with its occupation
in any material respect. In order to balance this disparity in approach and avoid potential
problems, the aforesaid provisions of the Construction Lien Act (Ontario) may need to be
supplemented with greater specificity.

4. Rent

Basic rent calculations for build-to-suit leases involve different considerations than do leases
of constructed premises where the basic rental rate can be easily fixed at the commencement
of negotiations. Such basic rental rate will often be calculated based on a stated rate of return
on imputed land value plus a reasonable estimate of the hard and soft costs of construction
incurred by the landlord. In some cases, the basic rental rate may be subject to adjustment
based on actual construction costs (subject to agreed upon construction budgets set out in a
guaranteed maximum price contract and accepted change orders). Should the tenant seek to
retain the fixed rate of basic rent as initially negotiated and resist any of the landlord’s
attempts to adjust it, it is imperative to have established a mutually acceptable budget and
detailed scope of work. This ensures the tenant is receiving a building of a specification and
value which is proportionate to the basic rent that has been fixed and agreed to at the outset.

5. Change Orders

The requirements of each of the tenant and the landlord to make changes to the approved
construction documents must be balanced. Typically, this will include a right in favour of the
landlord to approve any change orders submitted by the tenant, particularly if they will result
in cost increases, in which case the landlord will seek to have the tenant pay for such costs.
Similarly, the tenant will want to reserve the right to approve any changes proposed by the
landlord which alter in any material respect the proposed development and/or which could,
amongst other things, have a negative impact on the timing for completion of the project.

6. Other Lease Considerations

Although not unique to build-to-suit leases, the following issues and concepts also warrant
particular consideration in this context and should be considered carefully:

 Commencement vs. Construction Date: Build to suit lease forms often make the
distinction between “construction” and “commencement” dates. While the landlord may
seek a steadfast commencement date so that the commencement date for the payment
of rent is established at the outset, a tenant would be wise to defer any payment of rent
until the project has been substantially constructed.
 Tenant Rights re: Purchase: Given that build-to-suit projects are generally purpose built
for the original tenant, such tenant may seek options in its favour to purchase the project
at some point during the term of the lease, a right to be first to the table in the event of
a proposed sale (a right of first offer), and/or a right to match an offer received by the
landlord from a third party for a proposed purchase (a right of first refusal). Establishing
these rights in favour of the tenant will typically require that a balance be struck such
that the tenant has the benefit of some or all of these options without unduly limiting the
landlord’s ability to deal with the project and get the best price in the market. Such
provisions must specify how and when the tenant may exercise its right and set out the
criteria to be met in order to exercise such an option.
 Space Mitigation Strategies: Where the project is part of an existing commercial park,
the needs of the tenant for expansion flexibility into adjacent buildings and,
alternatively, exit and space mitigation strategies (in particular, flexibility in larger
buildings to sub-demise and sublet excess space) should be addressed.
 Warranty Items: Allocation of risk and the responsibilities for the costs of defects or
deficiencies covered under warranty or which result due to faulty design, construction
or defect should be expressly addressed in the lease, including as part of the landlord’s
 and tenant’s repair and maintenance obligations and the operating cost recovery
provisions.

Stay Informed

Disclaimer
This publication is provided as an information service and may include items reported from
other sources. We do not warrant its accuracy. This information is not meant as legal opinion
or advice.

Miller Thomson LLP uses your contact information to send you information electronically
on legal topics, seminars, and firm events that may be of interest to you. If you have any
questions about our information practices or obligations under Canada's anti-spam laws,
please contact us at [email protected].

© 2019 Miller Thomson LLP. This publication may be reproduced and distributed in its
entirety provided no alterations are made to the form or content. Any other form of
reproduction or distribution requires the prior written consent of Miller Thomson LLP which
may be requested by contacting [email protected].
Rent Constant Pricing in Build-to-
Suit Transactions
04 August 2014 Publication
Authors: Wesley N. Becker
A Solution to the Problem of Rent, Schedule and Design Control

A build-to-suit (BTS) project often puts the corporate real estate department
in a challenging position. The project must conform to an approved budget,
while also facing a very tight schedule with a series of milestones that must
be met in a perfectly orchestrated fashion. To meet the Project Schedule, the
project must move forward even before the building is designed or a rental
rate is set. The sooner the tenant can bring its developer partner on board, the
better the chances for success.

Rent is always a key concern. The tenant favors certainty and wants to know
what its rent will be. But a developer will not agree to a fixed rent until all
project costs have been determined. This cannot be done until the land is
selected, the building has been designed and priced, and site improvement
and infrastructure costs have been determined. Also, if the tenant insists on
rent certainty, it will not be able to select its developer partner until the
project is fully designed and priced so that multiple developers can bid based
on a fixed rent.

Project design not only impacts the rent and the Project Schedule, it also
raises the issue of design control. While the tenant has a notion of the desired
project, the plans and specifications are likely very preliminary. Perhaps the
site, which impacts building design, has not even been selected. The tenant
feels it owns the project and can make design decisions as the project
progresses. On the other hand, the developer partner will also feel that it owns
the project and will expect design control. If the building is not “market
standard,” but is unique or high cost due to tenant’s specialized design, the
building will be less attractive for investors and future users.

Rent, schedule and design control create an inherent tension in a BTS lease.
The tenant should not expect the developer to fix a rent for a building that is
not yet designed, but the deal structure should assure the tenant that it will
get a fair rent. The developer cannot expect the tenant to cede all influence
over building design, but a tenant has to respect the developer’s fundamental
interest in the project design. If the developer is not selected until the building
is designed and the project is priced, the desired schedule will not be achieved
and the tenant will not have the assistance of its developer partner during the
crucial design and pricing stages.

Use of the Rent Constant pricing approach to determine the initial annual rent
relieves this inherent tension in a BTS lease. In this structure, the developer
and tenant agree on a factor (Rent Constant or sometimes called a Lease
Constant) to be multiplied by the total development cost of the project (Rental
Base) to determine the initial annual rent. For example, if the Rent Constant
is 9% and the Rental Base is $10,000,000, then the initial rent would be
$900,000.

The developer will propose a Rent Constant based on multiple factors

including credit of the tenant, current interest rates, geographic market, type
of building, lease term, annual rent escalations, and special lease provisions
such as early termination or expansion rights. If tenant credit is investment
grade, the building is generic or market standard and in a good location, the
Rent Constant will be lower. If the building is specialized, the lease term is
short, or the tenant has early termination rights, the Rent Constant will be
higher. For a tenant selecting a developer, the Rent Constant can be a point of
competition among prospective developers. This approach also allows for
earlier selection of the developer partner so that the tenant can get the benefit
of the developer’s expertise as soon as possible.

The Rental Base will include all hard and soft costs for the development of the
project including land, site improvements, design, building construction, and
construction financing. The Rental Base will also include a developer’s fee and
an amount for contingency. The amount of the developer’s fee and the amount
and use of contingency can also be points of competition among prospective
developers.

The Rent Constant approach may seem risky to a tenant focused on a fixed
rental rate. What if costs go up making the rent higher than expected? But the
reality is that the developer will not accept cost risk unless the project is fully
designed and the developer has received final construction pricing. The
process of waiting for final design, final construction pricing, and then a final
rent number could delay the project for months, making completion on
schedule impossible. Also, once the developer fixes its rental rate, the tenant
will no longer have the right to influence the design of the project. Finally, a
fixed rent lease will create a more adversarial relationship between tenant
and its developer partner as cost and design issues inevitably arise. A
collaborative approach where the developer and the tenant work together to
address pricing and design issues as early as possible is much preferred.

The Rent Constant approach yields multiple benefits to the tenant and the
tenant need not accept unlimited rent risk. Rather, costs can be controlled by
forcing developers to bid on the Rent Constant, their development fee and the
budgeted contingency. The BTS documents should require that a competitive
bidding process be used for each contractor in an “open book” approach,
allowing both the tenant and developer to have some control over contractor
selection and pricing. Once construction pricing is finally established, the risk
of contractor default and construction completion can be shifted to the
developer and the general contractor. The Rent Constant approach allows the
tenant meaningful influence over building design. Finally, the tenant can
select its developer partner before the building is designed and even before
final site selection is made, so that the tenant benefits from the developer’s
expertise early, when it is most needed. Early selection of the developer helps
the tenant achieve timely completion of the project.

While no single approach is right for all build-to-suit transactions, I encourage

tenants to consider the Rent Constant approach because it gives them fair
pricing, the ability to influence design and the best chance for on-time
completion. It also allows for earlier developer selection, enabling better use
of their developer’s expertise and creates a more collaborative relationship
with their developer partner.

Authors

Wesley N. Becker

Retired Partner
[email protected]
INSIGHTS/COMMUNIQUÉS/LEASING TIMES/DECEMBER 3, 2012/LAYING THE
FOUNDATION FOR A BUILD-TO-SUIT LEASE

Laying the Foundation for a

Build-to-Suit Lease
December 3, 2012 | Savvas Kotsopoulos

A build-to-suit (or design-build) lease is essentially a landlord/developer’s agreement to

construct a purpose built building, usually for a single tenant. The landlord will typically own
or ground lease the lands (and once constructed, the building) and has the option of re-letting
the building to a new tenant upon the expiry of the term of the build-to-suit lease to the
original tenant. Build-to-suit leases typically are for a longer term than a normal lease in
order to permit the landlord to recoup its investment over the duration of the lease term.

A build-to-suit arrangement is essentially comprised of two agreements: (i) a development

or construction agreement, the result of a request for proposal (“RFP”) process, which defines
the relationship between the landlord and tenant from the design through to the construction
of the building; and (ii) a lease agreement, which stipulates the terms of the occupancy post-
construction. In some cases, the provisions regarding the construction of the building are
included in the lease itself or captured in an accompanying “work letter”. The construction
aspect of this arrangement is usually the key issue and the most complicated, warranting close
attention to the landlord’s and the tenant’s responsibilities in this regard.

Given the interplay of traditional lease issues with design, construction, timing and financing
concerns associated with making a project a reality, build-to-suit leases present a unique set
of obstacles that parties must face and which require careful drafting and attention. This
article highlights some of the key issues to be considered in this respect.

1. The Players

A build-to-suit lease has the potential to bind the landlord and tenant for an extended period
of time and the design-build process is typically a lengthy process requiring significant
commitments of capital, time and effort by each of the parties at the outset. Accordingly, the
question as to the exact role each party will play warrants more than a superficial evaluation.
A landlord will need to carefully evaluate the credit-worthiness of the tenant and be cognizant
of the nature of the tenant’s business and its specific needs to help guide the design and
construction of the building. Quite often such analysis will result in the landlord requiring a
parent guarantee and/or cash security for the tenant’s obligations under the build-to-suit
agreements. From a tenant’s perspective (and as part of the RFP response process), it should
assess whether the landlord has the expertise and financial wherewithal to deliver the building
within the required time period and as specified. Much of this will be contingent upon
evaluating the landlord’s previous build-to-suit experience, local and industry reputation and
organizational structure. In some cases (where, for instance, there is a significant tenant
improvement allowance payable by the landlord or where the landlord is a special purpose
entity), it may be appropriate for the tenant to require the guarantee of a parent entity, the
securitization of an amount owing via a letter of credit and/or self-help/set-off remedies. Who
will finance the project and on what terms also merits some analysis. A construction lender
will likely have its own requirements with respect to the project and will introduce its own
parties, such as inspectors, insurers and guarantors, into the mix.

The landlord and tenant will also each want to weigh in on the selection of the architects,
contractors, and engineers for the project and competing priorities will need to be balanced.
A landlord will want to ensure that the design of the building allows for a lease to a new
tenant upon the expiry of the term, while a tenant will want the design to best suit its particular
needs. The choice of contractor is also important, with factors such as experience, existing
relationships with the developer, reputation, and the bid amount weighing differently for the
landlord and the tenant.

2. Designing, Describing and Allocating the Work

A build-to-suit project typically starts with an RFP in which the tenant sets forth its projected
needs and seeks presentations from a number of developers. The RFP will usually set out the
types of uses, amount of space required, timeline for occupancy, range of acceptable rent,
general design parameters and other specifics that the tenant wants addressed in the RFP
response. Once the successful proposal is selected, the lease negotiations begin in earnest and
the landlord and its architects will begin to exchange design plans and specifications with the
tenant’s space planners and construction consultants. The landlord and tenant may very well
envision the finished project differently, in that the tenant will want the design to perfectly
suit its needs, while the landlord will try to balance the tenant’s requirements with the
necessity of designing a building where the construction costs are financeable and such that
the building is capable of being leased to as wide a market as possible once the initial tenancy
has ended. Given that the design specifications and parameters are of critical importance in
establishing the cost of the project, the rent and the timing for completion thereof, it is
important to provide as much detail as possible in the build-to-suit agreements as to the
known aspects of the design and the work to be completed. Similarly, there also should be a
detailed description of the parties’ construction duties and approval requirements concerning
the premises to be built and the allocation of obligations (for example, will the landlord fit-
out the premises to a “turn-key” specification or is the landlord simply providing a “cold dark
shell”?).

A commonly-encountered issue in a build-to-suit lease is the natural tension between

multiple contractors in the same building. Most timetables will require that the tenant
improvement contractor is working in the building at the same time as the general contractor
is putting the finishing touches on the base building. The practical concern centres around
meeting the needs of two contractors simultaneously and balancing their demands for the
overall benefit and completion of the project in a timely manner. To address this, many
landlords will suggest that the tenant avoid this issue altogether by contracting with the
landlord for the construction of the tenant improvements or with its contractor directly.

3. Timing
Timing for performance is a critical issue in a build-to-suit lease and a timetable with clearly
identified deliverables is imperative and must be incorporated into the agreements. Usually
the parties will establish a fixed move-in date (often motivated by the tenant’s need to move
out of its existing premises by a date certain) from which all players involved must work
backward and harmonize their deliverables. The timeline will likely include milestones for
the design, construction, and occupancy phases around which a schedule will be built, such
as securing of financing and permits, ground breaking, pouring of the foundation and
completion of the structural steel.

Since so much hinges on whether the project can be completed on time, the parties must
consider what will happen if there are delays. From a tenant’s perspective, it is important to
have the right to walk away from the project if it becomes apparent that the project is not
financeable, that obtaining permits is unduly problematic, or that the project will otherwise
be significantly off-schedule. Conversely, the landlord will seek to limit this right to narrow
circumstances, particularly after construction has reached a critical point. One approach to
balance these competing concerns is to tie the termination right to delays in meeting certain
critical milestone dates in the project schedule, including an outside date for the substantial
completion of the project itself. Nevertheless, after a certain point, walking away from the
project will not be a practical or satisfactory remedy for a tenant where it is faced with the
prospect of very few, if any, suitable occupancy alternatives and significant business
interruption losses as a result of the delays. As a result, tenants will often seek to fix liquidated
damages amounts for delays that will make any delay very uncomfortable for the landlord
and incentivize timely completion. The enforceability of liquidated damages can be a thorny
issue and accordingly where the actual damages are very difficult to estimate, the parties will
need to carefully consider the quantum and the factors influencing same. In addition, the
tenant may seek the right to take over the work itself (including an assignment of construction
contracts) and set-off the costs of completion against the rent that would be due under the
lease, although the practical application of this remedy has significant real world limitations.
The practical inadequacy of these remedies for the tenant underscores the importance of
undertaking a thorough program of legal and business due diligence very early on (and
ideally as part of the RFP response analysis) so as to assess as thoroughly as possible any
risk factors that could impact the project timelines.

Another key timing concept is establishing the date on which the building is sufficiently
complete so as to trigger, amongst other things, the commencement of the payment of rent
(or rent free periods, as the case may be). This date is typically described in build-to-suit
leases as the date of “substantial completion” or “substantial performance”, frequently with
reference to the provisions for determining substantial performance set out in
the Construction Lien Act (Ontario). While the landlord will want a definition broad enough
to oblige the tenant to move in and start paying rent despite some incomplete details, the
tenant will want to ensure that such details are minor and will not interfere with its occupation
in any material respect. In order to balance this disparity in approach and avoid potential
problems, the aforesaid provisions of the Construction Lien Act (Ontario) may need to be
supplemented with greater specificity.

4. Rent
Basic rent calculations for build-to-suit leases involve different considerations than do leases
of constructed premises where the basic rental rate can be easily fixed at the commencement
of negotiations. Such basic rental rate will often be calculated based on a stated rate of return
on imputed land value plus a reasonable estimate of the hard and soft costs of construction
incurred by the landlord. In some cases, the basic rental rate may be subject to adjustment
based on actual construction costs (subject to agreed upon construction budgets set out in a
guaranteed maximum price contract and accepted change orders). Should the tenant seek to
retain the fixed rate of basic rent as initially negotiated and resist any of the landlord’s
attempts to adjust it, it is imperative to have established a mutually acceptable budget and
detailed scope of work. This ensures the tenant is receiving a building of a specification and
value which is proportionate to the basic rent that has been fixed and agreed to at the outset.

5. Change Orders

The requirements of each of the tenant and the landlord to make changes to the approved
construction documents must be balanced. Typically, this will include a right in favour of the
landlord to approve any change orders submitted by the tenant, particularly if they will result
in cost increases, in which case the landlord will seek to have the tenant pay for such costs.
Similarly, the tenant will want to reserve the right to approve any changes proposed by the
landlord which alter in any material respect the proposed development and/or which could,
amongst other things, have a negative impact on the timing for completion of the project.

6. Other Lease Considerations

Although not unique to build-to-suit leases, the following issues and concepts also warrant
particular consideration in this context and should be considered carefully:

 Commencement vs. Construction Date: Build to suit lease forms often make the
distinction between “construction” and “commencement” dates. While the landlord may
seek a steadfast commencement date so that the commencement date for the payment
of rent is established at the outset, a tenant would be wise to defer any payment of rent
until the project has been substantially constructed.
 Tenant Rights re: Purchase: Given that build-to-suit projects are generally purpose built
for the original tenant, such tenant may seek options in its favour to purchase the project
at some point during the term of the lease, a right to be first to the table in the event of
a proposed sale (a right of first offer), and/or a right to match an offer received by the
landlord from a third party for a proposed purchase (a right of first refusal). Establishing
these rights in favour of the tenant will typically require that a balance be struck such
that the tenant has the benefit of some or all of these options without unduly limiting the
landlord’s ability to deal with the project and get the best price in the market. Such
provisions must specify how and when the tenant may exercise its right and set out the
criteria to be met in order to exercise such an option.
 Space Mitigation Strategies: Where the project is part of an existing commercial park,
the needs of the tenant for expansion flexibility into adjacent buildings and,
alternatively, exit and space mitigation strategies (in particular, flexibility in larger
buildings to sub-demise and sublet excess space) should be addressed.
  Warranty Items: Allocation of risk and the responsibilities for the costs of defects or
deficiencies covered under warranty or which result due to faulty design, construction
or defect should be expressly addressed in the lease, including as part of the landlord’s
and tenant’s repair and maintenance obligations and the operating cost recovery
provisions.

Stay Informed

Disclaimer
This publication is provided as an information service and may include items reported from
other sources. We do not warrant its accuracy. This information is not meant as legal opinion
or advice.

Miller Thomson LLP uses your contact information to send you information electronically
on legal topics, seminars, and firm events that may be of interest to you. If you have any
questions about our information practices or obligations under Canada's anti-spam laws,
please contact us at [email protected].

© 2019 Miller Thomson LLP. This publication may be reproduced and distributed in its
entirety provided no alterations are made to the form or content. Any other form of
reproduction or distribution requires the prior written consent of Miller Thomson LLP which
may be requested by contacting [email protected].

© Miller Thomson LLP 2019. All rights reserved.

General Questions
What is a build to suit?
A build to suit is a commercial building specifically constructed to meet the
design and physical specifications of one particular user.
Back to Top

Are there different types of build to suit developments?

Yes. A build to suit development can use either a sale-leaseback process or
can be managed by a commercial developer.
Back to Top

What is a Sale-leaseback build to suit?

In this process, a tenant will acquire the land, assume the liability of
financing, and hire a general contractor to plan and construct the building.
The tenant may then sell the property to an investor and lease the property
back.
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What if I use a commercial developer for my build to suit project?

Based on the company specifications, a tenant will hire a commercial
developer. The developer will acquire, take ownership, and manage the risk
of construction of the property. The tenant will then lease the property from
the developer/owner.
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What is involved in creating a build to suit development?

As with any commercial development, there is an extensive process involved
in build to suit development. It begins with having a plan/design/prototype in
place and then searching for sites. Once the proper due diligence, site
investigation, and budgets have been established, you’ll move forward with
the development of the project.
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How much input does the tenant have in developing the property?
While consultants, architects, engineers, and the developer will be the leads
throughout the development and construction process, a build to suit project
is meant to give the tenant significant control. The tenant can and will be
able to provide as much input as possible in order to meet
company/corporate standards.
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What are the advantages of a build to suit?

In the long run, a new build to suit development tends to be a more cost-
effective and less risky endeavor than other types of development.
The tenant has significant input into the design and construction. Ultimately,
this approach helps to:
 Maximize space
 Maximize efficiency
 Reduce long-term costs
Other advantages include:
Preservation of Capital
If a tenant uses a commercial developer to meet their build to suit needs, it
can help protect the tenant from the downsides of handling their own
development. The developer will carry the financial burden of development
of the project. So, instead of tying up capital in slowly appreciating real
estate, tenants can use that to help grow their business.
Allow for a greater rate of expansion
If a tenant considers a build to suit option using a commercial developer, it
will help expedite the development process. Using a developer who
understands your approach can significantly benefit your business. It can:
 cut down on inefficiencies and time lags in finding pre existing buildings that
meet your exact specifications.
 help you grow at a faster pace than a tenant may be able to allocate the
proper funds and financing. This applies if your business is considering
expansion and thinking of allocating your own funds to construct a new
property.
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Are there any disadvantages of a build to suit?

For one, the longer-term lease deals may be a drawback as it means the
tenant must be willing and able to commit to longer timeframes.
Due to the costs, tenants must also have excellent credit to gain financing
and move forward with such projects.
And overall, build to suit development can be costly, and time frames can be
lengthy. Therefore, a tenant must be able to reasonably forecast future
expansion plans to ensure the property is going to meet the company’s long-
term needs.
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Design
How does the design process work?
The design phase of the build to suit process should be collaborative
between the tenant, architects, engineers, consultants, and the commercial
developer. This results in a customized design specifically tailored to the
tenant's specifications. One or two initial meetings with the design team is
typically required to establish your design criteria and objectives, followed by
review and refinement of the resulting intermediate plans until the final
design exactly meets your requirements.
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Construction
How much does a build to suit cost?
The costs of build to suit projects will depend on location, size, type of
building, level of improvements and finishes, and the construction market.
There are a number of different factors that come into play, but the truth of
the matter is that build to suit developments can have more of an initial cost
commitment than other types of development. However, the space and
efficiencies build to suit projects provide may help offset the costs.
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How long does a build to suit project take?

The length of a project again depends on project location, size, type of
building, level of improvements and finishes, and the construction market.
Tenants should always allot time for preparation, municipal review and
approval of plans, and time for obtaining a building permit. Some of these
processes can take anywhere from a couple of weeks to months. So, as with
many development projects timeframes can be difficult to estimate.
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Lease
How long is a build to suit lease term?
A tenant must usually commit to a longer-term lease deal in order to justify a
developer’s investment. In many cases, leases are at least 10 years in order
 to provide a reasonable return on investment. If a project is more
specialized, it may become more important for the lease term to be longer in
order to fully amortize the landlord’s investment in the property.
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How is rent determined on a build to suit lease?

Rent calculations for build to suit leases are different than do leases of
constructed premises where the rental rate can be easily fixed at the
commencement of negotiations.
The rent on a build to suit project is typically based on a rate of return
applied to the project costs. In some cases, the rate may be subject to
adjustments based on actual construction costs.
The rate will vary based on current market conditions, the type of facility, and
the user's credit standing.
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What services are included in the rent?

Most build to suit leases are net leases, in which the occupant is responsible
for the costs of operating the facility. Net leases may be broken down into
three primary categories:
 Single Net: tenant pays one of the three expense categories
 Double Net (NN): tenant pays two of the three expense categories
 Triple Net (NNN): tenant pays all three expense categories. Triple net leases
are usually whole building leases with a single tenant for the long term (10
years or more)
How to Establish Accurate Site Valuation

July 02, 2019

Estimating the value of real estate is necessary for a variety of endeavors,
including financing, sales listing, investment analysis, property insurance,
and taxation. Improper site valuation can have a significant trickle-down
effect on the entire commercial real estate project.
The due diligence process can be quite complicated, which is why we want
to take a look at a few factors that help establish an accurate site valuation.
Performing a Market Analysis
The sales comparison approach is the standard valuation method for raw
land. The sales of "comparable" raw land parcels are analyzed to provide an
estimate of value for the subject property. Failure to obtain enough (and
accurate) comps can lead to improperly valuing the property.
Additionally, warped comps will severely impact the developer's basis
making it tremendously difficult to obtain favorable construction debt.

Property Appraisal
Commercial real estate appraisals assess the physical structure, zoning
records, geo-demographic information, financial records, leases, and comps
to value property as well as determine its best use. It’s important to ensure
the seller provides current and updated financial information to the
appraiser.
The appraisal valuations for developers are, 'As Is' and 'As Completed'. This
document is so critical that federally regulated banks will derive their final
point of leverage from the appraiser’s valuation.

Reviewing Documents
There may be a number of documents that are requested and reviewed
during the due diligence process. This may include a thorough review of
insurance policies so that the buyer can see any claims that were made
against the property and information related to the value of the property.
Title review can be one of the most important elements in establishing
property valuation because it can establish whether a property is even
usable or not. A title commitment should establish that the seller does, in
fact, own the property and address any liens, easements, reversions, or
covenants, conditions, and restrictions (CCRs).
Reviewing the Seller
The due diligence process may also look at the standing and track record of
the seller. Information such as past litigation, loan documents, or any cited
claims or violations should be gathered, as they’re critical to the proper
valuation of the transaction.
Insights into the seller and their history as a property owner will go a long
way in establishing what’s a fair deal for the site and ultimately the site
valuation.

The Trickle-Down Effect

Determining a project’s budget, expenditures, and the overall plan begins
with the valuation of land. Being too aggressive when it comes to
underwriting the deal can lead to improperly valuing the property. And
improperly valuing the property can drastically impact the entire project
feasibility and the residual use of a project, should anything go awry.
Taking the necessary steps, performing proper due diligence, and
establishing an accurate site valuation is critical to the entire commercial real
estate development project.

Tags: Site Selection Due Diligence

What are Soft Costs?
A Closer Look at Soft Costs in Commercial Development

Soft costs are those that are not directly related to the physical construction
of the building. Many of these costs are incurred during the early stages of
the commercial development process and pre-cursors to the construction
phase.
These costs are typically less noticeable than hard costs because they don’t
apply to tangible, physical elements of the project. However, without
adequately addressing the elements in the soft cost category, there would
be no commercial development project. Or, commercial
development/construction costs may end up much higher. For
example, proper design and engineering can help to lower a project’s hard
costs.
With that in mind, let’s take a closer look at some of the soft costs
associated with new commercial developments.

A Closer Look at Soft Costs

Here is a list of some common construction soft cost items.
Architectural Fees
These fees typically include feasibility studies, schematic design, design
development, construction documents, and construction administration.

Engineering Fees
Most projects will require a number of engineers to adequately plan all of the
elements of a project. Engineers such as mechanical, plumbing, electrical,
structural, and civil will be hired to identify potential issues and help ensure a
properly designed project.

Plan Review Fees

Plan review fees are fees paid when the application for the permit and the
project plans are submitted for review. In some cases, if the plan reviewer
discovers that the calculated construction valuation is higher than the
applicant’s declared estimate, a supplemental plan review fee could also be
assessed at the time of building permit issuance.

Permit Fees
Commercial developers will also be subject to paying fees for any permits
issued for new developments. The cost of the permits may be based on
several factors including the size and complexity of your project; the value of
the work you are doing; and additional permits required for your project.
Impact Fees
Municipalities charge impact fees to contribute to costs associated with
infrastructure and public service expansion due to the new development.
These are typically put in place in growth areas as defined by a city’s
general plan.

Environmental Phase 1, Soils Testing, and Special Inspections

This entails testing and assessing the potential environmental
risks associated with the land being developed. These test can sometimes
lead to subsequent tests that get more in depth.

Traffic, Acoustical, Biological, Economic, Archaeological Studies

Depending on the area of planned development, many new projects will
require a number of studies to ensure there are no detrimental impacts on
the surrounding areas.
Lender and Title Fees
Almost all financial transactions involve some type of fee. The type of fees
for construction loans and amounts can vary and may include guarantee
fees, processing fees, documentation fees, project review fees, and fund
control fees. There will also be legal fees for zoning and lender loan
document reviews as needed.
Brokerage Commission
These are fees charged by a broker to execute the leasing or purchase of a
property. If based on a percentage, these commissions can be up to six
percent of a lease or purchase. They may also be charged as a flat fee in
some cases.

How They Impact Your Development

Soft costs account for roughly 30 percent of a development project’s budget.
Unlike hard costs, soft costs can also include expenses that continue even
after a project is completed. This includes items like building and property
maintenance, insurance, security among other ongoing fees related to the
upkeep of an asset.
These costs are not negligible as they comprise a significant part of the
construction cost, and as noted previously, are integral to ensuring a
construction project is possible.
A Closer Look at Hard Costs in Commercial Development

June 11, 2019

When budgeting for a commercial development project it’s important to
remember that costs typically break down into two broad categories: hard
costs and soft costs.
Considering the impact of a thorough budget on the success of a
development project, you should be aware of some of the specifics of these
cost breakdowns.
In this post, we take a closer look at what hard costs are and what
comprises those costs in the commercial real estate development process.

What are Hard Costs?

These costs consist of tangible and quantifiable materials and elements of
the development project. Typically associated with the construction phase,
hard costs are related to the building’s structure, the site, landscaping, and
any equipment that is fixed. One of the biggest factors impacting hard costs
is varying material and labor costs.

A Closer Look at Hard Costs

Here is a list of some common construction hard cost items.
Building Shell
This category includes all materials required to complete the whole building
or structure. The structure consists of the foundation, framing, floors, roof,
finishing work, etc.
Parking and Additional Paving
This includes grading, paving, striping, curbs, and any parking islands. Some
of the work may fall into the off-site improvement category and might include
items such as a pedestrian sidewalk, along with curb and gutter. It may also
involve deceleration/acceleration lanes for higher traffic users.
Site Work and Landscaping
Site work typically includes all utilities underground, water systems, drains,
fire, grading, to name a few. As for landscaping, these costs involve putting
in grass, trees, shrubs, mulch, and other aesthetic items.
HVAC, Electrical, and Other Equipment
These costs are for HVAC units, installation, and cranes and other
equipment needed to install the units. Technology and security costs.
Electrical and other equipment will include lighting, technology and security
costs, phone and communication systems.
Construction Labor
Beyond just the physical elements that make up the interior and exterior of a
site, you have to account for the costs of the labor. This includes general
contractors and subcontractors such as carpenters, electricians, plumbers,
and any other specialties.
Change Orders
These items may sometimes be itemized under the building structure, but
may also be factored in separately. These can vary from market conditions
and labor costs to weather conditions and other unforeseen circumstances.
Contingency
This cost covers the amount of money reserved for unforeseen conditions
that might affect the construction process. This money is on reserve and is
not allocated to any specific area of work.

How They Impact Your Development

Hard costs typically account for roughly 70 percent of your total construction
budget. Varying project specifications can make hard costs more difficult to
estimate. Additionally, changing economic factors such as rising material
and labor prices can result in significant increases in project hard costs.
In the end, overall construction costs impact factors such as a tenant’s rental
rate to the projects overall return on investment. It’s always important to
have a detailed breakdown of a project’s hard construction costs and to
know the effect that they have on its economic viability.

Determining hard costs are challenging, and the accuracy of an estimate can
make a difference in whether or not a project is feasible. Finding the right
partner gives you the confidence you need to know so your next construction
project can stay on budget and schedule.
 The 5 Biggest Construction Risks and How a Preferred Developer Can Help

Some risks come with great reward. Others come with great challenges.
Commercial real estate development is filled with both.
Starting from the deal-making stage all the way down, the commercial
development process is filled with a variety of risks. But there may be no
phase riskier than construction. Each construction project is unique and
comes with its challenges and opportunities.
Unfortunately, there’s no way to predict or avoid ALL of the risks that are
associated with commercial construction. But we can break down the list
into five of the biggest, most common risk areas in construction and how you
can minimize that risk.

1) Project Approvals & Permits

In the development process, you run the risk that no usable planning permit
is received or that this process takes much, much longer than expected. This
risk also applies to other municipal approvals/permits, such as commercial
licenses. Whether or not grants are obtained is also included in this risk.
 With a Preferred Developer: A preferred developer handles the necessary
work with municipalities saving you time, resources, and avoiding the
headaches of complicated approval and permit issues.

2) Design/Technical Issues
Developments are often exposed to the risk of design defect losses, or
deficiencies. This can result from the uncertainty of resources and
availability of materials, inadequate site investigation, or incomplete design.
These risks can commonly occur when there are changes in project
scope/requirements, and if there are design errors or omissions.
 With a Preferred Developer: An experienced developer works with its
network of architects, consultants, and planners to ensure design issues are
not overlooked and/or handles the workload of correcting any issues.

3) Budget/Cost Overruns
From conditions unknown to the contractor to meeting client requests that
are beyond the original scope of work, commercial developments face a
variety of factors that can impact your budget. Change orders, delays,
fluctuating material and labor costs, and design issues can all result in cost
overruns.
 With a Preferred Developer: Using a preferred developer means as the
tenant, you agree to a certain rent and you know your expenses. The
developer takes all the risk of cost overruns.

4) Safety Concerns
Construction sites are filled with many different types of physical hazards
which need to be identified, assessed and planned for. While work safety
responsibilities fall on contractors, the responsibility still remains with the
developer (who hires the contractors) to ensure all legislative responsibilities
are correctly delegated.
Site management is a requirement before starting any development project
and this includes managing the proper implementation of accident
prevention measures.
 With a Preferred Developer: As the party responsible for hiring the
contractors, a preferred developer will manage and handle any safety issues
which can ultimately be challenging and even costly.

5) Site Conditions
Differing site conditions can increase construction costs, and can also delay
the project's schedule. Conditions that often cause issues include:
 Weather
 Buried debris
 Unexpected utilities
 Soils with inadequate bearing capacity
 Large amounts of unanticipated rock
 Groundwater at levels higher than anticipated
These conditions may also trigger clauses in contracts which then shift risk
from the contractor to the property owner/developer.
 With a Preferred Developer: These are issues that the property
owner/developer will be responsible for. They’ll have to take measures and
incur costs to mitigate those site conditions.

Construction will undoubtedly always be filled with its share of risks. It’s how
you reduce those risks that lead to great rewards. And effective risk
reduction starts with collaboration. In a preferred developer, you get a
partner that’s willing to take on the risks that come with the real estate
development process. So, as a tenant, you spend less time worrying about
the intricacies and risks and more time worrying about running your
business.
Putting 'Punch' Into Remediating Your Construction Issues

All good things must come to an end, and that includes construction
projects. But when they do, it should never be a set-it-and-forget-it scenario.
You need to ensure that all the details of your development projecthave
been accounted for. In construction, that means creating a construction
punch list.
The advent of technology in the industry already has contributed to
improving the way construction entities are designing and working on a
punch list. We now have accessible and reliable punch list software or apps.
This allows for smarter monitoring of the entire project.

What is a punch list?

A punch list is the document or list of items that define the work that doesn’t
conform to the contract specifications, after substantial completion of the
project. Where this is true, you see the punch list as more than items that do
not conform to contract specifications.
A good punch list will define all items that need to be addressed before final
occupancy and include a plan for completion. The list will include any minor
repairs to finishes, cleanup, and any outstanding remaining installations. In
some cases, the punch list will also include final additions to and any last-
minute details.
By preparing a complete and accurate punch list, the construction team will
have a clear understanding of the details remaining and everyone will leave
happy.

When are punch lists used?

This step in the construction project is performed upon substantial
completion of a project. It essentially marks the point at which the owner
rather than the contractor is responsible for the project. The majority of
construction contracts specify that a contractor should inform the project
owner when they believe that their work is almost done.
The contractor should also request either the owner or the architect to carry
out a “pre-final” project inspection. As soon as the architect receives the
punch list, he or she has to verify whether the project is truly at a near-
completion stage as the contractor claims. If yes, they examine whether the
tasks included in the punch list have been completed, as they should, and
that there is no other task left behind.
In the case where some of the tasks listed in the punch list aren’t completed,
the contractor can reach a resolution agreement with the project owner for
the pending tasks. Once this step is completed, the final payment can be
released.

Who’s responsible for what in a punch list?

Property Owner
A client must be present near the end of the project. They should inspect the
work and ask questions. A contractor will set up a meeting with the client to
have a punch list walkthrough. A client should be prepared for the
walkthrough and visit the site before the meeting to have a good
understanding of what work has taken place and look at what is left. A client
should not use the walkthrough with the contractor as the discovery
session.
General contractor
The GC should consult, have an eye for detail, and be prepared and helpful.
The GC should be prepared to walk the client through and point out
remaining items on the “to-do list.” They will use this meeting to show off
their work and give an eye for the details. Good contractors will be able to
show the client most of the items on the punch list, if not all. However, the
contractor represents the client so they will consult and assist the client
through the things that they feel the client would like to see.
Subcontractors
Subs should get it done, follow up, and communicate any changes. The
sub’s responsibility is to ensure the actual punch list tasks are completed
and completed with a high level of workmanship. The expectation is always
that these tasks will be completed efficiently and in a timely manner.
However, there are often items that come up at the very end of the project,
which add to the scope of work. A sub should know when changes are
outside of the original scope of work, and communicate extra costs and
schedule. Follow up and follow through are the biggest responsibilities of the
subcontractor.
Architects/Designers
These team members must design intent, and confirm what was built.
Architects or designers will often attend the punch list walkthrough to ensure
what was on the drawings was in fact built. They are responsible to point out
anything that was not built to the specified drawings. In some cases, the field
engineering and design changes may not be accurate to the drawings, but
rather client requested. In these cases, the architect and designer need to
be okay with the changes even though they aren’t the original designs. They
should lead the conversation and ensure the client got what the design
intended.

Why use a punch list?

Quality control in construction is of the utmost importance, especially when it
comes to legal issues. In most contracts, the general terms and conditions of
the construction contract require the contractor to mark his work as
“completed” after finishing and to request a preliminary inspection.
The main goal is for each person to sign off on their assigned portion of a
punch list to guarantee that everyone saw outstanding work, and saw when
that work was finished.
A well-written punch list can be a powerful guide throughout the whole
project as it will include every single task that should be completed.
A good punch list can pave the way for smooth collaboration between the
numerous project stakeholders. Now that the roles and responsibilities are
defined, all there is left to do is get it done.
Ensuring the Use of a Qualified General Contractor

Hiring a contractor can be a big decision. There are many factors to be

considered during this process. Regardless of what type of project you are
undergoing, it’s important to have the right company to do the job.
The first step in selecting a commercial general contractor for your project is
identifying what you need in terms of construction or renovation. Some key
questions to ask include: What are your goals for the project? What is your
budget for the project? What is the desired schedule for the project?
In finding the right contractor, it’s important to look at some noteworthy
criteria.

Verify your contractor’s registration, bond, insurance and infractions

Check to ensure they have the qualified license and request insurance
verification directly from the insurance company. Be sure to compare the
coverages between contractors as it can vary tremendously.
Contractor's license bonds are established as based upon the volume of
work within the state and the classification contemplated by the licensee. A
company that is licensed to offer surety products in a specific state does not
mean that the company actually does. You will need to contact the business
directly for additional information as to what services they offer.

Check contractor histories, credentials, and reviews

Look into the company, their qualifier name (the license holder), verify it
exists and is active. Is all their documentation up to date? What does their
history look like? Any complaints? Also, check with the local Better Business
Bureau for ratings, complaints and how they resolved those complaints.
Protect yourself. Do your due diligence. States offer resources, such as
Arizona’s Contractor Search and Building Confidence Program.

Get answers about costs

How a general contractor arrives at a bottom-line fee requires asking a lot of
questions. All costs should be illustrated in a divisional itemization with as
much detail as may be required to make accurate comparisons.
It isn't uncommon for contractors to give an “estimate” of how much they
anticipate the work will cost. The quoted cost should be the exact amount
that a particular task will cost, without much “wiggle room.” There should be
no such thing as charging too much if a price has been agreed upon.

Learn about the team and subcontractors

It’s important to know who will supervise your project, who are your points of
contact, and who will the subs be. Since subs are under the direct
supervision of the GC on any project, it’s imperative that they work as a
team. Both have to be a good fit.
Contractors and construction businesses often depend on subcontractors to
complete specialized tasks or work on the job. There are upsides for GCs
using subs: since subcontractors are usually only skilled in one or two
specific jobs, they have a much higher quality of work than someone who is
a jack-of-all-trades; GCs can focus on other important tasks while subs focus
on the job at hand.
If a sub you hire causes damage to a client's commercial project, you could
be held liable for their mistake. Require subs to have their own insurance
coverage.

Nail down timing and execution

Timing and execution are obviously crucial for all involved parties. Ask for a
timeline and inquire about other projects that may be happening
simultaneously. A qualified commercial general contractor will keep things
organized and moving smoothly.
Since they oversee the entire job, they make sure all of the materials are in
place as they are needed and will always keep you up to date on the
progress of the project. The contractor is in charge of all of the paperwork
and scheduling, making sure each part of the project is completed on time
and as efficiently as possible.

The goal for any commercial construction project is to find a reputable

company that provides quality work and in the defined timeline. Remember,
the company you choose for your commercial general contractor will be your
business partner, so choose the company that is a fit for your project and
has the qualities you’re looking for. Doing so starts with knowing what
criteria are important and the right questions to ask.
The Value of Value Engineering

January 22, 2019

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What is value engineering? In short, value engineering is a process by which alternate means,
methods, and materials are investigated and compared against initial construction costs. With a
build to suit development, it’s also important to note that impact on future costs as well.

This element of the commercial real estate development process is used to solve problems and
identify and eliminate unwanted costs. But this method is not simply about cost-cutting. True value
engineering is about giving careful consideration to all options, always with the project's goals in
mind while improving function and quality.

How can value engineering be implemented?

Value engineering is a method that can be implemented at any point within a commercial real estate
development project. Although, applying the process early on in the project stages can help avoid
more significant risk.

Within the three main stages of the development process, value engineering can be broken as
follows:

The planning stage: the developer and contractors should agree on an anticipated cost of the
project.

The design stage: the design team and the client should come together to review the proposed
design solutions, the cost estimate, and the proposed schedule and approach.

The construction stage: the architect/engineer team should be brought in to the decision-making
process to agree on proposed changes and confirm no negative impact on the overall design and
building function.
 Why use value engineering?

What is value engineering? In short, value engineering is a process by which

alternate means, methods, and materials are investigated and compared
against initial construction costs. With a build to suit development, it’s also
important to note that impact on future costs as well.
This element of the commercial real estate development process is used to
solve problems and identify and eliminate unwanted costs. But this method
is not simply about cost-cutting. True value engineering is about giving
careful consideration to all options, always with the project's goals in mind
while improving function and quality.

How can value engineering be implemented?

Value engineering is a method that can be implemented at any point within a
commercial real estate development project. Although, applying the process
early on in the project stages can help avoid more significant risk.
Within the three main stages of the development process, value engineering
can be broken as follows:
 The planning stage: the developer and contractors should agree on an
anticipated cost of the project.
 The design stage: the design team and the client should come together to
review the proposed design solutions, the cost estimate, and the proposed
schedule and approach.
 The construction stage: the architect/engineer team should be brought in
to the decision-making process to agree on proposed changes and confirm
no negative impact on the overall design and building function.

Why use value engineering?

Specifically, if we look at build to suit properties, where rents are based on
build-out costs, value engineering allows experienced developers to realize
better value for money in design, contracting, and final build out. And the
process is meant to not only benefit the initial construction phase but to
provide long-term value.
Upfront construction costs account for only 11% of the total lifecycle costs of
a building. That number highlights the fact that early decisions have a critical
impact on the long-term cost of ownership.
 The benefit of a great value engineering process to the owner and tenant will
be a better, more cost-efficient project that meets all of the needs and
objectives. Value engineering isn’t meant to diminish the project’s vision or
sacrifice project material and quality, functionality, performance, and
reliability. On the contrary, the process can actually improve aspects by
identifying innovative options and new approaches.
For architects, engineers, and contractors, value engineering can mean
reductions in redesigns and a more efficient construction process.
Overall, value engineering can help provide:
 Better work scope
 Decrease costs
 Decrease waste
 Expand consensus
 Help keep costs within set budgeting

The use of value engineering often means improved functionality of a project

combined with increased savings and value over the life of the building. The
right development partner can help leverage relationships in order to
implement value engineering, ensure quality construction, and finish with a
successful project on time and under budget.
The Steps to Hiring an Architect
Architects offer a comprehensive service that is broken into several phases.
An architect can guide you through the stages of planning, designing,
and constructing a project.
With the wrong decision, you risk losing your building’s intent and could face
design issues once construction begins.
While the process to find an architect can indeed be incredibly time
consuming, it’s essential to making your project a success. In general, the
shared goal of the owner and architect is to make sure that the project meets
the design intent as discussed in concept design.
All projects are unique and the process of hiring an architect varies case by
case and project by project.
When you do hire an architect, think about the following steps to help find
one that fits your needs.

Defining the Project

You’ll first want to ask questions such as: What are the project objectives?
What is the project budget and construction budget? What’s the project
schedule?
Consider the specifics and complexity of your project and whether it requires
general or technical knowledge. This will help you determine which type of
firm is best suited to your project.

Reviewing the Qualifications

Does the firm or architect have the necessary certifications? Does their
portfolio align with your project’s needs?
Are they equipped to handle a project of your size? Have they handled
similar sized projects before?
Do they have a positive track record in project’s they have serviced?
Ask the right questions to help you determine if the firm in question has
enough of the right experience to meet your project goals.

Determining if and what project management services are provided

Architects can offer more services than just designing a building. It’ll be
useful to know if the architect can:
 Manage the project.
 Help hire a contractor.
 Make design adjustments as the work progresses.
 Obtain necessary lien waivers from contractors.

Determining the project delivery method

Projects may fall into a couple of major delivery methods: Design-Bid-Build
or Design-Build. Design-Bid-Build is the most common project delivery
method, with the owner hiring separate architects and contractors to
complete the project.
The selection process for an architect can be much different depending on
the type of delivery method, so you have to know how you’ll approach the
project before honing in on an architect.

Examining Cost
Cost is always a crucial factor in hiring anyone, but it’s also important to note
that a lower cost is not always as cost-effective as it seems, while a higher
fee does not always provide the quality it appears to.
Instead of thinking solely about the design cost, consider the value you want
the firm to bring for the price. It is difficult at the onset of a project to
determine the scope and quality of the services that will be required. A fee is
best negotiated after determining the required scope of services.

First and most importantly, the success of your project is a priority. You
should choose a firm who fulfills most if not all of your criteria for success.
 Using Special Inspections to Ensure Quality Construction
Ensuring quality development projects is essential to making sure clients are
happy with their end product.
Quality control should include but isn’t limited to, personnel, subcontractors,
materials, and procedures. For example, a lack of inspection procedures
could lead to serious quality issues in a project.
This is where procedures such as Special Inspections come into play within
the commercial development process. Special Inspections are defined as
“the inspection of construction requiring the expertise of an approved special
inspector in order to ensure compliance with the code and the approved
construction documents”.
These inspections are different from the typical inspections needed for
building permits, and practically all engineered buildings require Special
Inspections.

A Bit of History
As a bit of history, the National Building Code (BOCA) first introduced
Special Inspection requirements in 1988. Initially, these requirements
emphasized the safety of structural components. That gradually changed,
and in 1996 BOCA introduced requirements for Special Inspections on non-
structural building components.

What They Entail

Special Inspections includes both testing and inspection of the materials,
installation, fabrication, placement of components and connections to ensure
compliance with codes and approved construction documents.
Inspection items include fabricators for pre-engineered structural
components, a fabrication process for prefabricated wood products, as well
as for materials such as:
 concrete;

 masonry;
 structural steel;
 high-load wood diaphragms;soils;
 deep foundation systems;
 sprayed fire-resistant materials;
 mastic and intumescent fire-resistant coatings;
 exterior insulation and finish systems (EIFS);
 smoke-control systems;
 and any special cases as determined by the building official.
One example of a Special Inspection is a Floor Flatness Test. After a building slab
is poured, an inspector will come in to take numerous measurements to ensure the
floor is flat and level. These tests are often required by tenants who use shelving
that needs to sit level, and also to ensure the floor will polish out correctly.
Another common example is a Rebar Inspection. Before a building slab is even
poured, the rebar set in place needs to be specifically inspected. The inspector will
check to ensure the right size rebar was used, the count is correct according to
plans, and that it is all tied together properly.

Common Approaches to Implementing Special Inspections

In a general sense, there are several common approaches that contractors
and developers will use to implement special inspections. They include:
1. Assigning separate special inspectors or testing agencies to different
construction materials or processes without a coordinator managing the
program within that given design discipline. Each inspector or agency is
retained individually by the property owner and is independently responsible
for their specific portions of the program.
2. Assigning one overall special inspector/coordinator to manage the project’s
entire special inspection program, involving all design disciplines.
3. Assigning a separate special inspector coordinator for each design discipline
to manage the inspection and testing efforts within the given discipline.

Using Special Inspections such as these, and planning them in advance can
significantly improve efficiency, reduce rework, and ensure quality
construction. Finding any non-conforming items and bringing them to the
contractor and developer’s attention early is key to avoiding bigger problems
later on in the development process.
7 Point Plan for Your Build to Suit Development

Yogi Berra wasn’t wrong when he said “If you don’t know where you’re
going, you’ll end up someplace else.”
The same sentiment applies to your build to suit development. If you don’t
have a plan, then you’re going to end up with something else (or nothing at
all).
Through successful collaboration, the goal of any build to suit is to provide
tenants with efficiency and customization while expanding their business.
So, in getting from concept to completion, why not use a simple, efficient
plan?
Here’s a concise 7-point plan for approaching a new build to suit
development.

1) Assess the Market(s)

Identify how your company can best grow. Look at the overall supply and
demand of the market. Do the demographic trends meet your requirements
or expectations? Is there demand for particular users or a void that you can
fill?

2) Determine Needs/Long-term goal

One of the things to consider with build to suit development is that the
timeframes are often longer than average - both the lease and construction
schedule. Before getting into a build to suit project, tenants should establish
what their needs and long-term goals are to determine if a build to suit is the
best fit.
 3) Determine Requirements
Finalize your proposed building requirements, including:
 its proposed use
 approximate size
 required schedule for completion
 proposed lease term
 other special lease requirements (if any)
In some cases, a preliminary budget, providing your initial view of what the
project will entail, may be included.

4) Finding the Right Developer

Taking the right steps and asking the right questions to find the right
developer is the next step in your process. A tenant will usually want to
assess:
 relevant experience in similar projects, expertise, staffing, and references
 a description of the developer’s team of experts who could be called upon to
participate in the project, including architects, engineers, land planners, and
attorneys
 a general description of how the developer would undertake the project

5) Plan/Design Preparation
Perhaps the single most important issue to be addressed in a build to suit
transaction prior to commencement of construction is the preparation of the
specific building plans. This will include specifications for building
components and materials, including the assignment of responsibility for
portions of the plans.

6) Site Selection and Analysis

Once you’ve established your requirements and site parameters are
set, you’ll move forward with the site selection and analysis stage. The
examination of specific categories of information about each competing site
is a crucial part of the selection process. Side by side comparisons of sites
identified as viable prospects will highlight the pros and cons of each
possible development site.
7) Determine Costs
Hand in hand with the review and approval of the plans is the review and
ultimate approval of the budget for the job. A general contractor will provide
more precise cost guidelines for building the project based on the approved
plans. This relates directly to the calculation of the rental rate, as the
developer/landlord will base rental rate off of those
construction/development costs.

While build to suit development has many ins and outs, extensive details,
and can be a complicated process, this broad overview is meant to help put
a plan in place, and get your project from conception to completion.
Knowing When a Build to Suit is Right For You
Efficiency. Customization. Quality. You probably want all of these things in
your ideal commercial space.
And you can achieve those in a number of ways. From leasing existing
space to redeveloping an older property.
There are advantages and disadvantages to every decision, but there may
be no better way to bring your vision to life than to develop a build to
suit (BTS).
But there are a few important considerations to remember when choosing
the BTS route and knowing if it’s right for you. Let’s take a look at five of
them.
>> YOUR BUILD TO SUIT QUESTIONS ANSWERED

design, and personalization so specialized that a new build

option? Is the
is configuration,
the most practical
space,
In today’s market, where consumers want a personalized experience, there’s
no better way to do that than by tailoring your requirements to meet their
demands. If you're a tenant looking to portray your brand through design and
is looking to maximize space, efficiency, and experience then a build to suit
may be the best option when expanding.
Do your
find a suitable
specifications/requirements
space to rent? make it too difficult, inefficient, and lengthy to
When your needs are specific, trying to find an existing space to meet those
can be time-consuming and can leave you disappointed. Take for example
an area like Phoenix, where 2017 ended with its strongest quarter of net
absorption in 5 years, driving vacancy rates lower, yet the central business
district has the 5th highest total of vacant land in the country.
Are you prepared for a long-term commitment?
For the most part, build to suit leases have long terms, often 10 to 20 years
or longer. With that in mind, you must be willing to accept the typical lease
structure of a build to suit. If a project is more specialized, it may become
more important for the lease term to be longer in order to fully amortize the
landlord’s investment in the property. Additionally, you have to factor for the
time commitment towards due diligence, acquiring, designing, and building
your facility.

Is your business in appropriate credit standing?

Generally, companies that are able to do build to suits have proven financial
track records and are quite stable, making them investment grade tenants,
or rated slightly below investment grade. The appropriate specifications and
costs are typically determined by your credit quality. Therefore, better credit
standing will result in a more practical, feasible project.

Are you willing and able to conform to project budget and rent?
Rent is always a key concern. Tenants typically favor certainty and want to
know what the rent will be. But a commercial developer can’t agree to a fixed
rent until all project costs have been determined. This can’t be done until the
land is selected, the building has been designed and priced, and site
improvement and infrastructure costs have been determined.

Build to suit development provides unique advantages to those that choose

these type of projects. And if you're a business with a specialized plan,
prepared for a long-term commitment, and can handle the financial costs,
then build to suit may be right for you.
7 Common Due Diligence Mistakes
It’s easy to talk about due diligence and check off the boxes in theory, but it’s
another to practice it thoroughly.
When working with a commercial developer, a prospective buyer, a real
estate broker, or whomever, it’s important to know due diligence is being
done, and being done right. It's an integral part to starting the commercial
real estate development process. Performing it properly can MAKE a
development project – committing too many mistakes can BREAK a
development project.
That’s why we want to take a look at some of the most common mistakes
that occur in the due diligence process. Here are 7 of the most common due
diligence mistakes.

1) Improper Site Valuation

Being too aggressive when it comes to underwriting the deal and failure to
obtain enough (and accurate) comps can lead to improperly valuing the
property. Estimating the value of real estate is necessary for a variety of
endeavors, including financing, sales listing, investment analysis, property
insurance, and taxation. So, improper site valuation can have a
significant trickle-down effect on the entire commercial real estate project.

2) Misinterpreting Lender Requirements

Lenders consider several different variables you might not factor in, including
intended use and environmental issues. Before moving forward it’s important
to understand exactly what your lender requires and why. Failing to do so
can mean lost time, money, and energy during due diligence.

3) Overlooking What Site Requirements Are Needed

When developing commercial property, knowing any and ALL
requirements that are needed to bring the property up to municipal
standards goes a long way in determining the viability of a project. In many
cases, some requirements slip through the cracks and create numbing
headaches down the road. The later in the project that these requirements
are addressed means the more you’re going to have to pay and the longer
your timetable will end up being.
4) Assuming Third Party Reports Are OK
Lenders can sometimes require that they give the approval to use third-party
vendors for various site inspections. Making the assumption that you can
use any third-party vendor or consultant is a common mistake that can add
significant cost to a project. Mistakenly having to pay two different vendors
for the same report costs much more than time; it is very expensive.
As a rule of thumb, if you’re not sure if your lender needs to approve of
someone, ask anyway.

5) Assuming Seller Has Disclosed All Issues

Unfortunately, not all sellers are forthcoming about past and/or potential
issues on their site. Not digging deep enough into the site’s history is a big
no-no. Even if a seller has inspections and reports on-hand, it’s vital
to review the reports and inspect the property yourself so you can get the
assurance that everything is in compliance. Assume nothing.

6) Expecting the Closing Statement to Be Error Free

While reviewing any type of legal documentation should be done with the
utmost diligence, ensuring the closing statement is error-free is crucial. The
buyer needs to carefully review and scrutinize all entries listed on the closing
statement and note any items that might have been omitted.
Making assumptions that all the previously discussed items are correct can
be costly.

7) Failure to Thoroughly Review Title Issues

A thorough review of title issues is a must, this goes for both exceptions
AND requirements. There may be a document recorded on the title (an
exception) that limits or prevents certain developer’s actions, such as use
restrictions or access issues.
There may also be something the title company needs (a requirement) that
is difficult to obtain, such as evidence of probate or removal of liens.
Mistakes in title review can cause delays in projects.
Learning from your mistakes is one of the most valuable lessons we can
learn. But sometimes it’s also valuable to know how to avoid those mistakes
in the first place. Take the time to thoroughly handle the due diligence
process. Don’t make assumptions.
Breaking Down a Build to Suit Lease
A build to suit lease has various definitions. The simplest being any lease
that references some construction to meet the tenant’s requirements. But
there is much more to it than just that.
A build to suit lease has several essential components: 1) the Landlord work
letter which specifies the work required to be completed by the Landlord
before the Tenant takes possession; 2) other essential lease terms for the
“build to suit” portion such as delivery date and further tenant improvement
allowance for Tenant build out; and 3) a thorough understanding of how the
lease it to be handled should the developer or new owner be involved
following construction completion.
>> YOUR BUILD TO SUIT QUESTIONS ANSWERED
That being said, there are a number of different types of build to suit leases.
It can sometimes even get a little confusing. But let’s try to clear thing up by
taking a look at a few of the most common types of build to suit leases.

Types of BTS Leases

Single Net Lease (N)
In this lease, the tenant pays base rent plus a pro-rata share of the building's
property tax (meaning a portion of the total bill based on the proportion of
total building space leased by the tenant); the landlord covers all other
building expenses. The tenant also pays utilities and janitorial services.

Double Net Lease (NN)

A double net lease (NN) is a lease agreement in which the tenant is
responsible for property taxes and insurance premiums in addition to rent.
All exterior and common area maintenance costs remain the responsibility of
the landlord.

Triple Net Lease (NNN)

A triple net lease (NNN) is a lease agreement in which the tenant is
responsible for all the expenses of operating the property, including both
fixed and variable expenses, as well as rent. The tenant is required to pay
the net amount for three types of costs: real estate taxes, building insurance,
and common area maintenance. However, the landlord is responsible for
structural repairs.

Absolute Net Leases

This type of lease is less common and more rigid than a NNN lease. This
type of lease is often referred to as a bondable lease. In this structure, the
tenant is responsible for all building expenses, no matter what, including
structure and roof. Most often there is confusion between a NNN lease and
an absolute net lease. This confusion often occurs when properties are listed
or advertised as simple labels, such as triple net or full service. These terms
are often commonly used by brokers and landlords, but may often conflict
with the actual terms of the lease.

Net leases are usually long-term, generally ten to twenty years with a
number of renewal options at fixed or formulae rates.

Build to suit development represents an advantageous, yet

sometimes complex commercial real estate endeavor. And build to suit
leases are significant commitments, so when it comes to addressing them,
it’s important to understand all of your options and ask the right questions.
Examining the Variables that Influence Cost of Occupancy
While many different factors go into managing your corporate real estate
portfolio, occupancy cost analysis is frequently the most powerful tool that
you can utilize to control expenditures.
The tenant’s annual occupancy cost is the sum of all costs associated with
occupying the space such as base rent, common area maintenance
reimbursements, and real estate tax reimbursements. Occupancy cost
percentage is the percentage of a tenant’s total gross revenue that goes
towards covering the costs of occupying its space.
Occupancy costs have a big effect on the bottom line. Depending on whom
you ask, they are usually the second- or third-highest costs of operating a
business. Personnel costs are usually first. Occupancy costs rank just before
or after tenant improvement (TI) costs. Some companies consider some of
TI costs as a part of occupancy costs. You need to be fully aware of what
goes into occupancy costs and look for ways to cut them and still deliver all
the needs for customer and employee satisfaction.
The Broad Factors
Location
Selecting operationally viable and cost-effective locations. Property location
will ultimately determine rental costs based on market conditions.
Leasing
Structuring transactions that compliment corporate objectives and
negotiating equitable financial terms.
Layout
Maintaining cost control over the design and construction process through
efficient design and construction management.
The Specifics
Some of the specific factors to consider when calculating occupancy costs
include:
Rent
The amount paid monthly (or variable periods of time) to occupy a
commercial space. Rent can be variable as well, with periodic rent increases
using different methods. It’s important to know how and when those are
factored.
Common Area Maintenance (CAM) charges
These charges may vary but generally include items such as garbage
service, parking lot maintenance and landscaping costs. Keep in mind that
CAM may fluctuate from month to month, depending on how your lease is
structured. For example, when it comes to triple net (NNN) leases, CAM
charges essentially represent one of the three nets, and the tenant is
responsible for 100% of those charges as defined in the lease.
Property insurance
This often varies depending on the type of lease. In a triple net lease, the
tenant is responsible for handling property insurance. In other types of
leases, even though your landlord writes the final check to cover the
property insurance for your building, you might be responsible for paying a
percentage of the bill. In most cases, the amount owed is based upon the
amount of square footage your business occupies compared to the overall
square footage of the building.
Taxes
Again, this varies depending on the type of lease. In a triple net lease, the
tenant is responsible for handling the property taxes. That being said, cities
and other taxing authorities are raising property taxes because of previous
sales of properties at record prices. They are basing their rates on the
highest possible values to produce more income to cover their costs.
General liability insurance
This is coverage in addition to the property insurance expense and is a
must-have. Not only is it necessary to protect your business, but in most
cases, it's required as a term of lease agreement.
Utilities
Except for specific types of leases (gross leases) the tenant will be
responsible for all utilities and need to be factored into occupancy cost.

Rising occupancy costs directly impact a company’s earnings, share value

and overall performance. Reducing these costs, on the other hand, can
increase a company’s profitability because every dollar saved drops straight
to the bottom line.
It’s crucial for all parties involved to understand the variables that directly
impact the overall cost of occupying a space beyond simply rent.
Constructing a Credible Build to Suit Work Letter
The provisions regarding construction are normally captured in the work
letter of the build to suit lease. With a coordinated team of expert consultants
and with a little leverage, a tenant should be able to establish a well-
rounded, effective work letter.
This should allow the tenant to maximize its potential savings in the
construction of the improvements. The tenant should always carefully
negotiate the terms of the work letter to ensure timely completion of the
expected quality of tenant improvements.

Elements of a work letter

Work letters cover issues such as the description of the work to be done in
sufficient detail, processes for resolving construction disputes and delays,
schedules and timetables, a methodology for determining the cost of
construction, and much more.
In particular, build to suit leases have the potential to bind the landlord and
tenant for an extended period of time. The design-build process is typically
lengthy and includes a variety of important elements. They also require
commitments of capital, time, and effort by each of the parties from the
beginning.
Some of the most important elements include:
An RFP
A build to suit project typically starts with an RFP in which a tenant sets forth
its projected needs and seeks presentations from a number of developers.
The RFP will usually detail the specification of the work to be done. Given
that the design specifications and parameters are of critical importance in
establishing the cost of the project, the rent, and the timing for completion,
it’s important to provide as much detail in the build to suit agreements as to
the known aspects of the design and the work to be completed.
Appointment of representatives
The landlord and tenant should have designated representatives for both the
design process and the construction process. The question as to the exact
role that each party will play warrants more than a superficial evaluation. A
landlord will need to carefully evaluate the creditworthiness of the tenant. He
or she must also be cognizant of the nature of the tenant’s business and its
specific needs to help guide the design and construction of the building.
A timetable for approving each step of the design process leading to
the “final plans”
Timing for performance is a critical issue in a build to suit lease and a
timetable with clearly identified deliverables is imperative and must be built
into the agreements. Parties will usually establish a fixed move-in date from
which all stakeholders involved must work backward and coordinate their
portion of the project. A timetable will likely include milestones for the design,
construction, and occupancy phases around which a schedule will be built.
This includes securing of financing and permits, groundbreaking, pouring of
the foundation, and completion of the structural steel.
Construction Responsibility
Since so much hinges on whether the project can be completed on time, the
parties must consider there is responsibility as it relates to construction.
From a tenant’s perspective, it’s important to have the right to walk away
from the project if it becomes apparent that the project is not financeable,
that obtaining permits is problematic, or that the project will otherwise be
significantly off schedule.

Why is a work letter important?

A work letter establishes both a process for resolving disputes and a
methodology for determining the cost of construction. The work letter is
basically an abbreviated construction contract.
Given the interplay of traditional lease issues with design, construction,
timing, and financing concerns associated with making a project a reality,
build to suit leases present a unique set of obstacles that parties must face,
and which require careful attention and drafting.
All of those elements of taking a plot of dirt and turning it into a customized,
successful commercial development can be found within the work letter of a
build to suit lease. It is the figurative framework for your build to suit
development.
 UNDERSTANDING BUILD TO SUIT DEVELOPMENT
Developing build to suit (BTS) properties means working to fully meet the
operational and corporate needs of the client. From site selection to
completion of turnkey and complex projects, build to suit development is an
exciting process.
But before we even get there, it’s important to understand some of the basic
elements of a new build to suit commercial property.

What is a build to suit?

A build to suit is a commercial building specifically constructed to meet the
design and physical specifications of one particular user.
These developments may come in a couple of different forms:
 Sale-leaseback: In this process, a tenant will acquire the land, assume the
liability of financing, and hire a general contractor to plan and construct the
building. The tenant may then sell the property to an investor and lease the
property back.
 Using a Developer: Based on the company specifications, a tenant will hire
a commercial developer. The developer will acquire, take ownership, and
manage the risk of construction of the property. The tenant will then lease
the property from the developer/owner.
The property is typically leased for a predetermined length of time and
typically longer term, due to the fact the building is designed specifically for
the tenant.
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What are the advantages of a build to suit?

In most cases, a new build to suit development tends to be a more cost-
effective (not necessarily total cost, just cost-effectiveness) and less risky
endeavor than some other types of development. Right out the gate, a
couple of reasons for this are:
 The buildings are fairly uniform/constant - meaning, the tenant has a
standard their working off of, so you know what to expect.
 And for the developer/owner, there’s almost no leasing risk. The tenant is
already identified and under lease.
Probably the biggest advantage of build to suit development is, as we’ve
mentioned and as the name implies, the property is designed and built to
 suit the specifications of the tenant. Therefore, the tenant has significant
input into the design and construction. Ultimately, this approach helps to:
 Maximize space
 Maximize efficiency
 Reduce long-term costs
The creation of a tenant’s ideal property helps them to avoid settling for an
existing structure that may not meet their specific requirements and
therefore lack the needed efficiency.
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What are the advantages of using a developer for a build to suit?

If a tenant uses a commercial developer to meet their build to suit needs, it
can help protect the tenant from the downsides of handling their own
development.
The developer will carry the financial burden of development of the project.
So, instead of tying up capital in slowly appreciating real estate, tenants can
use that to help grow their business.
It saves the tenant time and resources allowing for greater expansion, while
also getting a facility that will allow them to meet their full potential.
Additionally, because most tenants seek double-digit returns, and with CAP
and return rates in the single digits, deploying capital into development
projects doesn’t always make sense.
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How does the design process work?

The point of a build to suit is to develop a commercial property that meets
the specifications of a tenant. Meaning, the design phase of the build to suit
process is a collaborative approach between the tenant, architects,
engineers, consultants, and the commercial developer.
 Typically, a tenant will have maximum to significant input on the design of
the property in order to meet company/corporate standards.
However, the developer will play a vital role in building design, as the
developer has a fundamental interest in the project, as well as expertise and
understanding of the specific site and municipal requirements.
One important consideration of design is market standards. If the building is
not “market standard,” but is instead vastly unique to a tenant’s specialized
design, the building can be less attractive to investors and future users.
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What are the costs of a build to suit?

Simply put, construction cost estimates can be one of the most vital, yet
confusing elements of determining project costs.
There are a number of different factors that come into play, but the truth of
the matter is that build to suit developments can lean towards more of a cost
commitment than say leasing existing space. However, the space and
efficiencies build to suit projects provide may help offset the costs.
There are a number of factors that determine the specific costs of a build to
suit project. They may include:
 Location
 Size
 Type of Building
 Credit of the Tenant
 Length of Lease
 Municipal Requirements
 Specific Improvements
 Current State of Market
Typically, the specific design requirements of the tenant will play a significant
role in establishing the cost of the project.
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What is the lease structure of a build to suit?

Most build to suit projects tend to be net leases, where the occupant is
responsible for the operating and management costs of the property.
The lease period may be longer than a typical lease. This is because build to
suit properties are designed based on the specifications of a particular
tenant. In many cases, they are at least 10 years in order to provide a
developer/landlord a reasonable return on investment.
A longer-term lease generally allows the developer to achieve more
favorable financing, translating into a reduction in rental rate.
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What are the disadvantages of a build to suit?

Some of the elements of new build to suit development can be both
advantageous and detrimental, depending on a tenant’s business approach.
For one, the longer-term lease deals may be a drawback as it means the
tenant must be willing and able to commit to longer timeframes.
Due to the costs, tenants must also have excellent credit to gain financing
and move forward with such projects.
And overall, build to suit development can be costly, and time frames can be
lengthy. Therefore, a tenant must be able to reasonably forecast future
expansion plans to ensure the property is going to meet the company’s long-
term needs.
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Build to suit development is surely one of the most exciting, advantageous

commercial real estate development processes for companies looking to
grow and put down roots.
But before you even start down the road of a build to suit development,
before design or site selection, it’s important to find a developer and take
advantage of their expertise early on.
 BUILD-TO-SUIT SERVICE INCLUDES:
Preconstruction
 Client Needs Assessment
 Site Evaluation and Selection
 Feasibility Analysis
 Land Negotiation
 Due Diligence
 Lease Negotiation
 Financial Packaging
Project Design Development
 Architectural design and facility planning
 Design-Build
 Consultant Selection
 Design: Site / Shell / Tenant Improvements
 Construction Documents
 Fixtures, Furnishings and Equipment
 Project Budgeting
Entitlement Processing
 Land Splits or Plat
 Zoning
 Design Review Process
 Building Permit Process
 Special Use Permits (if required)
 Tax abatement / incentives
Construction Management
 Contractor Bidding and Selection
 Construction Coordination Meetings
 Client Reporting
 Site and Shell Improvements
 Tenant Improvements
 Jobsite Inspections – Progress Monitoring
 Construction Loan Draw Processing
 Tenant Fixturing and Operations Setup
 Punch List Completion