Why consider a build-to-suit office lease?

In order for a business to satisfy its office space requirements, it has four options:

1. Lease or sublease vacant office space
2. Acquire an existing building and renovate
3. Build and own its own facility or
4. A build-to-suit to lease

The build-to-suit lease

A build-to-suit lease is an alternative that allows the user or tenant to design and customize a new facility to meet the enterprise’s unique space needs without the large up-front capital expenditure that comes with building and owning. In a build-to-suit to lease arrangement, a company selects a real estate developer to design and build a customized facility on a preferred site and then leases it from the developer. Under this structure, the user never owns the facility.

A build-to-suit lease can offer several advantages to the company whose current space no longer ideally meets its objectives. The lease allows the tenant to expand the realm of optimal location choices and maximum space efficiency, since the facility is designed specifically for the tenant. New construction allows a developer to incorporate the most recent cost-effective energy systems in the project, incorporate state-of-the-art technology and construction materials with the goal of operating efficiency. The building can be designed to project the company’s image, attract and retain employees as well as enhance productivity and logistics. These key objectives can sometimes be challenging, in varying degrees, when leasing or renovating an existing facility.

Long-term lease solution

A build-to-suit lease is not a short-term office space solution. A long-term office lease commitment is necessary for the developer or owner to acquire financing, and the tenant’s creditworthiness must be acceptable to lenders to obtain favorable financing terms. The build-to-suit process is lengthy and may take several years to complete. Once the build-to-suit decision is made and a developer/owner is selected, a transaction has to be finalized that is inherently more complicated since there is a lease and complex construction component beyond your typical office build-out. In addition, the preferred land site has to be acquired, and the building has to be designed and built.

Evaluating all your options

A build-to-suit lease is generally considered more expensive than leasing existing office space, particularly in today’s market where office vacancy rates have risen and building owners are aggressively courting office tenants with attractive lease terms and concessions. However, the difference may be offset in the long term by savings in office space efficiency, reduced operating costs and improved company image.

When considering new construction, particularly for very large corporations in some instances, the user may have better borrowing power or a lower cost of capital than the developer. So it would seem that owning the building your office is located would be more cost effective. However, for most companies, real estate is not their core business, and they choose to allocate their investment capital to other strategic operating initiatives that offer a higher rate of return on their investment.

For every company, each of the four office space occupancy strategies has its own merits and disadvantages. A prudent business owner or management team will evaluate each option with real estate advisors to determine which alternative best suits their needs. In some cases, some of these options may not be a realistic or viable strategy. However, for the company desiring an office building designed specifically for its unique needs, the build-to-suit lease offers a new, customized facility without the significant capital expenditure of building and owning office space.

Coy Davidson is Senior Vice President of Colliers International in Houston. He publishes The Tenant Advisor blog.