How to Construct Build-to-Suit Projects

Increasingly, U.S. companies are embracing build-to-suit (BTS) development projects to leverage the capital, resources, and expertise of commercial real estate developers, while dictating the design, construction, and management of new facilities themselves.

Consider, for example, a company that wants to locate a distribution facility on the West Coast to accommodate growing inbound volume from Asia. The planned facility has unique design requirements to accommodate the business¹ specialized material handling equipment. Financing and building the warehouse is time- and cost-prohibitive; leasing or acquiring an existing facility would expedite the lead time of a build-to-own facility, but the company has concerns about potential renovation costs and accepting a multi-year lease at a facility with limited scalability. Plus, it does not want to sink a chunk of money into a new facility.

Instead, the company works with a third-party consultant to find available land, then secures a BTS contract with a real estate developer to acquire the land and bankroll the development and construction of the new facility per its requirements. The company will lease the facility, when completed, from the developer for a pre-determined period, while assuming all operational and maintenance costs and taxes.

In so doing, the company divests itself of land acquisition and development responsibilities while allocating time, resources, and capital to growing its business through mergers and acquisitions.

BTS developers assume all the responsibilities of a new facility – from securing land and acquiring development approvals to establishing a construction budget and coordinating and overseeing the construction phase.

A BTS blueprint provides a number of other benefits, including:

• Businesses can dictate where they want to locate a facility – keeping in mind transportation connectivity and labor availability.
• Tenants can use a single developer to coordinate land acquisition, design, construction, and funding.
• Companies can reduce up-front costs by agreeing to lease rates at 30 to 40 percent of design, saving time and money, and expediting the project¹s time frame.
• Predictable long-term occupancy reduces costs associated with rent negotiations and moves, and helps increase employee retention.
• BTS projects enable companies to better match their distribution and warehousing needs with market demands – for example, building a large, high-volume facility near an intermodal hub to speed product to market.

Tip the Scales in Your Favor

KNOW YOUR OPTIONS. Businesses have three options when it comes to expanding into a new facility: they can invest in and build their own; lease or purchase an existing facility and make necessary renovations; or partner with a developer to design and build a new facility for lease. Each option has its own advantages and drawbacks in terms of cost, customization, and time specifications. Businesses are best served by prioritizing these factors to determine what strategy best suits their growth plans.

KNOW WHAT YOU NEED. Implementing a build-to-suit strategy challenges businesses to forecast their long-term growth goals and needs. Some questions to consider: Where is the optimal location for a new DC? Will the location and facility serve your future transportation needs? What kind of material handling systems will be integrated in the facility and how will that impact design and use? It is equally important to build some flexibility into new facilities to account for operational and tactical changes or increases/decreases in capacity.

KNOW YOUR DEVELOPERS. Look for a developer that can provide one point of contact for the entire scope of the project. Also look at whether a real estate company has experience working with your type of business. What kinds of projects has it completed? What industry sectors does it serve? Does it understand your unique transportation and distribution needs? Some companies will specifically partner with a developer that has built an industrial park complex where infrastructure, environmental, and zoning approvals are already in place.