BUILD-TO-SUIT LEASE FAQs

 
General Questions

What is a build-to-suit lease?

 

A build-to-suit lease is a common arrangement whereby the landlord constructs a free-standing building to meet the specifications of a particular client, who then becomes the sole occupant of the building.  It offers an efficient method for a business to acquire and control a custom facility meeting its specific needs, and is used by all kinds and sizes of business, from the smallest to the largest.

What are the advantages of leasing, as opposed to owning my own property?

 

For some, there is an emotional satisfaction with owning business real estate.  For others, there is a vague idea that owning real estate is economically superior to leasing, often based on the presumption that the real estate will appreciate in value.  While appreciation is a possibility, it is important to recognize that it is not a certainty, and that the value of the real estate is determined by factors unrelated to the success or failure of your business, and that over the period of time you own the property, its location may gradually fall into disfavor as growth and new construction moves away from you.

While leasing may not be best for everyone, thousands of businesses, from the smallest to the largest, find its advantages compelling, including the following:

  • Preservation of capital:   A build-to-suit facility allows a business to preserve and re-invest its capital in its business operations, rather than in real estate.  Since the rate of return on capital invested in a successful business is almost always greater than the rate of return earned on capital invested in real estate, many business owners logically prefer to keep their capital productively invested in the operation and growth of their business, rather than in real estate.

  • Tax deductions:   100% of your rent payments on leased property are tax deductible, while only the interest portion of your mortgage payments are deductible.  Additionally, while the tax deductibility of depreciation is commonly thought of as a great reason to own real estate used for business, two factors severely limit its tax benefit.  First, a significant portion of the real estate cannot be depreciated at all - namely the land.  Second, most of the remaining improvements are required to be depreciated over a very long period - a period which the IRS continues to lengthen, and which is currently 39 years for most improvements.  This means that only a very small fraction of the cost may be deducted each year.  Before relying on tax considerations in deciding whether to own or lease, consult with your tax adviser.

  • Flexibility:   Due to its inherently illiquid nature, ownership of real estate requires a long term investment commitment.  A tenant's commitment to leased property, on the other hand, is limited to the term of the lease.  This shorter term commitment offers more opportunity to deal effectively with the evolving nature of the facility requirements of the business.  Changes in those requirements commonly arise from:

    • Business growth;

    • Changes in the business model;

    • Changes in technology;

    • Changes in the demographics of the business's target market;

    • Changes in business ownership; and

    • For closely held businesses, changes in the health, goals, interests and other circumstances of the owners and their families.

  • ​Timing and ease of disposition:  Because the value of real estate is determined by factors unrelated to those affecting the value of your business, the best time to sell your business is rarely the best time to sell the real estate, and vice versa.  Leasing allows your business decisions to be made without regard for the conflicting considerations posed by the underlying real estate.  Additionally, it is almost always easier to sell a business than to sell both a business and real estate.

  • Sticking with what you know:   Leasing allows you to focus on what you know and do best.  Commercial real estate and its management and market valuation are governed by factors unrelated to those affecting your business.  It is a business unto itself, requiring a distinct set of skills and knowledge to be effectively managed, introducing a new element of risk which the typical business operator has little means of controlling.

  • Administrative relief:   Leasing relieves you from the burden and distraction of managing and operating the real estate, and from the costly results of overlooking important management issues related to the real estate.

 

What are the advantages of a new building, as opposed to one previously occupied?

  • Because the facility is designed to your specifications, you lease only the facility need - no more and no less.

  • A new facility is designed exactly to your specific requirements, allowing you to operate with less space than you would need for an existing building that does not as efficiently meet your needs.  It also results in greater functional efficiency and productivity in the day to day operation of your business.

  • The selection of colors and finish materials allows your facility to reflect who you are, and to help establish your own business identity.

  • New projects are typically located in areas vibrant with growth and activity, often with better roads and more convenient access for employees and customers.

  • The heating and cooling system for new space is designed specifically for your use, and employs modern equipment in top condition, resulting in greater comfort than is possible with a system that has been patched together over the years as older space is remodeled, often resulting in thermostats in inappropriate locations, oddly split and unbalanced heating and cooling zones, and marginally effective equipment.

  • New buildings reflect modern ventilation design practices, ensuring a continuous and adequate supply of fresh air and a healthy environment.

  • The restroom fixtures, and other plumbing, electrical and lighting equipment is of course new and employs the latest technology, offering quieter, more reliable operation.

  • The roofing system is new, ensuring that rain and snow do not mean stained ceilings and the aggravation and risk of property damage.

  • New space is more attractive and inviting than previously occupied space, for both employees and visitors.  There are no stains, fraying or wear patterns in the carpet; no holes, patches, marring or mismatched coloring of the walls; no defects, fading or accumulated grime on the ceiling system and heating ducts; no musty or stale odors; no peculiar and serpentine layouts reflecting years of floor plan adaptation; no cracking or potholes in the parking lot; no faded, stained or mismatched paint on the building exterior - in short, nothing that reflects poorly on the image presented by your facility to your employees and customers.

  • New facilities comply with laws governing access for the disabled, removing the risk of your becoming involved in disputes or claims arising from access issues.

 

 

What is involved in creating a build-to-suit facility?

There are six main steps:

  • Select a site.

  • Establish the terms of the lease.

  • Prepare plans for the improvements.

  • Obtain a building permit.

  • Construct the improvements.

  • Move in.

 

 

 

What sites are available?

In addition to the existing locations that we currently own (see our available land section), we can assist you in locating and acquiring a site meeting your specific criteria in virtually any area of the Treasure Valley.

 

 

 

How long is your lease document?

Our lease is typically only about seven pages long (rather than the 40 to 50 pages often comprising commercial leases), and is widely regarded as a clear, concise and fair document.  Although the lease is very straightforward, unless you are experienced in commercial real estate, we recommend that your attorney review it as a matter of good business practice.  Because we do not employ our own attorneys for most leases, we are able to quickly prepare the lease (usually within a day or two of request), and promptly respond to any comments you and your attorney may have.

 

 

 

How long is the lease term?

Because each facility is designed to the unique requirements of one particular user, and involves a substantial expenditure for that purpose, the minimum term for general office uses is typically ten years to allow a reasonable earnings period for that investment.  The term will be longer for special-purpose uses or designs.

I would like to eventually own my own building.   Can I have a purchase option?

Yes, if ownership is a goal, a purchase option can be included in the lease giving you the future right to buy the project based on its value at the time the option is exercised.

How is the rent determined?

The rent is typically based on a rate of return applied to the project costs, with that rate governed in part by the current market conditions, the type of facility, and the user's credit standing.  For full service leases, the rent will also include a component to cover operating costs.  Since the rent is proportionate to costs, it is important to understand the related cost issues, as discussed below.

I would like to eventually own my own building. Can I have a purchase option?

 

Yes, if ownership is a goal, a purchase option can be included in the lease giving you the future right to buy the project based on its value at the time the option is exercised.

Do you charge percentage rent for retail projects?

No, in most cases we do not.  We believe that a tenant's success is more a measure of the tenant's own efforts, rather than a measure of anything the landlord has provided that isn't already adequately compensated for by the minimum rent.  (See the glossary entry for a definition of this term.)

Is a lease guaranty required?

A lease guaranty is typically required only if the entity signing the lease (often a corporation or limited liability company) is legally distinct from the entity or individuals who are operating and funding the business, or if the party signing the lease is relying on the credit of a third party.  Lease guaranties, like loan guaranties, are very common and do not reflect poorly on the character of the parties involved, but simply represent a means of managing risk.

 
 
 
 
 
 
 
 
 
 
 
Design
 

How does the design process work?

The design effort is a collaborative process involving you, the architect, the structural, mechanical, electrical and civil design consultants, and the construction value-engineering team members.  One or two initial meetings with this 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.

 

Our goal during this process is to minimize the time required on your part to professionally design improvements tailored to your specific needs.

Do you provide help in selecting finishes and colors?

Yes, we provide a design consultant to help select coordinated interior and exterior colors and finish materials that are compatible with your preferences and design objectives.

What is your sign criteria?

The sign criteria is governed by several factors, including the type of facility (for example, retail vs office), the provisions of any restrictive covenants governing the selected site, and local governmental sign restrictions.  Signs appropriate to the location and type of facility being provided are rarely an issue.

 
 
 
Construction and Costs
 

How much will my facility cost?

This of course depends on the location, size, type of building, required parking ratio, the level of improvement and finish, and the construction market at the time priced.  We can provide accurate estimates of cost based on preliminary plans, followed by firm pricing based on detailed construction drawings.

 

 

 

What if the costs (and therefore the rent) exceed my budget?

We share your interest in avoiding the late discovery, after much time and expense has been incurred, that project costs (and therefore the rent) are simply not feasible for your business model.  Depending on the type of facility, we can often provide a preliminary range of likely cost without the necessity of incurring design fees.  Additionally, we often recommend that preliminary outline plans be prepared for the purpose of obtaining an accurate estimate of costs, and with only a minimal investment in design fees.  If these preliminary costs aren't feasible, and the project criteria can't be modified to bring the costs within the necessary range, we have both avoided a costly mistake.

 

 

 

How much do you add to construction costs for a developer fee?

We do not add any markup of any kind:  no developer fee, no construction management fee, no administration fee, and no overhead fee.  The only costs included in our pricing are direct costs that we actually pay to third party vendors.  We consider our services to be an included, integral part of any lease with our firm.  Additionally, all costs underlying our pricing are available for your review.

 

 

 

An acquaintance tells me he can build my space for much less than you

have estimated.  How can that be?

For those not experienced in commercial real estate, construction cost estimates are probably the single most common source of confusion and disappointment, and can often lead to disastrous results when the real costs aren't determined until it is too late to change course.  Estimates are often given freely based on incomplete plans and specifications, with no meaningful definition of scope, without verification of current labor and materials costs, and sometimes for the purpose of enticement.

Our estimates include consideration of all sources of cost, not just the actual construction.  Before relying on any estimate, consider the experience and reputation of the estimator, whether it is based on a defined set of plans and specifications, and whether it includes consideration of the following costs based on current market conditions:

  • Land cost

  • Site improvements costs (site utilities, fire hydrants, staking, grading, paving, drainage, landscaping, site lighting)

  • Building construction costs based on approved specifications

  • Design fees (architectural, structural, mechanical, electrical, civil)

  • Materials testing and inspection fees

  • Utility connection, meter and transformer fees

  • Building permit and plan review fees

  • Impact fee

  • Bonding, if required

  • Legal, brokerage and financing costs

  • Course-of-construction insurance

 

 

 

Can I build my own space, or use my own contractor?

Yes, you or your contractor may provide for the construction of your facility.  However, unless you and your contractor have considerable experience with commercial construction, we recommend that you not attempt that undertaking.  Aside from the substantial burden involved with the proper administration of any construction project, when compared with residential construction, commercial construction involves a different class of sub-contractors and materials, involves different construction techniques, is subject to different building codes and inspection requirements, and often has more serious consequences in the event of delay. 

We have no economic incentive to provide construction services.  We do not assess any administrative charge or other fee for this service, instead regarding it as a fundamental component of any lease with our firm.  Our only reason for recommending that you allow us to provide construction services is the resulting assurance of the professional and timely completion of your facility with no unpleasant surprises.

Also bear in mind that all commercial general contractors rely on the same limited pool of qualified commercial sub-contractors within each trade, and that we provide for bidding among those sub-contractors, assuring you of competitive pricing when using our construction services.

 

 

 

How long will construction take?

Again, this depends on the type and size of the facility, and the extent of any long-lead-time materials involved.  Typical construction times range from four to eight months.  However, remember to allow time for preparation, review and approval of construction plans (four to eight weeks), and time for obtaining a building permit (four to eight weeks).

In those cases where time is of the essence, we are able to expedite this process:  We can coordinate close and timely participation by all team members during the design process; we enjoy excellent relationships with the permitting agencies and can ensure the plans spend minimal idle time within each approving department; we can identify and order long-lead items early in the design process; we can employ an early-start process in which we begin construction of the improvements prior to full permit issuance; and we can employ critical-path construction scheduling techniques to minimize actual construction time.

In any event, we commit within the written lease to a completion schedule, and you can rely on that schedule as the outside date for completion - we have never failed to meet our commitment.

 

 

 

Can my telephone and data cabling vendors, and my equipment installation

vendors, access the space during construction?

Yes, these vendors customarily have access to the space at the appropriate stage of construction.

 
 
 
 
 
 
 
Occupancy
 

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.  However, for office projects we can structure the lease as a full service lease, in which we provide some or all of the following services, depending on your preferences:

  • Property taxes

  • Building insurance

  • Electricity

  • Natural gas

  • Water service (both domestic and irrigation)

  • Sewer service

  • Trash service

  • Exterior and structural building maintenance

  • Heating and cooling equipment maintenance

  • Landscape and grounds maintenance

  • Property management services

Is janitorial service available?

Yes, janitorial service is available at a cost of from 10¢ to 12¢ per sq ft per month, depending on the size of the facility and the frequency of service.  We have found that many occupants don't need or want regularly scheduled janitorial service, but we make it available for those who do.

 

 

 

When is the base year?

(See the glossary entry for a definition of this term.)  For full service leases, your lease will typically establish the base year as the first calendar year of occupancy.  Until the year following the base year, we pay the operating costs included in the rent.  After the base year, the occupant pays only for any increases in those costs.