The concept of a Build to Suit NNN lease is the selling of a property by an operating business to an investor(Insight into Build to Suit). The business needs cash flow, and/or additional or better operating space, and can realize this by selling their underlying real estate, and concurrently, lease it back from the new owner or investor at favorable, NNN property, lease terms. Ultimately, for the tenant, a BTS lease:
- Maximizes space
- Maximizes efficiency
- Reduces long-term costs
For the most part, built to suit lease investors are generally real estate developers, real estate management companies, REIT (real estate investment trust), or asset management companies, amongst others.
It is important to understand that a BTS project is essentially a construction project(Insight into Build to Suit, Triple net leases) and hence governed by issues and agreements/sub-agreements in context of lenders, contractors, designers, inspectors, costs, materials, labor, timelines, deliverables and remedies and damages for deviations from the construction contract which feeds into a further contract – the BTS lease(Triple net leases). Here are some of the important elements:
The BTS Lease: includes important provisions such as a) the work letter which specifies the work required to be completed by the landlord before the tenant takes possession, b) essential lease terms such as delivery date and tenant improvement allowance for tenant build-out, and c) post-delivery obligations of both parties.
Completion & Commencement Dates: The commencement date is the agreed upon date for which rent payments are to begin. BTS NNN leases often make the distinction between this date and an estimated completion date. During construction, a determination is made that the property is “substantially completed”. At this point, the completion date could be converted into a commencement date causing start of lease term.
Warranty Items: a BTS (Build to Suit NNN lease)lease also includes clauses for the allocation of risk, responsibilities and warranties for defects due to faulty design or construction.
Rent calculation: there are a couple of methods used to determine rent in a BTS NNN lease. The first includes based on a rate of return applied to project costs. This calculation includes land value/cost based on an estimate of cost of construction, market conditions, and the type of building. In a second method, the rent calculated is a percentage of the cost of the project.
Work Letter: the provisions regarding construction are written into the work letter portion of a BTS NNN lease. The work letter is essentially a construction contract. Work letters cover the description of the work, schedules and timetables, resolving construction disputes and delays, how to determine the cost of construction, etc.
Purchase Options: since BTS NNN properties are generally custom built for the tenant, the tenant may seek options to purchase the property at some point during the term of the lease. 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.
Use your trusted advisors at Triple Net Investment Group for your next BTS project, call or email us today!
