Build to Suit is a way of leasing of NNN properties, where the property owner or the developer builds or constructs a building in accordance with the needs of the tenants. New Build to Suit projects are typically located in areas vibrant with growth and activity, often with better roads and more convenient access for employees and customers. A build-to-suit NNN lease allows a tenant 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, preferring real estate tenancy rather than ownership.
There are six main steps in a Build to Suit NNN lease:
- Obtain a building permit.
- Select a site.
- Prepare plans for the improvements.
- Construct the improvements.
- Establish the terms of the lease.
- Move in.
Typically, a developer leases the building to a tenant while retaining its ownership(1031 Properties gross lease). 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, (Build to Suit NNN lease investment)and the user’s credit standing. Since the rent is proportionate to costs, it is important to understand the related cost issues (see below).
Most build-to-suit leases are NNN leases, in which the tenant is responsible for all the costs of operating the facility(1031 Properties gross lease). However, for office projects a gross lease, where some or all of the following services, can be provided by the developer/owner:
- Heating and cooling equipment maintenance
- Landscape and grounds maintenance
- Property management services
- Sewer service
- Trash service
- Exterior and structural building maintenance
- Property taxes
- Building insurance
- Electricity
- Natural gas
- Water service (both domestic and irrigation)
For those NNN investors not experienced in commercial real estate(real estate advisor), construction cost estimates are probably the single most common source of confusion and disappointment(suit lease in 1031 peoperties). Before relying on any estimate, consider the experience and reputation of the estimator, whether it is based on a defined set of specifications, and whether it includes these costs based on current market conditions:
- Design fees (architectural, structural, mechanical, electrical, civil)
- Materials testing and inspection fees
- Bonding, if required
- Legal, brokerage and financing costs
- Course-of-construction insurance
- Land cost
- Site improvements costs (site utilities, fire hydrants, staking, grading, paving, drainage, landscaping, site lighting)
- Building construction costs based on approved specifications
- Utility connection, meter and transformer fees
- Building permit and plan review fees
- Impact fee
If ownership is a goal, a purchase option can be included in the NNN lease giving the tenant(Build to Suit NNN lease investment) the future right to buy the project based on its value at the time the option is exercised(suit lease in 1031 peoperties).
To conclude, a Build to Suit NNN lease investment is fairly complex. Hence, it is best to contact your real estate advisor at the Triple Net Investment Group, where experts have decades of experience in the subject.