National CRE News In Your Inbox.
Sign up for Connect emails to stay informed with CRE stories that are 150 words or less.
Making Sense of Reverse Build-to-Suit
Just about anyone involved with CRE understands the build-to-suit concept. A landlord or investor takes on the task of building and financing a property based on a tenant’s requirements. Once that property is completed, the tenant rents the property through a (generally) long-term lease.
Matthews Real Estate Investment Services recently penned an article, “Leveraging the Reverse Build-to-Suit Technique, ” offering a different take on the BTS process. The reverse BTS “is when the tenant takes on the developer role and leads the construction and development of a piece of real estate,” the article noted. The landlord’s role is to finance the project. The idea here is that when used properly, the reverse BTS allows a tenant to determine a building’s overall appearance, layout, size, and other features.
“This isn’t a new concept, but something I see more developers and tenants leveraging,” Matthews Real Estate Vice President and Director Simon Assaf told Connect CRE.
Assaf, who co-wrote the thought leadership piece with Matthews Real Estate Market Leader Matthew Wallace, added that reverse BTS could be appealing to landlords and building owners due to ongoing increases in construction costs and timelines. “This lowers their exposure to the project,” Assaf explained. The process can also generate stability (due to longer-term lease commitments). Furthermore, reverse BTS leases are typically triple-net, meaning tenants are responsible for most property expenses.
Reverse BTS can also help tenants “whose primary focus is growing operations rather than owning their own real estate,” Assaf said. The article also noted that a reverse BTS can help tenants create their own spaces reflecting a personal brand and identity.
Assaf explained that the best reverse BTS candidates are single-tenant buildings with a lease. “The developer can assess a market price, post-completion, based on the lease’s project value,” he added. “Also, there is only one tenant that will be responsible for the building once the developer funds the construction.”
Both the article and Assaf caution that a reverse BTS should be left to tenants with construction or development experience or connections to construction companies. “As a tenant, you need to understand the construction process,” Assaf said. “You’ll be the one who is responsible for all the construction.” Meanwhile, the landlord needs to have knowledge of the construction process (even though the tenant is the developer), lease negotiations, and overall market knowledge. Said Assaf: “You want to be sure you don’t end up with a lease property that’s worth less than the capital you contributed to the construction.”
- ◦Lease
- ◦Development
