Build-to-Suits: An Underutilized Strategy Fueling Business Expansion

Build-to-suit (BTS) transactions are a key strategy for businesses that require customized operational facilities. This approach involves constructing a new property, to be designed 100% to tenant specifications. Upon completion, the tenant enters into a long-term lease agreement at that location. BTS allows companies to optimize their operations and expand their footprint quickly, without large upfront capital investments.  

Understanding Build-to-Suit Transactions 

A build-to-suit begins with a tenant identifying specific requirements for a new location. These requirements are used to identify a target location, and then design and construct a building that precisely meets the tenant’s needs. Once these requirements are identified, there are two main ways to deliver the project: 

• Build-to-Suit Financing: A sale leaseback investor funds 100% of the project cost. The company and investor negotiate a lease agreement upfront, which commences upon construction completion. Rent is determined by the “yield-on-cost” (cap rate) multiplied by the total project cost. The yield-on-cost is determined by a variety of factors including the quality of the real estate location, the strength of the Guarantor, the site-level projections, the overall macroeconomic environment, the construction cost and resulting rents, the lease terms, and the anticipated construction timeline.  

• Forward Takeout Commitment: The company (tenant) funds the construction of the facility, and a sale leaseback investor guarantees to purchase it upon completion. This agreement is based on pre-set economic terms and a mutually agreed-upon lease. The terms would typically include either a fixed or floating cap rate, which may be defined explicitly or tied to a benchmark rate. The purchase price typically includes a profit over total construction costs, and the final rent is determined based on the yield, aligning with the agreed lease terms. 

Benefits of Build-to-Suit Transactions 

1. Capital Preservation: For many businesses, preserving capital is a priority. Build-to-suit transactions allow companies to achieve a custom facility without the need to allocate large sums of capital upfront. Instead, they commit to a long-term lease, spreading the cost of the facility over many years through annual rent payments. This strategy can be particularly beneficial for growing companies that need to allocate their financial resources towards other strategic initiatives such as investing in the business operations and other ROI positive projects.
   
   
2. Customization and Efficiency: BTS deals offer significant customization, allowing tenants to specify location, layout, size, and infrastructure of their new facility. This ensures the location will optimally support their operations and enhances productivity from day one, reducing the need for costly post-construction modifications.
   
   
3. Long-Term Stability: The long-term leases associated with build-to-suit transactions provide tenants with stability and predictability. Companies can secure a location that they know meets their needs for an extended period of time, allowing the business to focus on its core operations without the uncertainty of relocation or upcoming lease renewals. This stability is also attractive to the real estate investors, who benefit from reliable, long-term rental income and a mission-critical real estate asset.
   
   
4. Strategic Location: BTS deals allow tenants to select locations that optimize their business operations, such as proximity to highways, access to a skilled workforce, target daily traffic counts, customer demographics, or alignment with supply chain logistics, providing a competitive advantage for the business.
   
   
5. Operational Control: BTS facilities offer tenants more control over the construction process ensuring the facility meets their needs throughout the lease term, and operational control given the long-term commitment to the site. 

The Importance of Utilizing an Advisor for Build-to-Suit Transactions 

Build-to-suit financing is a sophisticated strategy to fuel business expansion, involving the construction of custom facilities to meet specific operational needs of a business. While the benefits of BTS, such as capital preservation, customization, and operational control are substantial, navigating these complex transactions requires expertise and precision in order to achieve the best outcome for the operator. 

Engaging an experienced advisor is crucial to ensure these deals are executed seamlessly and efficiently, paying attention to all of the details. Advisors bring a deep understanding of market conditions, financial structuring, and legal intricacies, helping to negotiate favorable lease terms and secure optimal financing terms for the business. They also provide valuable insights as it relates to the unit-level financial projections and corporate considerations, ensuring that the final facility aligns perfectly with the company's strategic goals and will result in a win-win outcome for the operator and the sale leaseback investor. For example, Ascension Advisory recently secured $6.2M in build-to-suit financing for Dirty Dog’s Car Wash, demonstrating the transformative impact of expert guidance throughout these transactions. Reach out to the Ascension Advisory team to learn more about how a build-to-suit and sale leaseback can benefit your business. 

Conclusion 

Build-to-suit transactions are an invaluable yet underutilized strategy for business expansion, offering a unique blend of customization, efficiency, and financial flexibility. By enabling companies to design and construct facilities tailored to their specific operational needs without large upfront capital investments, BTS arrangements drive operational efficiency and support long-term growth for expanding operators. Whether through build-to-suit financing or forward takeout commitments, businesses can secure strategically located, custom-built properties that align perfectly with their goals and operational requirements. The stability of long-term leases, combined with capital preservation for the operator, makes BTS an attractive option for companies looking to grow their footprint and focus on their core business activities.