For businesses seeking customized real estate solutions, build-to-suit (BTS) projects offer an opportunity to construct properties tailored to their operational needs. However, financing such developments can be a challenge due to the significant capital required. One effective and increasingly popular strategy is using the sale leaseback (SLB). This article explores how businesses can leverage SLBs to finance BTS projects.
What is a Build-to-Suit (BTS) Project?
A BTS project is a real estate development where a property is constructed specifically to meet the needs of a tenant. These projects are common for businesses requiring unique configurations which cannot be satisfied by existing properties in the market, but is also becoming an increasingly popular tool for businesses looking to expand their footprint.
What is a Sale Leaseback (SLB)?
A sale leaseback is a financial transaction where a business sells its real estate asset to an investor and simultaneously leases it back. This allows the business to free up capital while retaining operational control of the property. SLBs are typically structured as long-term leases, ensuring stability for both the tenant and the investor.
When applied to BTS projects, SLBs provide a mechanism for financing the construction of custom, new properties without requiring businesses to tie up large amounts of capital.
How SLBs Work in Financing BTS Projects
- Pre-Development Agreement
The business identifies its real estate needs and partners with a developer to plan the BTS project. At this stage, the business also engages with an advisor to start sourcing potential investors interested in acquiring the property and financing the land and all construction costs. - Financing via SLB Commitments
Instead of securing traditional financing, the business uses an SLB commitment to fund construction. The investor agrees to purchase the land, finance the construction project, and lease the property back to the business. - Property Transfer and Lease Execution
Upon construction completion, the business immediately begins leasing the property from the SLB investor, converting what would have been a significant capital expense into a manageable operational expense long-term.
Benefits of Using SLBs for BTS Financing
- Capital Efficiency
SLBs free up capital that would otherwise be tied up in real estate ownership, allowing businesses to allocate resources to core operations, expansion, or other strategic priorities. - Lower Risk
With the investor assuming ownership, businesses are shielded from risks associated with real estate market fluctuations. - Customized Facilities Without Debt
Traditional financing options, like loans, increase a company’s liabilities. SLBs allow businesses to develop custom facilities without adding debt to their balance sheets. - Tax Benefits
Lease payments under an SLB agreement are tax-deductible, providing further financial advantages over property ownership. - Predictable Expenses
Long-term lease agreements provide businesses with stability and predictable costs, aiding in financial planning.
Considerations and Challenges
While SLBs are a powerful tool for financing BTS projects, they require careful consideration:
- Lease Terms: Businesses must negotiate favorable lease terms, including rent escalations and renewal options, to ensure long-term affordability.
- Bid Process: It is important to create a competitive process working with a sale leaseback advisor in order to achieve the most attractive economics and lease terms.
- Investor Selection: Partnering with reliable investors who understand the business’s needs is crucial for a successful SLB agreement long-term.
When to Consider SLBs for BTS Projects
SLBs are particularly effective for businesses that:
- Have high-cost BTS requirements but lack the capital to finance construction outright.
- Prefer to focus on operational efficiency over owning real estate assets.
- Operate in industries requiring highly customized facilities, such as logistics, technology, retail, or manufacturing.
Conclusion
Financing build-to-suit projects through sale leaseback agreements is an innovative approach that balances customization and financial flexibility. By partnering with investors, businesses can fund the construction of tailored facilities without compromising capital or taking on debt. However, successful implementation requires careful planning, strategic negotiations, and collaboration with trusted partners.
Whether you’re a growing company seeking your first BTS facility or an established business expanding your footprint, an SLB arrangement could be the solution to achieve your real estate goals while maintaining financial agility.
Read more below of real-life examples of BTS executed by the Ascension team:
- $6.2M Build-to-Suit Financing for Dirty Dog's Car Wash
- Build-to-Suit for Oxbo's 195,000 Square Foot Facility in New York
Leave a Comment