Negotiating the Build-to-Suit Lease

Real Estate Influence
May 17, 2013 — 890 views  
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A build-to-suit lease is a land owner’s or a land developer’s agreement to construct a building, and in most cases for a single tenant. Here, the developer will construct the building as per the specifications of the client. The developer/landlord even pays for the construction as per the specifications of the client. The client will then lease the land from the developer, who will still retain the original ownership of the building.

This kind of a lease is for those who wish to occupy a building, but do not wish to own it. These leases will be valid for longer periods than a normal lease. This will allow the landlord to recoup the investment that has been made over the period during which the terms of the lease are valid.

The Details of the Lease

A build-to-suit lease basically has two parts. The first one is the development agreement, also known as the construction agreement. This document will serve as the basis for determining the relationship between the tenant and the landlord. The second part of the lease gives the terms regarding the occupancy of the building post the construction. The lease document can also include the terms and conditions regarding the construction of the building. If not, the terms and conditions will be included in the work letter which accompanies the lease.

Concerns of the Tenant

The tenant should be extremely careful when signing a build-to-suit lease. He/she should carefully analyze whether the landlord is capable of abiding to the terms and conditions as specified in the agreement. The tenant should understand that if the lease includes a building that is to be constructed, then special rules exist for it. If those exact rules are not followed, then it will ultimately result in the characterization of the leased property as the sole property of the tenant.

If the tenant is making payments for the construction without any right of reimbursement, then it will be enough to qualify the tenant as the owner of the property. The tenant should also be aware of the maximum guarantee test. This test imposes a bar on the financial responsibility that a tenant will accept. If this financial bar is exceeded, then the lessee may end up being shown as the original owner of the property.

Concerns of the Landlord

The landlord/developer should also be extra careful while selecting the tenants. The credit record of the tenant, the nature of the tenant’s business/occupation, and the specifications that are required to complete the building construction should be double checked by the landlord. The landlord can also ask the tenant for a cash security or a parent guarantee for affirming the tenant’s obligations under the agreement.

Negotiating Time

The time of completion of the project should also be negotiated by the tenant and the landlord. If the project is not completed in time, the tenant may prefer to walk away. But if this happens at a critical stage of construction, the landlord will most likely want to continue with the project. To avoid such disparities, a termination right to delays in achieving certain particular milestones in the project should be agreed upon in advance. To avoid legal and financial complications later on in the project, a thorough analysis of the risk factors that can affect the timely construction of the project should be also studied.

Real Estate Influence