Is a Reverse Build-to-Suit Lease Right for You?

When discussing commercial real estate, you’ll often hear about build-to-suit (BTS) leases, in which the landowner agrees to construct a property according to the requirements of the lessee, and the lessee leases the property once construction is complete. With a BTS lease, the landowner is in charge of construction and financing. However, sometimes, lessees and landowners will prefer a reverse build-to-suit arrangement.

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“These [leases] are all essentially financing vehicles,” said Marc Betesh, Founder and CEO at Visual Lease. “These are all ways to fund a new facility, reverse or direct.”

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What Is a Reverse Build-to-Suit?

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A reverse build-to-suit lease is when the tenant, or lessee, acts as the developer and is in charge of construction on a piece of real estate, often land. The landlord, as an investor and lender, must approve construction and finance the development, but they are not responsible for the actual construction and development project. Rather, that responsibility falls on the tenant. Many tenants who own their own real estate or construction businesses prefer reverse build-to-suit because they already have the resources needed for development. In addition, with a reverse build-to-suit, landlords don’t have to worry about additional costs outside of what was agreed upon.

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Reverse build-to-suit leases are “only applicable and advantageous to someone that knows how to build a building,” said Betesh. “So if you are a company that knows how to build a building, or even if you have your own construction, you build your own building.”

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Advantages of Reverse Build-to-Suit Leases

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There are a few reasons a tenant and landlord might agree to a reverse build-to-suit over acquiring or leasing existing real estate. Here are a few of the pros of this type of commercial lease.

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Fits Your Needs

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The main advantage of both build-to-suit and reverse build-to-suit leasing agreements is they fit your needs. In the same way someone can go to a custom tailor and get clothes made to suit their specific needs, said Betesh, in a reverse build-to-suit situation, the tenant “can go to a custom builder and build something that’s exactly what they want.” Essentially, in a reverse build-to-suit, the tenant has control over a building’s exact size, appearance, layout and any other specifications.

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Long-Term

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Reverse build-to-suit leases are usually long-term leases, and after going through the work of developing the property, a long-term lease assures a sense of stability for both the tenant and the landlord. The tenant has the assurance that they will be able to construct and occupy the property in the long run, and landlords know that they will receive steady rent income in the long run.

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New Construction

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Just like a BTS lease, a reverse BTS lease ensures that you will get new construction, which means fewer problems and maintenance issues. Because build-to-suit and reverse build-to-suit leases are usually triple net leases, maintenance is the responsibility of the tenant, so having a new, well-structured building will cut down some of those maintenance costs.

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Disadvantages of Reverse Build-to-Suits

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Reserve BTS leases aren’t for everyone. Here are a few reasons you might think twice about signing this type of lease.

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Requires Some Knowledge and Expertise

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“You have to know what you’re doing,” said Betesh. “If you’re going to do the reverse build-to-suit, you have to know your specifications.” Because many tenants don’t have construction or development expertise, or some connection to a construction company, they might choose to go with a build-to-suit lease rather than reverse build-to-suit. If you’re considering reverse BTS, it’s important to understand the logistics of what you need and how to successfully implement your plans.

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“If you’re doing reverse build-to-suit, you’re doing it yourself,” said Betesh. “So you better understand that you have nobody to turn to if it doesn’t come out right. You’re developing it yourself. Unless you have the skills and knowledge to do the construction side of the equation, you can get yourself into real trouble.”

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Long-Term

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While long-term leases can often be an advantage, they can also be a disadvantage if the reverse build-to-suit arrangement doesn’t go according to plan. “You’re committing to a long-term arrangement,” said Betesh, “and you’re locked in. It’s not like you can build it and say, ‘This is not quite what I wanted.’ You’re stuck because you’ve entered into a 10-, 20- or 30-year lease for that facility.”

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For this reason, you need to be sure of what you want and be able to follow through on those plans.

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Example of a Reverse BTS

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Often, buildings like Amazon warehouses are reverse build-to-suit leases. Amazon generally knows the exact specifications they want and has the resources and connections to construct the property themselves. So while the landowner is paying for construction, Amazon is the one hiring the construction company and managing the logistics of development, not the landlord.

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For Tenants With Construction and Development Knowledge, Reverse Build-to-Suit Makes Sense

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Reverse BTS leases are ideal when a tenant has specific needs and their own construction crew. Many tenants that go the reverse BTS option either own their own construction company or have some connection to certain developers that can build to their specifications. When choosing reverse BTS over BTS, it’s essential that you understand the specifications of your development and know-how to complete the project. Without that knowledge and experience, reverse BTS could prove more challenging than otherwise.