Commercial landlords and property sellers may use a variety of different strategies to attract viable long-term tenants. Offering to develop a property or completely renovate the interior of a building to suit a tenant’s needs can be a workable business model.
Build-to-suit leases can ensure that tenants have the exact amenities they require to successfully do business. Typically, the business renting a build-to-suit space absorbs the cost of construction initially and then recoups the cost over the duration of the lease.
Development companies and landlords are usually fastidious about validating the credit history and revenue of build-to-suit tenants, as they need to be confident that the tenant can pay. Even developers and landlords who vet tenants carefully can face major losses in a build-to-suit lease scenario.
What is the unspoken risk of a build-to-suit lease?
Build-to-suit leases are often longer leases than the average commercial lease. They may require a 10- or 15-year commitment. There may be an expectation that the tenant will renew their lease after the initial term ends. However, there is no guarantee that the tenant will continue to lease the space after the end of the initial lease.
While the business may recoup most developing costs over the term of the initial lease agreement, if the tenant leaves after the lease expires, the landlord may then have a commercial space that is unattractive to new tenants. There may only be a handful of businesses that can use the space as it stands, and the landlord may have to incur costs to renovate the space to make it attractive to new tenants.
Working with a real estate attorney when preparing to offer build-to-suit leases can help developers and commercial landlords limit their long-term financial exposure. Careful market assessment can also help reduce the risk inherent in a build-to-suit lease scenario.