What are contracts that are custom-made?

“Contracts tailored to specific needs offer companies a unique option for obtaining custom property for their operations, with the property being designed and constructed to meet the tenant’s requirements.”

This kind of agreement offers flexibility for both landlords and tenants. What are its benefits and how does it function in practice?

Keep reading to gain a deeper understanding of this structure and determine if it is the best fit for your business.

What do built to suit contracts entail?

Contracts known as “built to suit” (BTS) involve the construction of a property customized to the tenant’s needs.

This contract is primarily utilized in industries that need tailored spaces, such as logistics, manufacturing, and certain retail sectors.

The concept involves customizing the property to fit the tenant’s needs, providing a better fit than a pre-existing property.

What sets “Built to Suit” apart from traditional contracts?

The primary distinction between “built to suit” and traditional contracts lies in how the tenant provides access to the property.

In conventional agreements, the tenant leases a property that is already in existence and ready for occupancy, with specified features.

These agreements typically concern commercial, residential, or industrial properties that are constructed without input from the tenant in the planning or customization of the space.

In “built to suit” contracts, the landlord constructs the property to meet the tenant’s specific requirements.

The model involves the tenant agreeing to construct or renovate the property according to the tenant’s specifications before moving in.

The customization procedure may involve making changes to the layout, infrastructure, and other necessary adjustments to align with the tenant’s operations.

Contract length

Traditional contracts typically have a shorter lease period that can vary based on the agreed conditions.

In “built to suit” contracts, the duration is typically extended to mitigate risks for the renter who is heavily investing in property construction or modification. This longer-term contract serves to validate the investment made.

The extended length of time is a key aspect of the “built to suit” approach, providing greater safety for the lessee.

Each party’s duties

There is a notable difference in responsibilities between the two contract types.

The tenant in a traditional lease typically does not have much control over making changes to the property and must accept it as is, unless specific renovations are allowed.

In the “built to suit” contract, the tenant is actively involved in determining the property specifications, which can influence the design and functionality of the property.

Furthermore, in numerous instances, the tenant is permitted to monitor the construction and propose modifications as needed, a practice not found in conventional agreements.

Contract expenses

“Financially, ‘built to suit’ agreements typically come with a higher cost, as the tenant is responsible for the expenses of constructing or customizing the property to fit their requirements.”

The extra worth can be shown in the monthly rental cost, which might exceed that of a standard property in certain instances.

The contract might contain provisions that require the tenant to stay in the property for an extended time to validate the initial investment by the landlord.

In traditional agreements, tenants are responsible for covering the expenses of adapting the property, such as renovations or changes, to suit their requirements.

The tenant is responsible for covering the expenses of these changes, as well as the monthly rent. In contrast, the “built to suit” agreement includes these adjustments in the contract, streamlining the process for the tenant.

Versatility in application

The level of flexibility in terms of use varies between the two models. Traditional contracts provide tenants with a ready-to-use property but offer limited opportunities for customization or adaptation of the space.

In a “built to suit” agreement, the tenant has more flexibility to customize the space to meet their specific requirements, which can include property size, layout of internal areas, climate control systems, and other important features for their business.

Risk – Potential danger or harm that may arise from a particular situation or activity.

The level of risk associated with each kind of contract varies.

In a conventional lease agreement, the tenant faces less risk because the property is move-in ready and does not require any construction or modifications, allowing the tenant to evaluate the property without concerns.

The tenant might not be able to find a property that completely fits their requirements, leading to extra expenses for adjustments or moving to a different property.

The tenant takes on more risk in the “built to suit” contract by agreeing to construct or modify the property to meet their requirements.

The tenant offsets this risk by providing a long-term rental agreement.

Advantages for the tenant and landlord.

Benefits for the renter

Long-term contract security

One significant benefit is the guarantee provided by a lengthy agreement.

The tenant can be confident that they can stay on the premises for many years without needing to move because of limited space or unsuitable facilities.

This aspect provides stability for businesses, especially in industries like logistics or manufacturing that require significant investment in infrastructure.

No requirement to perform renovations or adjustments.

The tenant benefits from not having to do any maintenance or modifications, unlike in traditional lease agreements.

The “Built to Suit” contract involves the tenant taking on the construction responsibility, relieving them from managing works and costs so they can concentrate on business operations.

Cost of renting

The cost of renting should also be taken into account.

When tenants make improvements or alterations to the property, the rent may increase beyond typical lease agreements.

The highest rental cost can be a restricting factor for companies looking to lower their fixed expenses, even if the property meets all their needs.

Benefits for the tenant

Stability in finances

The primary benefit of the locator side is the assurance of financial stability due to the longer-term nature of the “Built to Suit” contract, ensuring a steady and secure income for an extended period.

This kind of agreement reduces the likelihood of the property being empty because the tenant, who has customized the property for their needs, is motivated to adhere to the contract for an extended time.

The tenant can customize the property to suit their preferences, making it more appealing to potential renters.

By providing a rental property that fulfills a tenant’s requirements, the landlord establishes a unique space that is not easily substituted by other available properties, ensuring a more reliable and fulfilling investment.

Trading ability

The renter can negotiate improved financial terms, such as higher profits, by adjusting the rent to account for any investments made in property construction or renovation.

The tenant can also take advantage of the property constructed based on request, which is very particular and appealing to specific businesses with unique technical or operational needs.

Challenges for the tenant and lessee

Tenant drawbacks

Long-standing dedication

The contract “Built to Suit” has drawbacks for tenants despite its benefits, mainly due to the long-term commitment it requires.

The tenant might feel stuck in a space that does not suit their needs over time due to the long-term lease typically required by the contract.

If the market or company conditions shift, the tenant will have limited freedom to relocate without incurring extra fees or penalties.

The tenant faces the risk of owning a property that may not meet future needs or operational changes, despite being tailored to their current requirements.

After the property is constructed, tenants might face additional expenses for future adjustments or be unable to make necessary changes if the contract lacks flexibility for modifications.

Downsides for the tenant

The hirer may face drawbacks as well, with the primary concern being the substantial initial cost.

The tenant incurs a significant expense to construct or modify the property to meet their requirements.

The renter must also address construction uncertainties, such as delays, unforeseen expenses, or project feasibility issues.

The landlord may choose to keep a unique property if the tenant breaches the agreement, which could deter other potential tenants and complicate future leases.

Property depreciation

The tenant bears the risk of property depreciation, particularly if market conditions change or if the property remains unoccupied by the end of the lease.

Adapting the property to suit one tenant can make it less versatile and challenging to lease to different types of businesses.

The renter is typically in charge of managing and maintaining the property, which is a common practice in rental agreements. However, with a “Built to Suit” property, maintenance may become more intricate due to customized systems or features, potentially leading to higher operating expenses for the tenant.

Conclusion

“Contracts tailored to individual needs, known as ‘Built to Suit,’ provide flexibility for both landlords and tenants in customizing real estate.”

This model is appealing to businesses requiring customized spaces and offering stability for long-term renters.

While this kind of agreement offers benefits like personalized features and assurance of occupancy, it also comes with drawbacks including extended commitment and construction expenses.

It is crucial for both parties to thoroughly assess their requirements and potential risks prior to selecting this approach.