Lease Build Out Issues and Requirements

Learn about the key issues involved with build-to-suit leases.

Build-to-suit leases are attractive to tenants as they allow for maximum space efficiency as space is designed to meet the specifications and needs of the specific user, and can be designed to meet certain cost-efficient energy-saving elements and to meet future expansion needs. Also, the tenant can incorporate design elements to create the desired company image. However, the build-to-suit lease also has disadvantages: they are complex transactions which require careful allocation of risks and profits between the tenant and the developer/landlord. These deals are not quick to negotiate or document. The tenant will need to make a long-term commitment to the building in order to induce the landlord to structure the lease as a build-to-suit and the lender to finance the construction. Thus, the tenant must conduct thorough due diligence, not only with regard to the title and zoning of the property, but also the ability of the developer to complete construction of the building to the agreed-upon specifications and within the critical timeline. While in other leases, the building is already in place and any additional work which is necessary for the tenant's occupancy is mainly interior improvements (or will be performed by the tenant), in a build-to-suit lease the building is not yet constructed, or requires significant renovations to accommodate the particular tenant's use; or the landlord will be solely responsible for all interior improvements and the risks as to timing and cost. The parties are sometimes working from preliminary plans in negotiating the development of the space or the entire site. Tenants are typically desiring to occupy the space to meet a critical business strategy (for example, the addition or relocation of a distribution center to address logistics needs, or a new warehouse building to satisfy inventory storage requirements of a rapidly growing business), or to consolidate functions as a cost-saving measure. In either case, the timing of completion of the building to the correct specifications is critical. As a result, the parties need to clearly understand the factors which could affect the time line for construction, completion and occupancy. This topic will help professionals involved in build-to-suit transactions understand the key issues involved in build-to-suit leases, and address practical solutions to such issues to ensure that the lease is properly structured and the issues involved in the build-to-suit transaction are considered early in the negotiating process and adequately addressed in the lease and ancillary documents.