Site selection is a critical issue in build-to-suit (BTS)
projects. There may be nothing more important to the success of a
build-to-suit project than its location. Factors such as the
strength of local labor markets, the quality of transportation
infrastructure, and the proximity to suppliers, customers and
existing employees are all fundamental to business operations. In
addition, the size and shape of the land parcel and how the
building fits on it, the potential for expansion, the status of
entitlements and land cost all impact the functionality and overall
success of the project.
As the tenant starts to identify specific land parcels suitable for
its project, the tenant will find that two approaches to land are
commonly used in build-to-suit projects. In the first, the
prospective developer controls the land, usually in a partially
developed corporate park ("Park"). In this approach, the
land and developer come as a package. The tenant cannot put its
building in that Park unless the tenant uses the Park
developer.
In the second approach, the tenant finds a suitable parcel owned by
a third party who has no interest in developing the land. The
tenant can control the land by putting it under contract with the
third party owner. Once the tenant has selected its BTS developer
partner, the tenant will assign the land purchase contract to the
developer, who will buy the land, construct the project and lease
it to the tenant. In this approach, the land and developer do not
come together.
Both approaches have advantages and disadvantages. Significant
advantages of the existing Park include faster and more certain
completion and better pricing certainty. Entitlements, which are a
major risk factor for the Project Schedule, should be mostly
complete, which makes for a faster and more certain Project
Schedule. The developer should have a good sense for
infrastructure, site development and building costs, due to its
prior experience in the Park, which will reduce pricing risk and
also help achieve timely completion. Another advantage is that the
Park is controlled by the developer, so the look and feel of the
"neighborhood" are predictable. Finally, because the
developer already owns the land, the risk of a third-party land
owner forcing a premature land closing is alleviated.
However, when the developer and land come as a package, there are
also disadvantages. An important disadvantage is the lack of
competitive pricing. If the tenant wants to be in that Park, it has
to pay the land price demanded by the Park developer. The tenant
will not be able to competitively bid one developer against
another, so the tenant has less ability to negotiate the best
developer deal. Also, the developer may have already exhausted any
available governmental incentives, which means they will not be
available to the tenant. In order to protect its interest in the
Park, the developer will exercise more control over design and use
of the building and may impose unwanted use limitations. Finally,
the tenant will have fewer location choices.
Key advantages to the tenant of acquiring the land from a third
party are reduced cost and greater flexibility. More land choices
will be available, so the tenant can create price competition among
land sellers thereby reducing cost. More land choices will also
yield greater flexibility on parcel size and location. Since the
tenant is not locked into a single developer, the tenant can create
price competition among prospective developers and thereby
negotiate the best developer deal, including the lowest rent
constant (aka lease constant). In addition, any governmental or
other economic incentives will accrue only to the tenant. Finally,
the tenant can protect itself by controlling the land. If the
relationship with the developer becomes rocky, the tenant can
change developers any time before the land is purchased, which
allows the tenant to retain negotiating leverage. That is not an
option when working with a Park developer.
Acquiring the land from a third party can create significant issues
with the Project Schedule and the Budget. The timeline for
entitlements will be more uncertain. Requirements for off-site
infrastructure may be less clear. If additional infrastructure or
site improvements are required the construction schedule will be
more subject to seasonal limitations. Utility availability must be
confirmed and enhancements may be required, also causing delay. In
addition to Project Schedule concerns, the cost of site development
and building construction may be less certain because the developer
has not developed other land parcels in the immediate
vicinity.
Finding the best approach to a build-to-suit lease is more about
trade-offs than it is about a particular approach being inherently
right or wrong, and that is certainly true in site selection.
Tenants that value being in an established corporate Park, want to
minimize the hassle and risk of a build-to-suit and are willing to
pay a premium for those benefits, may be better served by locating
in an existing Park and using the captive developer. On the other
hand, tenants that have sufficient in-house real estate expertise,
want added flexibility on site selection and design control, and
for whom lower cost is important, may find that controlling the
land themselves and having developers compete for their
build-to-suit lease is the preferred approach.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
