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Built to suit a bespoke real estate business

7/28/2022

In recent years, Built to suit contracts, also known as custom construction, have gained ground in the real estate sector. Understand the advantages of this type of business for owners and occupants.

Understanding Built to suit – BTS

Built to suit was born from the need to legislate a type of contract that until then did not exist. These are the so-called atypical contracts, as is also the case with Sale & Leaseback. In the Built to Suit contract model, the lessee orders the construction or renovation of a property that meets their specific needs, for later rent. On the other hand, the lessor, who can be the owner or investor, is responsible for the execution of the project and both sign a long-term contract, which is usually configured for long periods of 15 years - with the objective of shielding the contract period.

Guilherme Regal, Head of Capital Markets at Cushman & Wakefield, summarizes how this relationship works: “in the built to suit there is an investment of purpose. The tenant wants to be in a place that doesn't exist and finds someone who will make all the investment to make it happen. As a guarantee of the investment made, the owner has the security that the property will remain occupied for many years”, he explains.

Generally, investors are builders or developers who have a built-to-suit contract portfolio. Once signed, the contract becomes salable on the capital markets and can be monetized.

Advantages of Built to suit

To the occupant:

• It is not necessary to immobilize capital in the construction of an asset, thus managing to reduce costs and start or expand its operations without major investments.
• Enjoy a property with the exact measurements of your needs, avoiding additional expenses with renovations or adaptations.

For the owner:

• Guarantee of occupied property for a long period of time
• Return on the amount invested throughout the contract
• Built to suit contracts tend, in general, to reach monthly profitability levels in the order of 0.7% to 1.0%

Another important point about Built to suit is that there is no possibility to review the rental agreement index throughout the contract. That is, the values are the same from start to finish, giving more security to the tenant and the lessor.

While in the United States, Europe and Asia the built-to-suit is already an old acquaintance, being used by companies such as Walgreens, Starbucks and Amazon, in Brazil, the Built-to-suit contracts started to be regularized from 2012, through the Law 12,744/12. With the regulation, some rules that favor the autonomy of the parties were established, making negotiations more flexible in relation to traditional leasing agreements and causing the demand for made-to-measure properties to increase considerably.

Build to Suit in retail

In recent years, Built to suit has attracted the attention of medium and large companies in the retail sector, as the ability to rent factories and warehouses on demand has helped companies to expand geographically at reduced costs. In addition, the outsourcing of project and construction risks, the tax benefits (since the lease is a deductible expense from the income tax base) and the greater speed in operations, have been decisive factors for companies to opt for this type of location.

Another factor that has driven retailers' interest in Built to suit contracts is the boom experienced by e-commerce in recent years, especially attributed to the new consumption habits acquired with the pandemic. In this scenario, Built to suit proves to be an increasingly viable alternative for companies to intelligently expand their business.

Another retail segment that has expanded via BTS contracts is the food retail BIG BOX, with the growth of the segment known as wholesale.

The role of real estate consulting

For investors, it is possible to join Built to suit in two ways: through direct contracts or through real estate consulting. Cushman & Wakefield's role is to help investors choose the best Built to suit businesses to invest in, based on solid market criteria and analysis carried out by experts in the field. As for the occupants, the company works at the other end, helping companies that want to adhere to this type of contract to find the best business opportunities. In both cases, the consultancy acts as a bridge between the interested parties and ensures that the agreements are advantageous for both.

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