Built-to-suit vs buying land: options for a new facility

A company needing a new factory or warehouse has several ways to get one. It can buy land and build its own facility, lease an existing building, or ask a developer to build a facility to its specification and lease it back — built-to-suit. Each option has different implications for capital, control, speed and long-term cost.

The options

Buy land and build

The company acquires land, obtains approvals, appoints designers and contractors, and owns the finished facility.

Built-to-suit (BTS)

A developer acquires land (or uses land it already holds), designs and builds a facility to the occupier's requirements, and leases it to the occupier on a long-term lease.

Lease an existing building

The company leases a ready building, adapting it as much as the landlord allows.

Lease land and build

The company leases land long-term and builds its own facility on it. See long-term industrial land leases.

Comparing buy-and-build with built-to-suit

When buy-and-build tends to suit

• Highly specialised facilities — heavy machinery foundations, clean rooms, process plants that a developer couldn't easily re-lease
• Long expected tenure — the company expects to stay for decades
• Available capital and a wish to own real estate
• In-house capability to manage land, approvals and construction
• Expansion plans requiring control over adjoining land

When built-to-suit tends to suit

• Capital preservation — the company prefers to invest in its core business
• Speed — a developer with land and approvals in hand can move quickly
• Standard building types — warehouses, light manufacturing
• Limited real estate expertise in-house
• Uncertain long-term needs — though BTS leases are usually long

Key points in a built-to-suit deal

Specification

The building specification — size, height, floor loading, docks, power, fire systems — must be agreed in detail before construction. Changes later are costly.

Lease term and rent

BTS leases are usually long, to give the developer a return on its investment. Understand:

• Initial rent and escalation
• Lock-in period
• Renewal options
• Rent review mechanisms

Delivery

• Construction timeline and delay penalties
• Handover condition and acceptance
• Defects liability

Responsibilities

Who maintains the structure, roof, services and common areas? Who pays property taxes and insurance?

Exit and flexibility

• Can the occupier exit early, and at what cost?
• Can it sublet or assign the lease?
• Options to purchase the facility?

Expansion

Can the developer build an extension on adjoining land if needed?

Due diligence still matters

Even in BTS, the occupier should check that the developer has clean title, proper approvals and capacity to deliver. A defect in the developer's title could disrupt the occupier's use. See industrial land due diligence checklist.

Financial comparison

Compare over the same period:

• Buy and build: land cost, construction, financing, maintenance, taxes, minus residual value at the end
• BTS: rent over the lease term, fit-out, deposits

Results depend heavily on assumptions about financing costs, property values and lease escalation. Model several scenarios with financial advisers.

Solar and energy

Whichever route is chosen, plan for rooftop solar and energy needs from the start. In BTS, agree who installs and owns rooftop solar. See solar for warehouses and cold storage.

Residual value

When a company owns its facility, the land and building keep a value at the end of the period being compared. In a built-to-suit lease, that value stays with the developer. Industrial land in growing corridors has often held its value, but this varies by location and is not guaranteed. Include a cautious residual value in the comparison rather than assuming strong appreciation.

Common mistakes

• Choosing BTS without detailed specifications
• Underestimating long-term rent commitments
• Ignoring exit and assignment terms
• Not checking the developer's title and approvals
• Buying and building without the capability to manage it

A note on timelines

Built-to-suit is often described as faster, but that depends on the developer already having land with approvals in place. If the developer still has to acquire and convert land, the timeline may be similar to buying and building. Ask the developer exactly where the land and approvals stand, and tie delivery dates and penalties in the agreement to that reality.

How we help

Through industrial land and warehousing and logistics land services, we help companies compare buy-and-build with built-to-suit and other options, identify land and coordinate due diligence on sites and developers.