
In Montana, the concept of BTS is gaining traction, particularly as more land offerings include it as a key feature. But what exactly is BTS?
What is Build to Suit (BTS)?
At its core, BTS is an agreement where a commercial tenant partners with a landowner or developer to construct a new, custom-built facility tailored specifically to the tenant’s business needs. Once the building is completed, the tenant leases the space long-term, ensuring that both parties benefit from the arrangement: the tenant receives a space that meets their unique requirements, while the landowner secures a stable tenant with a long-term lease agreement.
While the concept sounds straightforward, BTS is more complex than leasing an existing property. It typically involves negotiating a lease and a construction contract simultaneously. These deals are highly customized and can vary significantly depending on the needs and circumstances of the tenant.
Types of Build to Suit Agreements
Each BTS project differs, but there are a few common scenarios:
- Developer-Driven BTS: In many cases, the tenant partners with a commercial developer, who finances and oversees the construction of the building. Once the project is complete, the tenant leases the space.
- Sale-Leaseback BTS: Some tenants prefer to take on the role of the developer. In this model, the tenant secures financing, buys the land, and hires contractors to build the facility. After the project is completed, the tenant sells the property to an investor, recouping the costs, and leases the space long-term.
At Sterling CRE, we often help tenants evaluate their options and connect them with developers or investors, depending on their specific needs.
Why Do Tenants Opt for Build to Suit?
Why do some tenants use the BTS option, even if it means waiting longer to move into a new facility? Many tenants opt for this model because it offers several key benefits:
- Customization: A BTS allows the tenant to design a facility that meets their exact operational requirements. This is particularly beneficial for specialized industries such as biotech, healthcare, or large retail operations.
- Capital Allocation: For many companies, the decision to lease rather than own comes down to capital efficiency. If a company can yield more than 10-12% on capital deployed within their business, they are likely to make more money as a BTS tenant rather than an owner-occupier. This allows them to allocate more capital toward growing their business instead of tying it up in real estate.
- Long-Term Planning: For businesses that anticipate long-term growth, having a facility built specifically for their needs can be crucial. BTS projects often involve longer lease terms, giving tenants stability in their real estate planning.
Challenges of Build to Suit Projects
While BTS offers significant advantages, there are also some challenges tenants must consider:
- Time Investment: One of the biggest drawbacks is the time it takes to complete construction. Depending on the complexity of the project and local factors such as labor availability and permitting, the tenant may need to wait several months or even years to move into their new facility.
- Rising Costs: In Montana, as in many other regions, construction costs have been steadily rising due to inflation, supply chain issues, and labor shortages. These factors can drive up the overall cost of a BTS project, making it more expensive than leasing an existing space.
- Creditworthiness: Financing for BTS projects requires strong credit from the tenant. Lenders and developers want to ensure that the tenant has a solid financial standing and accurate growth forecasts to mitigate the risk of long-term leases.
Who is Using Build to Suit in Montana?
With Montana’s rapidly growing population and evolving economy, we’re seeing more interest in BTS projects from various industries. Corporate retailers, healthcare providers, and tech companies with specific facility needs are increasingly exploring BTS as an option. As the state continues to develop, more tenants will likely seek out BTS opportunities to accommodate their business expansion.
While BTS isn’t the right fit for every business, it can be a highly effective solution for tenants with specific facility needs and long-term growth strategies. Whether you’re a retail giant looking for a custom storefront or a tech company seeking a specialized lab, BTS offers the flexibility and customization that traditional leasing may not.
For more information on Build to Suit opportunities in Montana, contact Matt Mellott for more info on BTS projects.