What contract terms for a Build To Suit, Single Tenant deal?

Question

There is a parcel of land I've identified to purchase with interest from a national chain wanting to do a single tenant net lease build to suit deal.

In preparation for negotiating a lease and executing the build to suit, what term(s) should be in place to protect the Landlord in case we are midway thru construction and the Tenant wants to walk?

Should the lease be signed before due diligence is complete? What if the Tenant doesn't want to sign the lease before the end of due diligence or even prior to me closing on the land?

In other words, I'd like to mitigate as much risk as I can at this point so any guidance would be appreciated, thank you.

Winston Parks · Answer

Agree with @Greg Dickerson. If you have a national chain with many existing stores then they know you want to limit your downside. Do as much due diligence as you can on the property while you have it under contract like checking utility locations, zoning, setbacks, permit process, etc. Ask them for their building plan prototype, etc and submit to a commercial GC to get ballpark figures. ALWAYS get an executed lease BEFORE you close on the land.

Do a quick search on crexi or loopnet to understand what types of leases this national tenant typically agrees to and what cap rates they are trading at. Or contact a commercial broker to ask them about the caps and/or tenant. Shoot for a longer initial term, ideally 15 years, annual increases, and absolute NNN (no landlord responsibility(ish)). Have a commercial real estate attorney draft the lease for you and seek input from an experienced commercial broker.

You will likely have some out of pocket expenses prior to the lease being executed, but limit that the best you can. Thats the risk of development.

Good luck!

Ronald Rohde · Answer

thats some of your cost you need to invest. this is a big project with big profit. It requires a corresponding amount of capital and risked capital. You're not tying this up with $10,000...

Quy Huynh · Answer

Joel, thanks for your reply, always love reading your posts.

Approximately how large of a deposit have you seen on average and at which stage of negotiations?

Joel Owens · Answer

If you haven't done this before you likely need a consultant or leased fee developer.

There is a ton that goes into this and having the wrong lease set up could severely impact value to the property when you go to convert from construction loan to permanent or you want to resale. Newbie developer mistake is to get so excited for national tenant to commit that you give in to their terms and then have a whopper of a problem when you go to sell. Ideally you want a large non-refundable deposit when you reach a certain stage of  negotiations. What quality of lease and terms you can get will usually be how desirable the site is in your area. If you have a B+ to A site and many similar tenants want it then tenant has less leverage on lease negotiation and terms. You need to know what tenants command what cap rates. A Chick fil a might be a 4.5 cap and a Bojangles might be a 6 cap. Even though they might have close to the same interior space size Chick fil a might require double drive thru because of volume they do and because of that might pay much more rent per square foot than the Popeyes.

Quy Huynh · Answer

Hi Winston,

Building plan - would this be something you submit with an architect to see if their prototype could fit on the parcel in addition with checking with local jurisdiction?

Lease - Is having a fully execute lease common prior to closing on the land when doing a build to suit? Is closing without a signed lease an option?

Quy Huynh · Answer

Hi Greg,

Lease signing - Wouldn’t we need to know if the Tenants concept can fit the lot of not prior to signing a lease? Have you seen Tenants sign prior to having a conceptual or approved site plan for the parcel?

Financial penalty - during the lease term I'm familiar, but what about during the buildout process?

Greg Dickerson · Answer

You should do basic due diligence and feasibility before you enter into a lease but you definitely want to put the lease in place prior to spending money on site plan development and approval process etc. General terms are usually min of 10 years and you will want to get deposits and guarantees so the tenant can not walk without financial penalty.

The best thing to do would be to have a local real estate attorney familiar with these type of deals draft all leases and contracts as they are very technical.

What contract terms for a Build To Suit, Single Tenant deal?

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