Q: My company needs an additional real estate facility. We want a developer to buy the land, develop the project, own the building and lease it to us. How can we make sure the project is completed on schedule?
A: To complete a build-to-suit (BTS) project on time, you should focus on the Project Schedule early in the process. An understanding of all milestone dates and the critical path to completion will allow you to develop an accurate schedule so that you can achieve timely completion.
The Project Schedule for a BTS transaction has three main drivers: the requirements of your business operation; issues related to selection of the preferred site and developer; and the development requirements of the building project. All of these factors must be integrated into a single comprehensive Project Schedule that will help you orchestrate the BTS process and manage timing risk. (Note: the Project Schedule is different from the Construction Schedule, which is prepared by the general contractor and ultimately becomes part of the Project Schedule.)
Your business requirements might include i) whether your current facility is owned or leased. If leased, when does the lease expire? If owned, will the facility be sold, leased, or used by another division, and if so, when? ii) whether specialized improvements or equipment require additional lead time iii) how much time is required to move your operations into the new location iv) the internal corporate approvals you will need to proceed; and v) whether your business is subject to seasonal factors making it hard to move during certain periods.
Site and developer selection issues include i) selecting the preferred markets for your facility and making a final decision ii) identifying developers with the necessary characteristics, such as experience and creditworthiness iii) screening developer prospects and iv) the date for land acquisition.
Development requirements include i) commitment of the developer’s financing; ii) the developer’s own internal approvals iii) governmental entitlements iv) preliminary and final project pricing v) completion of plans and specifications vi) the construction schedule for the building vii) necessary approvals for, and construction of, special infrastructure, such as road widening or traffic signalization viii) execution of the build-to-suit lease and ix) the closing date for land acquisition.
All these critical milestones and processes should be integrated into a comprehensive Project Schedule. By its nature the Project Schedule will be constantly evolving. Don’t wait until you have final information to get started. Once a draft Project Schedule is prepared, investigate ways to manage your own critical dates if extra time is needed. For example, can you get a short-term extension for your current facility? If you hold over, what would the penalties be? If you are forced out of the current facility, could you find temporary space? At what cost? Successful completion of a BTS project requires the orchestration of a multitude of events and processes. A good Project Schedule is the first step in this process.
You may be tempted to think that financing, entitlements, construction schedules and plans and specifications are the domain of the developer and that you need not be concerned with them. To the contrary; you need a full understanding of all the development critical dates, as well as your own business requirements. Inquire specifically as to how the developer will finance the project and when financing will be committed. Find out what internal corporate approvals the developer needs to go
forward and when those will be obtained. Make sure you raise these issues early in the developer selection process. But once your developer is selected, think of him or her as your partner, along with the rest of your BTS team (broker, architect and attorney), in the transaction.
To manage the risk of timing in a BTS project you should take ownership of the Project Schedule from the beginning. My suggestion to clients is that they start to develop a Project Schedule even before they identify a developer or location. Fully understanding all critical dates is the first step to a successful BTS project. The second step is starting the BTS process early. This will ensure you have plenty of time built into the Project Schedule so that adjustments can be made, as unexpected events inevitably arise. As long as there is plenty of time available you can negotiate as an equal with the developer. But as time passes, you’ll have fewer options available and will be less able to negotiate your best BTS deal.
This article appeared in the May/June 2014 issue of the Leader.