How does “build to suit” land leasing work? If structures are built on leased land, aren’t they then owned by the lessor after the lease period ends? What is the advantage of this arrangement?
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The advantage to the lessee is that you get the exact building you want. The advantage to the lessor is that you get a lessee that’s more “locked in” to the specifics of your building and thus likely to be a long-term tenant.
The owner of the land agrees to build a structure on the land for the lessee to the lessee’s requirements. The lessee agrees to lease the structure upon completion for X number of years.
The specifics are negotiated on a case by case basis.
Someone looking to build or expand a business may not have the capital to build their own structure. They may also have very specific needs (plumbing and fixtures for a restaurant or a specific amount of square footage for office space) that they cant find in the local leased space market. So a land owner who wants to start generating revenue will sometimes fund the cost of building a structure based on a new lessee’s requirements. Typically, the lessee will have to sign a minimum lease (say 3 or 5 years). At the end of the lease, the landlord will have equity in a building that they can then lease out again.
Leasing something is kind of in-between renting and owning. You agree to rent something for a set period of time and at the end of that time you become the owner of that thing. But if you decide that you do not want it, that you cannot afford it, or otherwise decide to stop making payments before the end of the lease period/completion of the total amount owed you do not retain ownership. Instead you walk away like a common renter and the original owner can then lease, sell, or rent to someone else.
The advantage of this is that for a time the original owner has steady income more reliable than a common renter.
yes, the structure is owned by the lessor. but commercial leases typically run 10/20/30 years. and any costs of initial construction might be fully paid by the lessor (and recouped back in the lease payments) or the lessee might even contribute to the cost of building the initial structure. same thing when you lease an empty building, lessor/lessee negotiates terms for the initial build up or renovation.
Tax considerations: if you build it yourself then depreciation schedules are in effect, but when you pay a lease, you rent it and you deduct the cost of the lease. A lot businesses that own land and buildings will sell them to another company and lease them back again.
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