Built to suit: what is it and how to invest in this real estate contract model?

Many people are looking for ways to invest in the real estate market given its breadth and potential for return. Among the possibilities that have attracted different investors are the alternatives linked to a specific contract model, which is known as built to suit.

In general, this contractual model is related to a very specific form of real estate leasing. However, when the subject involves investments, it is necessary to deepen your knowledge on the subject to make the best decisions regarding your money.

What is built to suit?

The expression built to suit (BTS) is used to define a model of real estate contract in which the lessor builds or adapts his property to meet the needs of the lessee.

This type of contract gained a lot of popularity in the United States in the 1950s. BTS was regulated in 2012, receiving the name of “lease in adjusted construction contracts” (Law nº 12.744/12).

This law is still little known — especially among those who do not participate in the real estate market . In general, this contractual model is used by companies that need a specific property to carry out their activities.

This is because the contract only applies to non-residential leases located in urban territory. In this sense, the lessee does not need to spend his resources on the purchase of the land or hire a contractor for the construction or renovation of the property.

After all, it is enough for him to use the BTS real estate contract model, indicating his needs so that the lessor can customize the property that is the object of the lease.

How does this contract model work?

Now that you know what is built to suit, it is pertinent to learn how this contract model works. As you have seen, this is an operation that is usually used by companies that need a property adapted to carry out their operations.

As they cannot find properties that meet these requirements on the market, the alternative is to contract BTS with a lessor interested in the model. The contract will define all the characteristics that the property will need to have.

This may involve a series of renovations to the existing property or even the construction of a new one. Then a period will be stipulated for carrying out these adaptations, as well as a term of duration of the lease – which is usually long (from 10 years).

All costs involved in this procedure will be added to the rent, which must be paid monthly. In this context, the longer the term of the contract, the more diluted these expenses may be in the installments.

Also read:  Investing in real estate shares or buying shares in FIIs: which is the best option?

What contractual rules should the parties be aware of?

As you have seen, the built-to-suit real estate contractual model can be quite specific. After all, each company may have a particular requirement for its business model. However, it is important to pay attention to the rules laid down by law.

The first point of attention involves the rule that defines that, during the stipulated period for the duration of the contract, the lessor will not be able to recover the rented property. So, if you have a property and suspect that you might need it in the short term, the BTS model is not the best choice.

If the lessee wants to return the property leased under a BTS contract, he will be obliged to pay a fine proportional to the period of performance of the contract. It is worth mentioning that this penalty cannot exceed the sum of the rental values ​​until the end of the lease.

Another particularity that can be agreed concerns the waiver of the right to review the rents during the term of the contract. This means that the monetary restatement of rents, common in lease contracts, may be waived.

As for the other contractual provisions, these may be freely agreed between the parties. In any case, any gaps and omissions will be interpreted in light of ordinary legislation (Law No. 8,245/91 — the tenancy law).

What are the advantages of the built to suit contract?

After knowing how the built to suit works and the rules that those interested in this alternative need to be aware of, it still remains to explore the advantages of investing in this business model.

For the owner, this is a way to guarantee a long-term lease. Generally, those who have properties for rent can have losses during vacancy periods — when the property is unoccupied. In the BTS model, the contracts are long-term.

It is also worth noting that this type of lease ensures the receipt of a complete flow of rents to the lessor. After all, if the lessee wants to terminate the contract early, he will have to pay a fine corresponding to the remaining lease period.

In relation to the lessee, hiring using the BTS model is a way of renting a property with specific characteristics for the exercise of its activity. With this, those who rent can avoid costs — such as acquiring the land —, having to deal with hiring labor, buying materials, etc.

How to invest in this contract model?

The lessor or lessee interested in this contracting model will need to seek opportunities directly in the real estate market. This may involve hiring a professional in the field or a real estate agent to intermediate the negotiation.

Those who do not have a property for rent, but want to expose themselves to the results of leases in the BTS model, can invest in shares of certain real estate funds (FIIs). These are collective investment vehicles formed by the capital of multiple investors with an interest in the real estate sector.

Shares are traded on the stock exchange, usually at an affordable cost. When you become a shareholder, you participate in the profits of a portfolio of investments in the real estate sector, assembled by a professional manager.

Many FIIs have properties in their portfolio that are leased under the BTS contract model. Others invest in fixed income securities that are backed by BTS contracts — for example, real estate receivables certificates (CRI).

Therefore, as an investor, you have a wide range of opportunities through FIIs. However, it should be noted that choosing an investment involves the need to assess your investor profile and objectives.

Knowing now what is built to suit, you have discovered a new form of business that can benefit both the lessor and the lessee and, above all, the investor. However, if you still have doubts about this contractual modality, be sure to seek professional support.

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