What is a build-to-suit industrial lease?

What is a build-to-suit industrial lease?

A build-to-suit (BTS) transaction is a real estate development arrangement in which a developer or institutional landlord agrees to construct a new industrial facility to the specific requirements of a named tenant, in exchange for the tenant committing to a long-term lease of the completed building. Unlike leasing an existing building from available inventory, a build-to-suit delivers a custom-designed facility that precisely matches the tenant's operational, structural, and site requirements. In a typical GTA industrial build-to-suit transaction, the tenant specifies their requirements — building size, clear height, dock door count and configuration, truck court dimensions, power supply, office space ratio, specialized features like cold storage, chemical handling areas, or mezzanine structures — and the developer designs and builds to those specifications. The developer finances the construction, manages the build, and delivers the completed building to the tenant at an agreed occupancy date. The tenant pays a base rent designed to provide the developer with an acceptable return on their total development cost, including land, hard and soft construction costs, and financing. Build-to-suit leases are almost universally long-term — typically 10 to 15 years minimum, and sometimes 20 years for very large or highly specialized facilities. The long term is necessary to justify the developer's investment in a building designed for a specific tenant's use, which may have limited re-leasing appeal to the broader market if the tenant vacates. Rent in a build-to-suit is typically structured as a net lease, with annual escalations of 2-3% or fixed step-up amounts built into the lease. From a tenant's perspective, the key advantages of a build-to-suit are specification control, operational optimization, and long-term cost certainty. A purpose-built facility eliminates the compromises inherent in adapting an existing building to a specific use, and the long-term fixed rent structure provides budgeting certainty over the full lease term. The primary trade-off is flexibility — a 10 to 15-year commitment is a significant operational lock-in, and tenants who underestimate their future growth or who experience adverse business changes may find the long-term commitment constraining. In the GTA industrial market, build-to-suit transactions are most common in Milton, Vaughan, Brampton, and the Highway 401/407 corridors where greenfield industrial land remains available. Major e-commerce operators, national 3PLs, and large food and beverage distributors are the most frequent build-to-suit users. Michael Law advises tenants evaluating build-to-suit opportunities across the GTA. Contact Michael at mlaw@lennard.com or (905) 917-2045.