THE BALANCE BETWEEN TENANT AND DEVELOPER
THE VIRTUARCH EXPERT TALK:
Build-to-suit (BTS) projects are attractive for tenants with special requirements to their building which are difficult to be found on the lease market. They are also highly interesting for commercial real estate developers, because they can provide a long-term revenue.
However, both players have a different focus. This is where an architecture firm with management competence like VIRTUARCH comes into play. From the architecture point of view BTS projects are highly demanding, they require experience in many fields, from the site selection to the handover of the building. Daniel Heusser and Holt Zhang from VIRTUARCH talk about the challenges of BTS projects and how to ensure that the involved parties have benefits it from the start to the end.
What is BTS exactly?
Daniel Heusser: In short, one can say, BTS refers to buildings that are constructed for a user with specific design specifications. There are different models of how BTS projects can be rolled out. The most used for industrial buildings for foreign companies in China is the model where the future tenant commits to rent a building which will be purposely built for him by a developer. Another form practiced in some markets is a so-called sales-leaseback. That means a company buys some lands, evaluates the liability of financing the project, commissions the designers and contractors to execute the planning and construction works. After completion, this company sells the property to an investor while leasing it back. This form is practically more a financial transaction than a BTS.
Holt Zhang: In most of our BTS projects, a future tenant gets into contract with a developer who takes the ownership, managing the risks of the construction of the property according to the specifications of the tenant. Normally, the lease is a long-term contract, simply because the building is specially designed and built according to the needs of the tenant.
What are the advantages of BTS
Holt Zhang: The most important advantage compared to renting and upgrading an existing workshop building is that the building is planned and designed according to the specifications of the tenant, while the investment costs are in the books of the developer. As a consequence, you can maximize efficiency, cost-efficiency and also the space available. Due to the nature of BTS the Developer has advantages, among them fewer leasing risks, because the tenant is already known, and usually there is a long-term leasing contract, as mentioned before. A good example of a built to lease project as we talked about is the Sofima Chongqing Factory which incorporates administration offices and workshops in a 17,600 sqm factory built according to the needs of the tenant. When planning the design, our idea was to combine the two distinct zones which including offices and workshops to encourage communications between the factory work floor and administration space.
Daniel Heusser: When we took over the project, we learned that a requirement of the tenant was a wide field of vision. This we realized by introducing a main façade that is emphasized with full height Low-E glass. This particular glass was selected for its outstanding energy performance and safety capability which was the requirements from both the tenant and the developer.
Holt Zhang: Another example of a successful BTS project we carried out is the MAGNETI MARELLI Hefei Project. It is located at 108 Ningxi Road, Hefei High-tech Zone, with a total area of 40,000m2 and a construction area of 28,000m2. Before the project started, we talked in details with representatives of the tenant about their needs and their requirements, to come up with a design that was specifically created for them to meet these needs. We had to take many aspects into consideration. The project construction included joint factory buildings, office buildings, power stations, fire pump rooms, door guards, and roads and parking spaces in the plant area. In the end, all these modules were combined in a way that suited the tenant in the best way.
Daniel Heusser: In general, you can say that if the tenant works together with a developer, he does not have the risk which comes with managing the project. The developer is responsible for the entire project delivery or at least for the permitting and construction. And of course for the financial part, which could be an issue, we will talk about that later.
What are the challenges of BTS projects?
Holt Zhang: First of all, you need a very good preparation, a detailed concept design and specifications. In the next phase, and that is very important, we need to make sure that the object is built in a proper way. As architects with project management experiences we have to be onsite to control the quality of the material the developer selected, this should be the same quality the tenant expects and needs.
Daniel Heusser: That is the decisive point. In the BTS model, the developer develops according to the design requirements of the tenant, but he is interested in saving construction costs by using less expensive material, which means less quality. If you reduce the quality of the floor, for example, it may be not as long-lasting as it should be, which is not in the interest of the tenant. There is a fundamental difference in interest between the developer and the user: For example, insulation and air con systems are an expense to the developer, while energy consumption for air con is a bill paid by the tenant for the entire using period of the building.
Holt Zhang: So, our role as architects and interior designers is to help tenants to specify their needs and to ensure that the project is executed in the agreed quality; our role as experts in project management is to control the quality in each phase.
Daniel Heusser: Basically, it can be said: If high quality is a priority in a project, BTS is not the best way to ensure it. BTS has its advantage if the investment cost has to be reduced to the minimum and if the schedule is extremely tight.
In any case tenants are well advised to trust an architect who helps them to specify their needs and, in their interest, controls all construction phases. This is actually what we do.
The next VIRTUARCH Expert Talk will focus on how to change or expand schools during the short period of a summer break.