Best Practices – Built-to-Suit – Why You Don’t Want Your Landlord To Be Your Builder.

Today I have an announcement from Infrastructure Ontario.  In this announcement we learn about a $21B Rail project in Canada  being tendered to Design, Build, Finance, Operate, and Maintain (DBFOM) Ontario’s Go Transit System.

The goal of this tender is to transform the existing Go rail network from a commuter transit system into a regional rapid transit system.

It’s a huge undertaking and I am certain the biggest firms in the world will be jumping on top of this monumental project.

This RFQ is a perfect example of government’s ever increasing reliance on Public Private Partnership (PPP).  Public Private Partnership models transfer the risk of government projects away from the public sector onto the private sector.

PPP agreements are highly effective for governments seeking private organizations with  funding or know-how to execute or operate a public works project.

There are definitely strong opinion on whether these types of arrangements are or are not cost effective.

In private industry, we have similar models.

Today I wanted to discuss some of these models and evaluate some of the benefits these models offer.

Build to Suit

I’m sure you have driven past a vacant warehouse or office and seen signs that read “Build-to-suit” or some variation of that.  Essentially this means the Owner or property manager will lease and build a space to suit your business needs.

This is not a new phenomenon and is quite common.

“Build-to-suit” models work in a couple of ways.

Under the most basic build-to-suit model, you sign a lease for a space and pay the landlord a separate sum for construction.  This arrangement is a simplified version of what you could do on your own by hiring a General Contractor, except the Landlord operates as your General Contractor.

Another way this could work is where the Landlord takes no money from you for construction and instead adds cost into your lease every month as reimbursement for the cost of construction.  For the Occupant, this is by far the simplest form of arrangement.

Co-Working

An evolution to the “Build-to-suit” model is the co-working model.  This is also not a new model, but it has seen greater adoption and acceptance in recent years.

A co-working model is the ultimate form of DBFOM available for private business.

With co-working environments, you either lease a space or become a member of a cooperative work place.  The space may be pre-built, or a space can be built for you.

Co-working has the added benefit that all of the office resources of a typical office are shared and essentially the office is operated for you.  You don’t need to hire a receptionist, cleaning company, security guards, or mail room personnel, these services are included.

Limitations and Loss of Control

Each of these models give up a certain level of control over the final product and the operation of the space.

Certainly co-working environments don’t work for warehousing or manufacturing, but if office space is what you need, it’s perfectly viable.

You can use build-to-suit for warehousing and if you are providing your own equipment, build to suit can work for light industrial spaces too.

If you have a major manufacturing facility these options are not for you.

Cost Effectiveness

In addition to loss of control, these models may also cost more.

Consider that the landlord in a build-to-suit model may not be as prudent in negotiating the cost of construction with the trades.  Another thing to look out for is that the trades and the Landlord probably have prior relationships and you will definitely be at a disadvantage.

Another concern is that if you choose to pay for the construction through your lease, you will be paying interest on the cost of construction and you will probably be locked in to a long term lease.  This means you will be limited in the future if you wanted to expand and move out.

In a co-working space, the value proposition is quite high for smaller businesses.

As your operation grows, the costs for building and operating your own space start to look more favorable.  So while co-working is extremely attractive for start-ups or as temporary space, it’s not a great long term solution.

Closing

For the government of Canada, transferring the risk of building, financing, maintaining, and operating a regional rail line seems like the best choice.  With a lack of funding and experience taking on such a project themselves would not make much sense.

If you are a start-up with a need to focus on your core business, you may feel the same way about setting up an office.  In that case, build-to-suit or co-working may be for you, just not for too long.

What do you think?  Are build-to-suit or co-working options good?  Have you used one of these for your business?  Tell me your stories.

Thanks for reading.  If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe.  This helps promote my content and is greatly appreciated.

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