Enter the necessary financial information into the calculator to estimate an average annual lease payment needed to recover a stated construction cost over a lease term (straight-line, principal-only). This does not include financing/interest, required return, land, soft costs, operating expenses, taxes/insurance, or escalations.
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Build To Suit Lease Formula
The following equation estimates a straight-line (principal-only) annual lease payment needed to recover a stated construction cost over the lease term. Actual build-to-suit lease pricing typically also reflects financing/interest or required return, developer profit, land/soft costs, operating expenses, taxes/insurance, and any escalations.
BTSC = CC / L
- Where BTSC is the average build-to-suit lease payment on a straight-line basis ($/year)
- CC is the total construction cost ($)
- L is the lease duration (years)
To estimate the annual build-to-suit lease payment (principal-only), divide the total construction cost by the lease duration in years. To estimate a monthly amount from an annual payment, divide by 12.
| Total Construction Cost ($) | Annual Lease Payment ($/year) |
|---|---|
| $100,000 | $10,000 |
| $150,000 | $15,000 |
| $200,000 | $20,000 |
| $250,000 | $25,000 |
| $300,000 | $30,000 |
| $400,000 | $40,000 |
| $500,000 | $50,000 |
| $600,000 | $60,000 |
| $750,000 | $75,000 |
| $1,000,000 | $100,000 |
| $1,250,000 | $125,000 |
| $1,500,000 | $150,000 |
| $2,000,000 | $200,000 |
| $2,500,000 | $250,000 |
| $3,000,000 | $300,000 |
| $4,000,000 | $400,000 |
| $5,000,000 | $500,000 |
| $7,500,000 | $750,000 |
| $9,000,000 | $900,000 |
| $10,000,000 | $1,000,000 |
| *Assumes a fixed 10-year lease term and a straight-line recovery of construction cost only (no interest/required return, land, soft costs, operating expenses, taxes/insurance, or escalations). Formula: Annual Lease Payment = Total Construction Cost ÷ Lease Duration (years). | |
What is a Build To Suit Lease?
Definition:
A build-to-suit lease is a commercial real estate arrangement where a landlord or developer constructs a custom building for a tenant, who agrees to lease the property once completed. This type of lease allows the tenant to specify exact building requirements while the landlord often recovers project costs through the lease payment structure.
How to Calculate Build To Suit Lease?
Example Problem:
The following example outlines the steps and information needed to estimate a straight-line (principal-only) lease payment.
First, determine the total construction cost. In this case, the cost is $1,200,000 to build the property.
Next, determine the lease duration in years. For this example, the term is 10 years (120 months).
Finally, calculate the annual build-to-suit lease payment using the formula above:
BTSC = CC / L
BTSC = $1,200,000 / 10
BTSC = $120,000 / year
Estimated Monthly Payment = $120,000 / 12 = $10,000 / month
FAQ
Is a build-to-suit lease more cost-effective than a traditional lease?
This depends on factors such as market conditions, construction costs, and the tenant’s specific requirements. While custom spaces can optimize operations, the tenant typically assumes higher lease rates to cover construction expenses.
Who covers the construction costs in a build-to-suit lease?
Generally, the landlord or developer finances the construction. The total expense is then factored into the tenant’s rent, allowing the landlord to recover costs over the lease term.
What are the benefits of a build-to-suit lease?
Tenants receive a tailor-made space suited to their operations, while landlords secure a long-term tenant and recover their investment. This arrangement can be mutually beneficial when planned and executed with clear terms and cost expectations.