Thought leadership from our experts

The increase in popularity of build-to-suit facilities in Singapore

Over the last decade in Singapore, with changes to the global markets and the evolution of new financial structures and business models in its midst, the build-to-suit model has become significant to many businesses; and in tandem, spawned a growth in the area for some developers as well as real estate investment trusts.

A build-to-suit model is fundamentally an amalgamation of a construction contract and a lease whereby the landowner cum landlord develops and constructs on his land a building or other facility in accordance with the specifications and needs of the business of the tenant and subsequently leases out the completed development to the tenant. This would be for fairly long lease periods of 10 or more years and often with options to renew for long terms.

In essence, this arrangement is a specialised form of financial engineering. Real estate developers and also real estate investment trusts, with more ready access to financial and investor support as well as expertise and experience in construction, design, planning and project management are well placed to carry the burden of the initial capital outlay of the costs of land and risks during the construction period. Businesses can benefit by having these specialists attend to the creation of their dream buildings without the burden of upfront capital outlay or having to find their own internal or external resources to oversee the construction to completion. This results in an asset light business yet with the ability to attain the building or facility which the business needs. At the same time this affords the developer/landlord a steady stream of income for a long period of time. Examples of businesses which have found favour in the build-to-suit arrangement are data-centre, pharmaceutical, logistics and distribution, technology, and oil and gas businesses. One can surmise that in these industries where the business is mainly operations driven, the entity involved may find that committing upfront capital to real estate and time to plan and oversee the development of a facility is a drain on its resources.

It will come as no surprise that the legal document between parties is essentially an agreement for the development of the land coupled with a lease agreement. The former agreement which deals with the development is critical in setting out the road map to the dream building. It should articulate the intentions of the parties; the time schedules anticipated; clear description and specifications and plans of the dream building together with where necessary, the expected materials to be used and possibility, introduction of tenant's works. This will have to be negotiated with the developer/landlord following its own construction methods and sometimes with its own partners in the construction industry. As much as is possible to try to spell out exhaustively in a document the rights and obligations of the parties, the parties should be aware that a key factor to the success of this arrangement often lies in the implementation stage – where glitches are resolved when parties are able to have a "give and take" practical approach.

The developer/landlord has to work out its own business plans not only for the short to medium term but for the long term as well. It has to ensure sufficient funding for the acquisition of the land - whether a lump sum upfront capital outlay is required by way of the purchase price or a more gradual stream of periodic payments such as land rent. Singapore's Jurong Town Corporation (JTC)'s latest policies have helped in such a scheme, recognising the situation where a business is interested in the industrial land but a separate developer (called "Third Party Facilities Provider") is allowed to apply to JTC for the land and hence to develop on the land the building/facility which the business wishes to lease subsequently. The developer/landlord has to bear in mind the funding and resources required for the successful planning, designing and constructing of the building/facility. These amounts are then taken into consideration when working out the rent payable by the borrowers during the term of lease.

The lease agreement then sets out the terms and conditions of the landlord and tenant relationship. The amount of rent and other charges payable has to be worked out and negotiated between the landlord and the tenant. The lease agreement would typically contain the boiler plate provisions of long leases with amendments or inclusions of particular provisions to suit the needs of the particular asset and business. Parts of the lease agreement which form the subject of much discussion and negotiation often relate to the provisions governing assignment or sub-letting, additions and alterations to the building, yielding-up of the building upon the termination of the lease and re-instatement requirements.