Design build is an arrangement typically involving an owner of land agreeing to build a structure of a size, quality of construction and overall appearance in accordance with requirements of a specific tenant. The owner, as landlord, then leases the completed structure to that tenant. In today’s marketplace, design build activities have expanded and include numerous arrangements and variations.
Most design build activities begin with a detailed analysis of the user’s needs, building and site criteria, and a detailed costing. Commercial brokerages typically have extensive information concerning hard and soft costs and a range of typical land values to help in cost estimating. Hard costs include all structural, mechanical and electrical components, site preparation (e.g., excavation, fill, landscaping, asphalt and cubs), and contractor overhead and profit. Soft costs normally include project management, engineering, legal and consulting fees, financing charges, and connection fees.
Design Build Options
Brokerage involvement in a design build strategy can also include analysis of lease versus own options. Clients may then evaluate various possibilities including:
· Ownership by acquiring suitable land and constructing a building;
· Leasing of a completed building based on pre-determined building/site criteria; or
· Acquisition of suitable land followed by a sale/leaseback arrangement where a new owner (the developer) constructs the building and enters a long term lease with the former owner as a tenant.
Design build arrangements are commonly associated with a seller’s market when demand for land is high and existing space is limited. Ease of financing at attractive rates is also an important element in the growth of design build activity. Conversely, such activity is dramatically reduced in markets where ample lease space exists at very competitive rates and building are available for sale below replacement cost.
Design build scenarios can be complex given the particular needs of users. Commercial brokerage activities will often in clued not only detailed costing estimates; e.g., land and building costs as well as interim and permanent loan costs, real estate commissions, closing expenses, and contingencies, but also detailed pro forma statements outline all cash flow projections, present value estimates and internal rates of return. A rent quotation is established for the tenant following cost estimates and development of a pro forma statement.
The sale/leaseback involved the sale of a property by an owner with the leaseback of the property to that original owner. The sale/leaseback arrangement can prove beneficial to both the seller and buyer of property. The seller liquidates his/her equity in the land and arrangement. The buyer, as an investor, is assured of a long-term cash flow and the seller may have an option to repurchase the property following the lease. Obviously, certain risks are associated with the sale/leaseback.
The investor is relying on the tenant to make regular lease payments, thereby ensuring the anticipated rate of return. Any default can adversely affect investor cash flow. On the converse, the land may appreciate substantially during the lease period, with the investor enjoying capital appreciation even though the building may have depreciated significantly during the extended lease period.