Five Questions You Should Be Asking Your Build-To-Suit Developer
Chances are, as a franchisee or franchisor, you have engaged a build-to-suit real estate developer to help facilitate new-unit growth for your brand. Better said, many more have probably come knocking on your door to offer their services or pitch a “great site” that you should capitalize on as soon as possible.
Often times, a transactional, one-way relationship ensues and you, as the client, are left to feel like you are on a need-to-know basis every step along the way. Prioritizing your people and your concept over the distraction that can be real estate development doesn’t mean you don’t have a right to know the economics, upside and exact timeline associated with the delivery of your store.
Here are five questions you should not only be asking your build-to-suit developer, but also holding them accountable to answer.
1. How Much Was The Land Acquired For?
While the price of the land that your new building will sit on can generally be found through a simple internet search or some digging within the local real estate community, it is not commonplace for a build-to-suit developer to disclose this information to you, the tenant. Obviously, it is an essential lever in determining the rent you will pay when it’s time to open. A build-to-suit developer brings many advantages to the table and complete project financing is certainly one of the most important advantages. However, just because they pick up the tab on your land doesn’t mean you aren’t entitled to know exactly what it cost. If you want to understand your rent calculation, this is imperative.
2. How Will My Rent Be Calculated?
Even though you have chosen to prioritize the operational components of managing your restaurant, a transparent build-to-suit partner who is truly interested in your success should be able to provide a prospective budget for your project. At the bottom of the budget lives your rent number, but the most important details live above that: Land cost, construction costs, soft costs, total project costs, cap rate, and development spread. All are integral in computing your initial rent payment. Don’t be embarrassed to ask exactly HOW your build-to-suit partner arrived at your rent payment! If there’s nothing to hide, this is a simple exercise and request.
3. How Much Money Are You Going To Make On This Project?
Your build-to-suit partner is going to shoulder a significant burden of risk throughout the development of your project. With risk, reward should follow. That said, a transparent development partner who is not only interested in your long-term success will also be comfortable outlining exactly what is in the deal for them. The developer is the one managing the complicated processes involved with design, permitting, construction management, vendor management and turnover all while dodging deal-killing elements around every corner. However, as with every high-functioning partnership, a developer who is comfortable disclosing their upside clearly values transparency and seamless communication.
4. What Happens If There Is Additional Profit When This Deal Is Sold?
A build-to-suit developer will generally not make any money on a project until it is built and sold to a real estate investor, usually through the 1031 exchange market. Before your project begins, the developer will analyze and underwrite all the factors that influence the deal’s value on the investment market. This scenario is governed by a Cap Rate, or the rate of return an investor will accept for purchasing your deal from the developer on the open market. Higher value opportunities will bring higher prices and lower cap rates. Lower value opportunities will garner lower prices and higher cap rates. By underwriting your deal on the front end of the project, a developer will assign a budgeted cap rate and begin to understand their financial upside. However, when the deal is finally brought to market and sold it is possible that it will sell at a higher price (or lower cap rate) than originally budgeted thereby generating additional profit for the developer. Discuss this concept with your development partner early and often. While it can be a complicated concept to fully understand, a true partner may be willing to either share or concede 100% of the upside of the sale to you.
5. How Can I Follow The Progress Of My Project Through Construction To Delivery?
Transparency on the front end of a project is obviously very important and will certainly help you feel comfortable with your development partner and their intentions. The same level of transparency should also be expected through pre-development and construction all the way to store delivery. Not only will this help you, the operator, better understand the timelines associated with training your people and ordering product, it will make for a streamlined process right up to opening day. Find out if your development partner has standard practices for reporting milestone events during construction. Even better, ask for access to their construction management software so you can follow along in real time with the project. If there are no standards for reporting or tracking through a proprietary software it can be very difficult to ensure a clean hand off when it’s time for your doors to open.
Plaza Street Partners is re-defining the relationship between single-tenant retailers and developers using a common sense, tech-enabled approach to process management. Are you a Plaza Street Partner? Learn more at www.plazastreetpartners.com.