5 key issues for the investor when buying a ready-made BTS (build-to-suit) investment
BTS (build-to-suit) projects are currently very popular on the real estate market in Poland. They ensure the implementation of commercial facilities, in particular industrial and warehouse facilities, tailored to the needs of their users. Implementation of the BTS project at the request of a specific user usually involves a non-standard profile of the constructed facility, a higher than market rent rate and a longer rental period (up to 30 years). The long-term rental of the BTS facility ensuring high rent is an attractive investment product for many investors who want to invest their capital in commercial real estate with a high return rate .
When deciding to buy a ready BTS investment from its developer, you should conduct a detailed legal, business and technical audit to examine the risks associated with the investment. Here are the most important of them:
1. The amount of rent:
Despite appearances, rent much higher than the market rate may pose a problem for the investor, especially in a situation where the lease agreement with the user of the BTS facility has been concluded for a shorter period than the investment payback period anticipated by the investor. After the expiry of the lease, it may turn out that the current tenant will not be interested in further use of the facility or will want to renegotiate the rent rate.
In this situation, the investor is faced with the choice of reducing the rent or losing the existing tenant and looking for a new one for whom the BTS facility will not be an equally attractive product.
2. Early termination by the tenant:
Similar risk as above is also associated with the possibility of early termination of the lease agreement by the tenant. Often tenants, in particular industrial facilities, reserve the right to terminate the lease agreement in the event of circumstances beyond the control of the landlord preventing or significantly impeding production operations at the BTS facility. As a result, the investor is burdened with the additional risk of losing the tenant during the rental period without the possibility of seeking contractual penalties or compensation from the tenant.
3. Service charges:
The high rent specified in the contract is not everything. It is also important whether and to what extent the tenant covers, as part of service charges, costs related to the maintenance of the property, its maintenance, service repairs, insurance or property tax. This is particularly important for industrial facilities that require frequent, additional outlays after their construction. The higher the costs charged to the property owner, the higher the CAPEX budget required and the lower net operating income (NOI), and consequently the lower return on investment.
4. Valorization clauses:
The increase in inflation over the next few years may mean that the real return rate on investment will be lower than assumed. Therefore, it is important that the lease agreement provides the investor as the landlord with the opportunity to adjust the rent to the extent that NOI will be maintained at the assumed level.
5. Free assignment of claims and guarantees:
For an investor financing the purchase of a BTS facility with a bank loan, it is important that the contracts concluded by the developer enable the assignment of claims and guarantees to the financing bank. This applies in particular to claims and rights arising from guarantees provided by the tenant, a design company or a general contractor for construction works. Usually, banks granting loans for a ready-made investment will require the assignment of such rights and claims as security for loan repayment. Any contractual restrictions on the possibility of assignment may complicate the issue of obtaining financing.
Do you want to learn more about BTS investments in Poland? Contact us. Our Law Firm offers legal and tax advice on real estate transactions. We advise and represent developers implementing BTS investments, tenants of commercial facilities, as well as investors buying ready BTS projects.