Pre-Construction NNN: Build-to-Suit (BTS) Investor Benefits

Jan 26, 2023

Are you a commercial real estate (CRE) investor wanting to purchase a single-tenant, triple net (NNN) lease property with a buying advantage? Build-to-suit (BTS) pre-construction properties tenanted by major brands offer notable benefits if you’re willing to wait up to six months to close.

What are the triple net investor advantages for buying a pre-construction property?

  1. BTS pre-construction properties often offer a higher-than-average, locked-in cap rate.
  2. You eliminate the competition, leaving room to negotiate a better purchase price.
  3. There’s the potential to start receiving monthly credit or “interest” from the developer that’s equal to the monthly rent payments.
  4. Receive steady monthly income with inflation protection for 15–20 years and earn a potential 7–10% IRR.

The Single-Tenant Build-to-Suit (BTS) Process

When you hear the term “build-to-suit” what does that mean? In a BTS lease, the tenant — usually an investment-grade company or large franchisee, like Dollar General, Taco Bell, or Walgreens — contracts with a development company to build new properties. Most brand-new, national, single-tenant, NNN lease properties are build-to-suit.

Companies that use BTS agreements have very specific brand guidelines for design, functionality, and accessibility, and cannot adapt to an already-built space. Medical clinics, drug stores, and fast-food restaurants are prime examples.

Here’s a simplified snapshot of how a BTS project works:

  1. At the beginning of a BTS agreement, the tenant signs a lease (drafted by their company) while the developer gets the land under contract. Most often, the BTS lease is a triple net lease stating the tenant pays for maintenance costs and property taxes and the developer is responsible for mortgage costs (if any).
  2. Once the development company takes title of the land, it begins the approval process, which includes survey work and permitting.
  3. The developer follows strict brand requirements detailed in the construction provisions part of the lease.
  4. Once construction commences, developers will often contact CRE brokers to sell off-market.
  5. The BTS property is usually finished within six months and ready for tenant occupancy.

Why Consider Buying a Pre-Construction NNN Property?

Developers are incentivized to lock in a buyer before construction is complete to recoup their investment quickly and eliminate the hassle of finding the right buyer once construction is complete.

Therefore, to entice qualified triple net lease investors to purchase pre-construction NNN properties, the developer, who is also the seller, will often negotiate a higher-than-market average cap rate, a lower-than-average sale price, and with Westwood Net Lease Advisors’ representation, often add credit rent into the deal.

Please keep in mind, as you’re reading this, that each pre-construction deal is unique. The following benefits are not set in stone. We help clients negotiate the best deal for their goals on a case-by-case basis, and some developers don’t have the leeway that others may have.

Typical BTS pre-construction triple net investing benefits include:

A potentially higher-than-average cap rate. Buyers who are ready to invest can often benefit from a higher-than-market average cap rate as a reward for waiting for the property to be completed.

Elimination of the competition with first right of refusal. Pre-construction properties are often brokered off-market through a buyer’s advisor who has developer relationships and a roster of qualified investors. Some hit the open market with attributes that beat existing listed NNN properties, so they sell first. Either way, qualified buyers — especially cash buyers — typically enjoy the first right of refusal and eliminate the competition.

Possible credit rent or interest. If your advisor knows how to negotiate “credit rent” from the seller months in advance of the property closing, you could receive interest in the amount of the up-and-coming rent payments before taking title, potentially earning monthly income before the tenant occupies the building. This could positively impact your cash-on-cash (CoC) return.

A long-term lease with stable monthly income for 15 to 20 years and the potential for 7–10% IRR. As the owner of a brand-new property with a 15–20-year triple net lease with built-in rent increases, there’s the opportunity to receive inflation-resistant, stable monthly income for years to come and a potential internal rate of return (IRR) of 7–10%.

Pre-construction deals professionally negotiated by a well-known buyer’s advisor with a credit-rent agreement are a win-win for the seller and the buyer. The seller has a legally binding sales contract from a highly qualified buyer and your capital can start earning interest rather than sitting idle waiting for the deal to close.

A sign that says New Market Opportunities

Can You Buy a Pre-Construction NNN in a 1031 Exchange?

Yes, you can buy a pre-construction NNN property in a 1031 exchange. It is a risk as you need to be ready to close the deal in about five months and the property must be complete. But with the right planning and preparation and the help of an experienced 1031 exchange team, it is not only possible, but it’s also a great way to trade up to a brand-new, high-quality, income-producing CRE investment.

Fast-Food Franchisee Construction Financing

With the economy being what it is today, businesses are looking for creative ways to finance their construction projects. In some cases, with fast-food and quick-service restaurants (QSRs), as the CRE investor, you might have the opportunity to act as a lender to the franchisee to help fund construction or improvements. This could provide higher-than-average interest secured by the lease. Earning a few extra percentage points could increase your cash-on-cash return.

We recommend speaking with your CPA or financial professional before becoming a construction lender.

Pre-Construction Sale-Leaseback

In a sale-leaseback transaction, a business owner, developer, or corporation sells its property to an investor and leases it back with a long-term, triple net lease, keeping control of operations while becoming the tenant. This type of sale works very much like a regular pre-construction NNN transaction, except that you would be buying from the tenant rather than the development company.

Sale-leaseback properties are known for being generally low-risk, stable investments that typically offer above-market yields and slightly higher cap rates than other triple net properties. Gas station and convenience store combos are known for sale-leasebacks, as are fast-food and QSRs, manufacturing, and industrial properties.

Green gas station and store lit up at night

To Wrap it Up — A NNN Pre-construction BTS Property is a Solid Investment

If you’re in the market for your first or next triple net lease property and can’t seem to find what you’re looking for, a pre-construction, build-to-suit NNN just might be the solution. Pre-construction BTS properties offer all the benefits of a regular triple net lease investment and more.

  • A pre-construction BTS will often come with a higher cap rate, better purchase price, and the potential for credit rent that can add tens of thousands of dollars to your CoC return.
  • If you’re utilizing a 1031 exchange for pre-construction, just be sure to start the process BEFORE you sell your original property or you may not have enough time to complete the exchange.
  • As a NNN investor, you might be interested in becoming a construction lender to a high-credit tenant. If so, there’s the potential to earn higher-than-average interest secured by the lease.

No matter how you decide to move forward with NNN Investing, a Westwood Net Lease Advisor can help you locate off-market, pre-construction, triple net lease properties for sale and work with you throughout the process.

Westwood Logo in blue/goldContact Us for a No-Obligation Conversation

As with any commercial real estate investment, there are specific legal parameters involved in the BTS triple net buying process, therefore we recommend engaging a Westwood Net Lease Advisor who specializes in triple net lease investments and pre-construction deals, as well as 1031 exchanges. From our first contact through closing and thereafter, we offer buyer representation, at no cost to you. Contact us today for a no-obligation conversation. 314-997-5227


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