Build-to-Suit NNN Development: How New Construction Net Lease Properties Are Created

What Is Build-to-Suit NNN Development?

Build-to-suit (BTS) development is the process of constructing a commercial property specifically designed for a predetermined tenant, who simultaneously executes a long-term NNN lease on the property. Unlike speculative construction, where a developer builds without a committed tenant, BTS development begins with a signed letter of intent or lease from the tenant — making it one of the most de-risked forms of real estate development available.

The result of a successful BTS NNN project is a brand-new, purpose-built property occupied by a national or regional tenant under a 10–20 year absolute NNN lease — the same product that trades in the investment market as a "new construction NNN" property with a premium cap rate premium over older vintage assets.

Why Tenants Pursue Build-to-Suit

Major national tenants use BTS development extensively because it allows them to expand their footprint without committing capital to real estate ownership. From the tenant's perspective:

• Capital efficiency: Instead of buying and developing land (which ties up corporate balance sheet capital), the tenant signs a long-term lease and lets the developer/investor own the real estate
• Location control: The tenant selects the site based on their proprietary site selection criteria — ensuring the location meets their traffic count, demographic, and competitive requirements
• Brand consistency: BTS allows the tenant to build their prototype building design rather than adapting to an existing structure
• Speed to market: Working with an experienced BTS developer who has municipal relationships can accelerate the permitting and construction timeline significantly

The Build-to-Suit Development Process

Phase 1: Site Selection and Tenant LOI

The development process begins either with a developer identifying a site that matches a tenant's criteria, or with a tenant approaching developers about a specific trade area they want to enter. Once mutual interest is established, the tenant issues a Letter of Intent (LOI) outlining the key lease terms: rent, escalations, lease term, and construction requirements.

Site selection criteria vary significantly by tenant:

• McDonald's and QSR: High-traffic intersections, proximity to rooftops (residential density), high daytime population, strong ingress/egress
• Dollar General: Suburban and rural markets with 7,000–12,000 SF footprints, lower land costs, proximity to underserved population centers
• Starbucks Drive-Thru: High-income corridors, morning commute patterns, proximity to office concentrations, minimum traffic counts
• Pharmacy (CVS/Walgreens): Corner locations, high prescription volume demographics, accessibility requirements

Phase 2: Land Acquisition and Entitlements

Once a site is identified and an LOI is in place, the developer acquires the land (or secures it under contract) and begins the entitlement process — obtaining all government approvals necessary to build the specific project. Entitlements typically include:

• Zoning approval or variance (if the site isn't already properly zoned for the intended use)
• Site plan approval from the local planning commission
• Traffic impact study and mitigation (if required by the municipality)
• Utility connection approvals (water, sewer, electrical)
• Environmental clearance (CEQA in California, NEPA for federal projects)

Entitlement timelines vary dramatically by municipality — from 3 months in rural Texas to 18+ months in California. Experienced developers with existing municipal relationships can often navigate this process faster than the theoretical timeline suggests.

Phase 3: Lease Execution and Construction Financing

Once entitlements are approved (or substantially de-risked), the tenant typically upgrades from an LOI to a fully executed lease. This executed lease then serves as the primary collateral for construction financing — a short-term loan (usually 12–24 months) that funds the land acquisition (if not already purchased) and construction costs.

Construction lenders evaluate BTS deals based primarily on the tenant's credit quality and the executed lease. A McDonald's BTS project with an executed corporate lease can often secure 70%–80% construction financing — significantly higher than speculative commercial construction.

Phase 4: Construction

BTS construction for NNN tenants is generally tenant-driven in terms of specifications. The tenant provides detailed prototype building plans (or in some cases, the tenant's own design/build team manages construction). The developer's primary role during construction is:

• Ensuring the contractor delivers the building per tenant specifications and on schedule
• Managing lien waivers and draw processes with the construction lender
• Coordinating with the tenant's construction management team
• Monitoring for schedule slippage that could trigger lease start date complications

Construction timelines for typical NNN formats: QSR (3,000–5,000 SF) = 4–6 months; pharmacy (10,000–15,000 SF) = 6–10 months; dollar store (9,000 SF) = 4–6 months.

Phase 5: Certificate of Occupancy and Lease Commencement

Upon receiving the Certificate of Occupancy (CO) from the municipality, the tenant takes possession and the NNN lease commences. From this moment, the tenant begins paying rent — and the developer's investment is now a fully occupied NNN property with a long-term corporate-guaranteed lease.

Development Yield vs. Acquisition Yield

The primary financial benefit of BTS development over buying an existing NNN property is the development spread — the difference between the yield at which the property stabilizes (the "development yield" or "cost yield") and the cap rate at which comparable properties trade in the investment market.

Example: A developer builds a Starbucks drive-thru for $2.2M all-in (land + construction + soft costs). The executed lease generates $115,000/year in NOI. The development yield is $115,000 ÷ $2,200,000 = 5.23%. If comparable Starbucks NNN properties sell at a 4.75% cap rate in that market, the implied value of the completed property is $115,000 ÷ 0.0475 = $2,421,000. The development spread of ~50 basis points represents approximately $220,000 in created value — from a project that took 12 months.

How Investors Participate in NNN Development

Investors access BTS NNN development through several structures:

• Direct development: The investor controls the project from land acquisition through stabilization — maximum return potential, maximum involvement required
• Ground lease investment: The investor owns the land beneath a BTS project and leases it to the developer/tenant under a long-term ground lease — lower yield but truly passive
• Buy upon completion: The investor buys the completed, occupied NNN property from the developer at stabilization — paying a premium over development cost but acquiring a turn-key asset
• Forward purchase commitment: The investor commits to purchase the completed property at a fixed price before construction begins — locking in pricing in advance of completion, often at a slight discount to what the property would trade for on the open market

Risks in NNN Development

Despite being one of the most de-risked forms of commercial development, BTS NNN projects carry specific risks investors should understand:

• Entitlement risk: Local governments can deny permits or impose conditions that make a project economically unviable
• Construction cost escalation: Materials and labor costs can increase between project inception and completion, compressing the development spread
• Construction delays: Delays can push lease commencement dates and extend the period during which the developer carries costs without rent
• Tenant credit changes: In rare cases, a tenant's financial condition can deteriorate during the development period
• Interest rate risk: Construction loan rates and permanent financing rates can shift materially during an 18–24 month development cycle