Build Lease Transfer

Build Lease and Transfer (BLT) is a procurement & project delivery methodology in which a private contractor constructs and funds a project on behalf of a public sector client. Later, the private entity leases the project to the client for a fixed period. Subsequently, ownership is transferred to the public department or agency.

Build Lease Transfer is a Public-Private Partnership (PPP) model where public and private sector entities collaborate to gain mutual profits and advantages. A private entity may enter into an agreement with the central or local government agencies. One of the main benefits of this model is that the public entity need not worry about upfront capital expenditure, even though it can access and use the building or structure immediately after construction. The public sector entity can also contribute to construction design.

• Under the Build Lease and Transfer (BLT) agreement, the private sector entity constructs a building or facility, leases it to the public sector entity, and transfers the property to the public agency once the contract tenure is over.
• It is a financing arrangement used frequently in business, infrastructure development, and civil construction.
• An important benefit of this procurement mode is that contractors consider the construction lifecycle while making project decisions, especially design decisions.
• The drawbacks of this methodology include the complexity of project agreements and difficulty estimating costs and risks over long periods.

Build Lease and Transfer (BLT) is an arrangement where the concessionaire constructs a facility, leases the operating part per the agreement, and gives the ownership of the building or structure to the owner (public entity) after the contract concludes. BLT agreements are long-term contracts for major projects like public infrastructure, government buildings, or commercial facilities. It is done for a lease charge as specified in the PPP Contract.

Under a leasehold arrangement, the client pays the contractor rent for a set period. The development costs, which include land acquisition, design, construction, and running expenses, are a major determinant of the rent that will be charged for property/building use. It is a financing arrangement commonly used in construction and infrastructure development projects.

It involves a fixed, well-defined process. First, a private developer designs and constructs (end-to-end) a project or facility, such as an airport or power plant. The project is leased for a fixed period to the public entity, usually 10 to 30 years. The private entity operates it as a business until the lease period is over and recovers its investment to earn profits. Finally, after the lease expires, ownership of the project is re-transferred to the government or partner at a predetermined market price. BLT allows developers to build and profit from the project while leasing it, ultimately transferring ownership to the government or public entity/partner in the long run.

Here are some examples to help understand this concept better.

Example #1

Let us consider a hypothetical example of a builder to understand the concept.

Daniel is a builder who employs the BLT strategy to create an office building for the government. He enters into a contract with a government organization, and in accordance with their requirements, he constructs the office building. After it is finished, Daniel leases the structure to the government for 15 years, during which they pay him regular rent. At the end of 15 years, the government receives ownership of the building upon expiration of the lease.

Example #2

An August 2023 news report from Trinidad and Tobago revolves around the BLT strategy. In the case of NH International and the wholly state-owned Urban Development Corporation of T&T (UDeCOTT), it has been referred to as the lease-to-own agreement. NH International reported that the government agency acquired the ready-to-use 7-story Ministry of Health building worth $280 million (total cost) without initial investment (in any form). A lease rental agreement has been fixed for a 15-year tenure to ensure effective operations.

Emile Elias, Executive Chairman, NH International, talked about how various aspects of the project were simplified, such as financing, design, construction, parking allotments, etc., through the BLT arrangement (with certain other provisions specific to this case). He also explained how this arrangement benefits taxpayers and how local contract engagements and hiring promoted development within the region. This is a fine example of the BLT model, which covers project cost, budgeting, financing, taxation, lease rentals, regional economic development, facilities management, and final handover, among other things.

The advantages and disadvantages of Build Lease and Transfer are discussed below.

Advantages

• Transfer of Risk: During the lease term, the lessee takes on the operational and maintenance risks, lowering the builder's or developer's risk.
• Long-Term Revenue Stream: For the duration of the leasing arrangement, the private builder or developer receives consistent revenue through lease payments.
• Asset Ownership Transfer: At the end of the lease period, the lessee receives ownership of the asset, giving them long-term asset ownership and the possibility of value growth or property appreciation.
• Effective Asset Utilization: Resource allocation is maximized by allowing the lessee to use the asset during the lease term without incurring upfront ownership fees.
• Customization and Specialization: The private entity (builder or developer) employs its skills in asset management and construction, ensuring the asset is constructed and maintained in line with industry standards. Some flexibility exists, and the building may be designed according to a client’s needs, as clients are entitled to ownership rights eventually.

Disadvantages

• Initial Expenses: The builder or developer is responsible for paying the asset's initial construction expenses, which can be high and may demand significant funds.
• Limited Control: Depending on the conditions of the agreement, the lessee may only have limited control over changes made to the asset throughout the lease period.
• Uncertain Future Needs: Difficulties may arise if the lessee's future needs change or upgrading or expanding the asset during the lease term becomes necessary.
• Transitional Issues: There may be complicated legal and administrative procedures involved in the transfer of ownership after the lease period, which could cause delays or disagreements.

This article has been a guide to what is Build Lease Transfer. Here, we explain the concept with its examples, advantages, and disadvantages. You may also find some useful articles here -

• Build, Own, Operate, and Transfer
• Build Operate Transfer
• Public Infrastructure