While writing my INBiz article for the Indiana Economic Development Corporation last week, I did some informal research to better understand the primary reasons businesses relocate facilities.  My informal research caused me to look back at the businesses I’ve worked with during the seven years I was employed by Duke Realty Corporation and the last 15 years since starting my firm, Carmen Commercial Real Estate Services.  This process brought to light some interesting observations that I thought I would share over the next week or two.

First, there seems to be a direct correlation between a company’s growth and the level of need it has for assistance to manage the business’ real estate strategy, planning and events, such as complete relocations or facility expansions.  What I found was that in general, businesses that are relatively static, stable, and simply aren’t growing, seemed to take on more of the responsibility to manage real estate leases, facility actions, etc. themselves.  On the other hand, businesses owners and managers that I would qualify as “growth oriented” seem to need, or are more willing to bring in outside support for their real estate needs.  I don’t think it stops with the real estate.  It seems that these same “growth oriented” firms utilize a broader scope of outside professional services.

I attribute the greater need for assistance of the growth businesses to a number of characteristics.  Maybe first and foremost is a lack of in-house resources to perform duties related to managing commercial leases and facilities.  Why do they lack in-house resources?  I don’t think there’s any science here.  These business are growing, or trying to grow, and its human capital is dedicated solely to fulfilling its core objectives.  In other words, employees of the company are focused on meeting company objectives and any effort directed to ancillary duties simply dilutes the company’s ability to meet its objectives.

I’ve found that employees within high growth businesses usually don’t have a lot of time to allocate toward duties that are not essential to meeting company objectives and creating value.  Further, taking people away from their day-to-day duties to perform work that is outside their expertise not only reduces company productivity, but also produces a lower quality of work from people ill equipped to perform this work in the first place.  Some of these duties might be real estate cost analysis, negotiation of facility leases and building operating expenses with landlords, property searches and evaluations, construction planning / pricing, and relocation project management.

Therefore, the theme within these companies seems to be focused on the business objectives, while outsourcing all other duties to outside professionals.
In the upcoming week, I’ll post more key items that I’ve found in my research about growing businesses.

Earlier this week, we released a video about a project we worked-on last year with an exciting company called CIK Enterprises.  Whenever I need a shot of enthusiasm and / or motivation, I think about my friends and founders of CIK, Andy Medley and Scott Hill.

When I met these guys in 2002, their office was set-up in one or two small rooms above a coffee shop in Danville, Indiana.   Although, I knew little about their business or the industry, after our first meeting, I knew these guys were winners.  I met Andy and Scott when they contacted me through the Carmen Commercial Real Estate website, requesting information about Indianapolis office space.

Since then, CIK's growth has been off the chart.  In 2006, CIK was picked by the Indiana Chamber of Commerce as the best place to work in Indiana.  CIK will undoubtably be known for years to come as one of Indiana's great success stories, not to mention, on a personal note, CIK has played an intregal role in the growth of my Indianapolis commercial real estate company.

Take a moment to watch and enjoy the video.

Last week one of my long-time clients referred me to an Indianapolis business owner whom I'll call Ed.  Ed is an accomplished business man and the owner of a small accounting firm that, due to its business growth, required expansion of its offices. 

Prior to my engagement with the firm, the managing partner had entered into negotiations with the building landlord to expand the offices.  These negotiations didn't quite pan out the way the firm had hoped.  Fortunately, we were able to renegotiate this and other lease terms that had already been negotiated by Ed, which ultimately improved the firm's rights as a tenant in this particular office building.

The issue at hand was the firm’s ability to continue expanding within the building.  During my meeting with Ed, he proudly proclaimed that he had been able to obtain this right for the accounting firm with a Right of First Offer.

Upon reading the proposed term, I asked Ed what the proposed expansion language meant to the firm.  He responded, “the landlord will have to ask his firm if it wants to lease any adjacent office space, prior to the landlord's finalizing a lease with another tenant for the same space”.  At this point, I felt compelled to clarify that the firm was provided an expansion right, however, not the right he thought the firm was getting. 

What Ed thought he was getting is known as a Right of First Refusal, meaning, before a space is leased to another tenant, not when the space initially becomes available, the landlord or its leasing agent must first offer Ed's firm the office space.  The Right of First Offer that Ed had originally negotiated meant the landlord could offer the firm space as it comes available and if the firm does not act upon the offer they lose the right for the remainder of the lease term.  This is an important distinction in respect that a commercial lease tenant may not be prepared to expand into additional office space when the space becomes available, however, may want to lease additional space downstream before the space is leased to another tenant as a last resort to protect the firm's ability to grow.

Ironically, in this particular case, the adjacent office space that was the subject of the accounting firm’s Right of First Offer, was vacant as the terms were being negotiated.  Therefore, if Ed's firm had executed an agreement with this term in place, in theory, the landlord could have immediately offered the firm it's Right of First Offer and if the firm declined, the right would have been lost for the remainder of Ed's lease term.

The bottom line is this: Rights of First Offer are good; Rights of First Refusal are much better when trying to protect your business' ability to grow.  Be cautious in your negotiations.  If you don't know, ask for written clarification.