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.

After a long hiatus, I’m once again posting to my blog. This month, two of the most prominent commercial real estate companies, Jones Lang LaSalle and Staubach Company, merged.  This merger itself is not unusual, as it seems to follow the trend in the commercial real estate industry of consolidation to take advantage of expanded customer bases, expanded services, not to mention the benefit that often accompanies such consolidations, lower operating overhead through the alignment of duplicate services.  What I believe is most notable about the Staubach / Jones Lang LaSalle merger is the obvious differences in the operating models of these firms.  Staubach operated primarily as a tenant-representation firm throughout North America. Jones Lang LaSalle offered an array of "full services" around the world.

Staubach was a tenant representation stalwart that held firm to the idea that the best way to service tenants was to do so without the conflicts caused by managing and listing property.  The “Tenant Only” business model makes a very compelling case, which proved very successful for Staubach.  I too have subscribed to the “Tenant Only” model since forming my firm in 1993, Carmen Commercial Real Estate Services.  Now, as Staubach Company transitions into the larger “full-service” entity, I suspect that many of the clients represented by the firm, and there are many, must be considering what this merger will mean to them.

On one hand, many businesses engage a commercial real estate brokerage firm because of the firm’s principles and operating model.  However, over time relationships are built upon confidence and trust that customers have in the individual commercial brokers that are actually providing the service.  Nevertheless, the underlying principle remains: I’ve convinced businesses to utilize my services because I’m free from the conflicts of interest that accompany full-service brokerage firms. Subsequently, if I’m absorbed into an entity that provides a wide array of services, some of which conflict with the services that I have previously provided to customers, I have to believe that my clients might be justified in having concerns that my firm’s business model no longer reflects, in fact, may contradict the basis by which I was hired to represent them.

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.

While recently reviewing a client's lease, it occurred to me that office and distribution center expansion are probably the leading reason commercial leases are renegotiated prior to the planned expiration date.

How often have we, as consumers, felt like the Seller has us "over a barrel" as a result of an extenuating circumstance that places us in a less than desirable negotiating position?  In my case, it was turning in a leased auto early.  Somehow I convinced myself that I would only drive ½ the number of miles than I had historically driven my car year after year. Let’s put it this way.  The salesperson could have told me that my new Chevy was a bargain, in spite of the monthly payment that would have allowed me to comfortably drive a new Bentley, and I could only smile.

Too often, business owners and managers seem to concede that they’re over the proverbial "barrel" when their business requires an expansion of its office or warehouse well in advance of their firm’s scheduled lease expiration date.  This can lead to unnecessarily paying more rent under highly rigid lease terms. 

Leased facility expansion is an opportunity to renegotiate an existing lease and improve upon terms originally negotiated.  It’s also an opportunity for a business to reconsider how it uses its space; possibly remodeling its existing offices to better suit any changes that have occurred in the business since the office was new.

Keep in mind your landlord wants and needs to lease more space.  Your business is the key to making that happen.  The business owner and manager should capitalize on the landlord's needs by improving the office or distribution center lease terms.   When negotiating facility expansions on behalf of clients, I never fail to make it clear to the building landlords that only through its being creative and aggressive, will it realize benefits of increased occupancy and greater building operating income.

Think of it as a partnership between landlord and tenant.  The landlord creates expansion opportunity; the tenant uses this opportunity to expand its business.  The landlord's increased building occupancy and rental income increases the value of its real estate.