When you, as a business owner or manager, hire a commercial real estate broker to represent your business in its search and negotiation for office or warehouse space, the above question: “What do you need” is often the first question you’re asked by the commercial broker.  Needless to say, the question is often received with surprise and perplex.  More often then not, the commercial tenant doesn’t know their needs as it pertains to office space.  Further, the business may have naively hired the broker to help them identify space needs.

During my 23 years of leasing all types of commercial real estate, but specifically Indianapolis office space and Indianapolis warehouse space, as well as representing tenants throughout the US, it is not uncommon that business owners and managers are not aware of their specific needs for commercial space. Additionally, many businesses have hired a broker to help them uncover some important questions about their future office space.  Ironically, commercial real estate brokers, including me, are not equipped to uncover these needs, unless of course, the broker was trained in space planning and design.

When my clients lease Indianapolis office space or warehouse space, unless they have a very clear understanding of their needs, I will recommend their hiring a commercial space planner and / or designer to help with a needs assessment.  In fact, this step has become so important, my firm, CARMEN Commercial Real Estate Services, as a service to its clients, has a project manager and designer on staff to guide clients through a programming process and needs assessment.  Until the business’ needs are identified and clearly defined, I cannot effectively perform my work.

As a further note on this subject, you should beware of the commercial real estate broker that feels compelled to first ask its client:  “What do you need?”  You have to ask yourself if this is a professional that is willing to do all of the ground work that is necessary to understanding your business and its needs.  Or worse, is this broker more focused on getting your business to a closing, as opposed to providing your business with a valuable service.

Visit our project management post.

“Tenant Representation”, as it has become known, is actually a term to describe the Tenant and Buyer Agency, which is the role a real estate broker takes when they act on the behalf of the business or individuals by providing its client with expertise, conducting communication with a seller or landlord and its respective agents, and providing its client with resources not readily available to most businesses.  But most importantly, the Buyer / Tenant Agent acts in the BEST INTEREST of its clients and has a fiduciary responsibility to its clients.

The above concept of representing buyers and / or tenants is in contrast to the role of a Listing Agent, which in theory represents property Sellers and / or Landlords, whereas the agent has the same fiduciary responsibility to its Seller and Landlord clients.

Real estate brokers that specialize in Tenant / Buyer Representation became more common in the mid 1980’s when a growing awareness occurred among buyers of residential and commercial property of the conflicts of interest that exists in real estate brokerage, which is when a broker represents a property owner in its efforts to sell or lease property, while also representing buyers or tenants.  Simply put: How can a real estate broker represent the best interests of a property buyer or tenant, while also representing the best interests of the seller or Landlord.  The answer is obvious, it can’t.

The concept of Buyer / Tenant Representation was further advanced by a few highly visible class action law suits brought against large brokerage companies for breach of fiduciary responsibilities, while representing both sides of real estate transactions. 

Remarkably, the real estate industry’s response to the market’s awareness of the conflict of interest, and the representative legal complaints against brokerage firms, was not to separate its representation groups to prevent such conflicts, but rather, to develop legal documentation that would allow firms to continue with a “business as usual” mentality.   The only solution that seems to solve the issue in the best interest of the customer is separation of business units that represent Buyers and Tenants, from those that represent building owners.  In the purest form, firms would exclusively represent Buyers / Tenants or firms would represent Sellers and Landlords exclusively, which was the model for establishing my firm, Carmen Commercial Real Estate Services, in 1993.

 Other News
The Indianapolis Business Journal reported reported today that vacancy for Indianapois office space located in the suburban market increased by 0.5% during Q3 - 2007 to 18% , whereas, the vacancy in the CBD decreased by 0.2% to 15.5%.  The citywide vacancy for Indianapolis office space increased by a net of 0.2% to 17% overall.  Full Story

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.