Indianapolis Commercial Real Estate

Site Selection Magazine Rates Indianapolis in Top 10

2010-11-03T04:41:00.000-07:00

Yesterday, Inside Indiana Business reported that Site Selection magazine rated Indianapolis' business climate in the Top 10 cities in the U.S.. The magazine rated Indianapolis best in the midwest and 10th overall, per a survey of natioanl real estate executives and a review of Indianapolis' economic development record.

Once again, Indianapolis rates high as a great place to do business as well as rating high as having an exceptional quality of life. It is also why I'm particularly pleased for my business, Carmen Commercial Real Estate, to be part of the Indianapolis business community.

Indianapolis Office Market Recovery

2010-10-18T12:53:00.000-07:00

CoStar Group, the commercial real estate industry’s largest information resource, reported this week in its 2010 Third Quarter Office Review and Outlook that the U.S. office market has begun a recovery, posting positive net absorption for the second consecutive quarter. CoStar cited three major indicators of the recovery process:

1. Positive office employment growth for a second consecutive quarter. Office employment growth indicates that recovery is beginning to take hold despite high unemployment levels and continued layoffs. In the past two quarters, approximately 24,000 and 8,000 office-using jobs respectively have been created, according to U.S. labor statistics.

2. The strength of leasing activity. CoStar Group CEO, Andrew Florance was quoted in the article saying, "Leasing activity in the quarter was healthy and robust," adding, "We’re now seeing the strongest leasing activity numbers we have seen since the peak of the market [in 2005 and 2006]." "Tenants are no longer staying on the sidelines to wait for a better deal. They are trying to move in to capture better deals," Florance said.

3. The historically low level of new office supply. "Office deliveries in the United States remain stunningly low, historical all-time lows," Florance said. "We're down 85% right now in deliveries [from historical averages]. When you look at new construction starts, we're running at about 3 million to 4 million square feet of new construction starts for office space in each quarter in the United States. That is well below what is required to replace depreciating inventory."

CoStar indicated that the U.S. office vacancy rate is clearly moving down and declined slightly in the third quarter to 13.62%. "This means we are no longer in a deteriorating market," Florance said, "and the balance is shifting ever so slightly but consistently from being a tenant market to being an owner market."

Okay, so what does that mean to Indianapolis office tenants? It means that office tenants in general can anticipate rental rates increasing as the recovery progresses. Fortunately for Indianapolis area businesses, there appears to be a bit of a lag before the national trend toward recovery takes place here. In Q3 2010, slight increases in Indianapolis office vacancy occurred, raising the CBD and Suburban markets to 20.3% and 22.4% respectively.

I believe that now is the time to get in the market before further indications of a recovery cause building owners to make marked changes to their leasing plans by increasing effective rents and decreasing lease incentives.

It is worth noting that in the three recessions I’ve experienced personally while working for Duke Realty Corporation and since founding Carmen Commercial Real Estate, I’ve always been amazed by how quickly the market responds, usually with increasing rental rates and diminishing lease incentives, such as landlord buildout allowances and free rent.

If you are interested in exploring your current lease terms and how a renewal negotiation or relocation could potentially lower your facility costs, please contact me. My team and I would be happy to survey the current market and provide our best professional direction for you and your business.

Eight Tips to Negotiating Office Lease Renewals

2010-05-11T05:25:00.000-07:00

This evening I came across an article that appeared in Ezine Articles titled: Eight Tips for Negotiating an Office Lease Renewal. In general, this was a well written article that recommended some very good points for business owners and managers when negotiating facility lease renewals. But I believe the strongest point made by the article was never actually articulated by the author.

Most business owners and managers couldn't help but read the author's 8 tips without thinking "how can I possibly find the time to conduct an effective lease renewal negotiation?" And the truth is, most can't. Conducting an effective lease renewal negotiation will mean that business managers must have some level of understanding of the market, the landlord's current circumstances, alternative spaces available to them, and many other factors and dynamics that are pertinent to the negotiation.

Yet most managers and business owners are already stretched for time and resources. Adding the above duties only takes the owner or manager's focus further from their core business.

Therefore, I believe the article reinforces the business owner or manager's need to enlist the resources of a commercial real estate broker to lead, or at least help, in the lease renewal negotiations. Further, if a business owner or manager is going to hire a broker, doesn't it make sense to hire a broker who specializes in Tenant Representation? Further, if the owner or manager is located in a market that has a firm specializing in Tenant Representation, such as my firm, Carmen Commercial Real Estate Services, that specializes in representing tenants in the Indianapolis office space market, the interests of the business are even more assured of being served.

Understanding Capital Gains on Investment Property

2010-03-03T04:07:00.000-08:00

Here we are again, in the middle of tax season and trying to understand, or a least our accountants are, the financial implications of the 2009 financial performance of our businesses and ultimately, our personal income. Recently, I was reminded by a long time client of Carmen Commercial Real Estate who purcahsed a building to operate his business about 10 years ago and is now considering selling the building, that many people are not well versed on how capital gains are calculated on the sale of investment property.

I thought an overview of how one calculates capital gains on investment property might be helpful. Since I'm not an accountant, rather than writing this information myself and risking inaccuracy, I thought it prudent to find a good article written by an expert addressing this topic. Thus, I located an article that appeared in the March 2010 newsletter of Gabrielle Glass of First American Exchange Company, which I believe does a thorough job of explaining the topic and walking the reader through an example. Here's a link to this article:

Calculating Immediate Tax Savings

The one thing I want to stress when considering the sale of investment property, consider the tax implications of the sale prior to putting the property on the market. With the help of your accounting and/or tax adivor and your real estate professional, you can get a pretty clear picture of your tax liability from the sale. Further, the results may cause you to reconsider selling the property altogether or to do some tax planning in advance of the sale to position you for down-stream tax implications. An example of this might be to 1031 Exchange, which will allow you to roll gains into another property to avoid immediate taxes from the sale.

In-person Negotiating (cont.)

2010-02-26T07:55:00.000-08:00

In my last post, I discussed the value of in-person communications in office lease negotiations. It’s also worth mentioning that the personal investment of time helps to define the level of commitment the various parties has to the business transaction. Through my 25 years of leasing Indianapolis office space and warehouse space, most of which as been operating Carmen Commercial Real Estate Services, I couldn’t think of a more appropriate application of this theory as commercial real estate transactions and specifically, office lease transactions. In the lease transaction process, meetings create a sense of collective accountability to reach compromises and clear hurdles. Lease transactions involve a series of crucial negotiations that are all related and underscored by the importance of long-term financial obligations by both parties.

Other benefits of personal meetings to finalize space negotiations involve the creation of documentation about key lease points and the opportunity to further involve third parties to the transaction, such as brokers, architects and attorneys. Each party should also strategize their respective role to ensure that goals are met and the proper bridges get crossed, which is a role perfectly suited to the cross-industry expertise of your tenant representative.

Whether dealing with engineers over electrical capacity issues or addressing a disagreement about pass-through expenses with your landlord, tenant representatives can effectively assemble and oversee effective team meetings that will knock down hurdles and move the transaction forward in a more effective matter than would be possible through a train of e-mail, lost attachments and poorly worded text messages.

Stress Person-to-Person Lease Negotiations

2010-02-26T07:31:00.000-08:00

I recently read that a news item that stated that a reasonable argument can be made that the proliferation of electronic communication…email, has had a negative impact on our ability as business people to empathize with those we do business. Further, it would be difficult to argue that electronic communications hasn’t diminished our effectiveness in business in the name of efficiency.

Sending a brief email to a client or prospective new customer can be seductive because it’s often undisruptive to our daily routines and workflow. However, the limitations of electronic communication are obvious. Simply said, email doesn’t allow for flexibility in the communication process or, maybe better said, doesn’t allow one to “think on their feet” during a discussion.

I can appreciate this view first hand, as President / CEO of Carmen Commercial Real Estate Services, an Indianapolis commercial real estate brokerage company, specializing in Tenant Representation. When negotiating commercial real estate transactions, it is imperative to communicate in a direct manner: over the telephone at a minimum or whenever possible, in-person. One-to-one interaction should become a priority, especially after weeks of e-mails and text messages about key components of an office lease have morphed into a morass of fluctuating numbers and vague confirmations. When discussing the business impact of a significant real estate transaction, no one can afford to be confused.

Possible Change in Lease Accounting

2010-02-24T10:00:00.000-08:00

Yesterday I read an article in BKD Insights, a construction and real estate newsletter published by the accounting and advisory firm BKD, LLP, that I believe is important to pass along to my friends and clients. The subject of the article is about a proposal that if adopted, will impact any business that leases office, industrial, or retail building space. According to the article, Proposal Would Make Significant Change in Lease Accounting: "In the paper the FASB and the IASB discuss a proposed change in lease accounting. It would require the lessee to recognize an asset representing its right to use the leased item and a liability for its obligation to pay rentals".

This change will impact some businesses more than others, but based on the example provided in the article, the impact on businesses with substantial annual lease costs could be significant. Therefore, I'm monitoring this potential change in accounting so that if adopted, my clients that occupy Indianapolis office space or facilities elsewhere around the U.S. will be aware of the benefit to their businesses. Thank you to my friends at BKD, LLP for providing us with this valuable insight.

Tenant Representation to Minimize Risk & Cost

2009-12-22T06:06:00.000-08:00

The commercial real estate industry is in a state of flux. Building occupancies and rental rates are changing rapidly. The variance between rental rates quoted by landlords and the effective rents tenants and their advisors negotiate can be dramatic. Desperate landlords are increasingly aggressive and very creative in their attempts to fill vacant space. Buildings that once competed within pennies of each other are now offering drastically different economic packages depending upon their current leasing status and capital structure.

Without an expert who follows these trends and interpret the subtleties of landlord pressure points, while possessing the experience to negotiate for appropriate tenant protections, a prospective tenant exposes themselves to unnecessary risk and costs. In order to minimize facility costs and mitigate the risks associated with leasing commercial space, businesses are seeking the services of brokerage firms and professionals that specialize in tenant representation.

Most importantly, exclusive tenant representatives serve only tenants and reject all fiduciary relationships with landlords or their lenders. Unlike full service real estate companies that attempt to represent both tenants and landlords, “Tenant Reps”, as they’re known, never subordinate your interests to those of a landlord or lender who has a financial interest in a prospective building.

If 2010 brings decisions in your business that will impact your space, you may want to consider utilizing a tenant representative to help you maximize the benefit of leasing commercial space in the most favorable tenant market in years, while helping you to navigate the potential pitfalls of today's challenging market conditions.

Tenant Reps Lower Cost

2009-12-22T05:03:00.000-08:00

The Indianapolis commercial real estate market and the market throughout the U.S. is more turbulent than it has been in nearly 20 years. In fact, when it’s all said and done, today’s market may prove worse than the first commercial real estate recession I experienced from 1989 to 1993.

In the current environment, Landlords are doing all they can to maintain occupancy and continue to generate enough cash flow to service their debt. In an environment like this, tenants have a tremendous opportunity to negotiate aggressively with landlords; however, there are numerous pitfalls that can trip up even the most stable companies looking for an attractive lease in the right building. That is why it is now more important than ever to rely on a seasoned commercial real estate broker that works exclusively as a tenant representative to assist you with your space needs.

Given current conditions, exclusive tenant representatives' insight is invaluable. A tenant representative is a commercial real estate broker that specializes in only representing tenants, thus, eliminating the potential for conflict of interest that can occur with brokers that both represent tenants and landlords. A “Tenant Rep”, as they’re known, can help you make sense of the quick ups and downs of rental rates, concession trends, occupancy numbers and key company relocations or bankruptcies that are impacting the local real estate community. They are also in touch with important space usage trends, such as how to best leverage open floor plans, negotiate an environmentally-friendly fit-up and whether or not subleasing is a good option for your company.

Temp & Contract Workers Influencing Office Trends

2009-12-21T04:22:00.000-08:00

A recent jobs report out of Washington made note of the increasing number of temporary and contract workers that staffing firms are using to fill vacancies in companies throughout the country. In fact, it’s predicted that contract workers could makeup a quarter of the American workforce within only a few years. If this trend picks up in 2010, commercial landlords may start to see tenants downsize, increase demand for smaller office floorplans and even start to seek shorter lease terms to accommodate fluctuating staff needs.

Important for tenants considering taking advantage of this employment trend, which can have a number of business benefits, is how it will impact the concessions a landlord can provide. Current market conditions are more favorable to commercial tenants than they’ve been in nearly 20 years. But landlords cannot afford to offer the types of concession packages on a short-term lease commitments that are common to long term leases, especially when the landlord risks the space may soon be back on the market after the short-term lease. It simply doesn't make financial sense for them.

When a landlord offers abated rent, a generous improvement and relocation allowances or other types of concessions common today, they amortize those costs over the life of the lease. An 18-month lease, for example, will not afford a landlord to offer space in much beyond an "as-is" condition. This is important to understand, as many business managers or owners that I speak with in my day-to-day business with Carmen Commercial Real Estate Services often don’t seem to recognize the difference in value a short-term vs. long-term lease provides to a landlord and thus, they often expect landlord concessions for their 3 year lease that are found in a longer-term lease.

Thus, if a short term lease or other flexibility options are your goal, then understand that your effective rent may be higher and build-out allowance a bit less than what your neighbor, who recently negotiated a five-year lease for space in the same or a comparable building, is paying.

The trend in business to hire contract workers is allowing businesses to reduce overhead, reduce the amount of space leased, and hire specialized employees on a per project basis. It is critical, however, that when seeking space for your temporary employees or contractors that you remain realistic and flexible on your space needs. Serious rent reductions, improvement allowances, green fit-ups and other benefits that have become common will not be as readily granted to a short-term tenant.

That being said, space today remains considerably less expensive than it was a few years ago, so there are still many opportunities to secure quality space and historically low cost. If you're planning on adding contractors or employees in the upcoming future, my firm would be glad to give you some ideas of what is available in the market. Provide us with a snapshot of your data at our Criteria Questionaire, and we'll provide you with a survey of availalbe properties.

Top 10 Mistakes Companies Make When Leasing Office Space

2009-11-06T04:20:00.000-08:00

This week I came across a blog post from a popular Silicon Valley commercial real estate blog that I believe did a wonderful job of articulating the most common mistakes that tenants make when leasing office space. The entry was posted on July 14th on SquareFeetBlog.com and proved to me that businesses seem to make the same mistakes regardless of where they're from, Silicon Valley or leasing Indianapolis office space. Instead of re-writing a similar document for my readers, I'm going to post it as it appeared on SquareFeetBlog.com and provide some of my own notes following each item ast I believe is valuable for my readers.

Following payroll expenses, facilities and related expenses are generally the second highest expenditure for a company. While people are naturally the most important asset to a company, real estate decisions should not be far behind. Too often though, companies fail to see the significance of real estate in the same light.
The impact real estate has goes far beyond the bottom line; it plays an important part in everything from employee retention to the level of productivity and workplace morale. It’s for these reasons that companies should always be cognizant when making real estate decisions.
The top ten mistakes that companies make when leasing space are:

1. Not Using a Commercial Real Estate Broker. It is imperative that companies not only understand the market, but have an advocate working on their behalf to both maximize savings and help the company meet its goals. A good broker can provide insight into the market, trends, landlords, demographics, and be a skilled negotiator. It is also important that you use a broker who is focused on commercial real estate; residential brokers often try to dabble in commercial and get in over their heads.

CARMEN: Let's take this one step further: To maximize the impact of your real estate expert, I believe it is important to utilize the services of a commercial broker that only represents tenants and DOES NOT take on landlord listings. The reasons are two-fold: First, listing agents provide on-going service to their landlord clients and thus, are paid commissions for leasing space every time a lease is completed. On the other hand, they'll only be paid once for representing you on your lease transaction. Now, who would you expect to receive the most service, the broker's tenant clients or the broker's tenant clients? Secondly, there is a tremendous potential for a conflict of interest when commercial brokers represent both landlords and tenants. Therefore, the only way to be sure your broker is looking out for your best interest is to engage a broker that exclusively represnets tenants. Further, there is good reason to be suspect of brokers that claim to "exclusively represent tenants", but their firms employ listing agents. Let's face it, what and who do you suppose these brokers are talking about at the coffee maker?

2. Waiting Too Long to Start The Process. The longer a tenant waits to start the process, the fewer the number of options that will be available to them. Waiting too long can mean that a tenant will pay more, receive less favorable lease terms, or that they are forced to leave and take less than desirable space elsewhere.

CARMEN: I'm a big advocate of businesses integrating some level of facility planning right into their on-going strategic planning process. Facilities planning, leased or owned, should be part of the continual process of managing your business. In fact, your "Tenant Broker" should be part of this process and can be invaluable in planning both physical and economic aspects of your business as they relate to your facilities.

3. Leasing The Wrong Amount of Space. Figuring out how much space to lease is not an exact science. Forecasting involves assumptions, which can often lead to costly mistakes if incorrect. Uncertain events notwithstanding, companies should take the time and effort to work with a space planner or architect to plan and program to determine the right amount of space to lease. With that information in hand, companies should then go one step further and think about the impact certain business scenarios would have on that number, the likelihood of those events happening, and adjusting the number so as to minimize the likelihood of taking down too much or too little space.

CARMEN: Once again, strategic planning! Your real estate advisor, which I hope by now you're in agreement should be a broker and firm that only specializes in representing tenants, can bring valuable resources to the table in the form of space planners and project managers to help identify current and future needs.

4. Picking the Wrong Location. What may seem like the right location might in fact not be. Companies should consider things such as access, public transportation, demographics, zoning laws, and other factors to help identify the right location for their business.

CARMEN: Simply said, try to eliminate as much of the emotion as possible when evaluating commercial real estate. Also, refer back to Mistake #2: more lead time in the search and decision process leads to better decisions.

5. Not Thinking About The Future. Aligning a real estate plan with a corporate business plan is difficult to do when milestone events and setbacks do not always go according to plan. To help deal with the "unknown", negotiating leases which provide both expansion and contraction rights to the extent possible is therefore instrumental. Companies need to go beyond the simple lease and think about sublease rights, expansion rights, rights to cancel, and options to extend.

CARMEN: See my notes regarding strategic planning after Mistakes #2 and #3.

6. Not Measuring The Space. Companies should strongly consider verifying the landlord’s square footage numbers. In larger transactions, even a small difference can translate into a large savings. If it is not possible to measure the space, tenants should at least try to negotiate a tolerance in the measurement. Generally though, and per BOMA standards, a variance of up to 2% is acceptable.

CARMEN: It depends on the size of the transaction, but it's often a good idea to have a design expert as part of the team your "Tenant Broker" assembles to design your space or at least to check the landlord's space planner's work.

7. Signing Too Long or Too Short of a Lease. Companies often think that by signing a short lease they are buying themselves flexibility. That may be true in many cases, but that flexibility often comes at a price. On the flip side, tenant’s may feel a long term lease provides maximum stability, but there are far too many cases – particularly in Silicon Valley where swings in rent can be large - where long term leases signed at the height of the market have gone so far as to force companies into bankruptcy or caused severe harm to the company. It’s therefore imperative that companies take a long-term approach to real estate, while keeping short term trends and business activities in focus.

CARMEN: This is a very important point. I can't tell you how often I've seen business owners and managers enter into lease terms (length of lease) that have nothing to do with the growth or predictable changes they're anticipating in their businesses. This disparity can kill a business, or at least add unneccessary cost. Once again...Strategic Planning!

8. Not Verifying Building Systems and Infrastructure. In today’s environment, data, power, networking, and HVAC capacity and availability are crucial. Tenants should ensure that buildings they intend on occupying are capable of providing the network connectivity and other building systems necessary for a tenant’s operation before signing any lease.

CARMEN: It is imperative for a business to fully understand its needs. If you don't have the resources on staff to do so, bring it in through vendors and the team that your "Tenant Broker" should assemble to add value to your facility evaluation.

9. Not Having Your Insurance Carrier Review the Lease Language. Tenants should always have their insurance carrier review the language within a lease that pertains to insurance and subrogation to verify that the insurance is not only attainable, but attainable at a reasonable cost. It is strongly recommended that the actual lease or lease language be sent to your insurance carrier for review before any lease is signed.

CARMEN: Could not have said it any better.

10. Not Retaining Legal Counsel. By using an attorney well versed in the documenting of a real estate transaction, companies can help avoid ambiguity and errors which could lead to expensive litigation or legal wrangling down the road.

CARMEN: I believe experience is key here. An attorney versed in commercial real estate leases will help to keep the cost of the lease review and negotiation under control.

These are by no means the only 10 mistakes a tenant can make when leasing space. Instead, it is meant to outline some of the most common mistakes tenants can make, and also what can be done to help avoid them. A good commercial real estate broker can help guide you through the leasing process. If you have additional tips, feel free to share them by making a comment.

Bad News for Commercial Investors...Good News for Tenants

2009-11-01T01:44:00.000-07:00

Last week, Reuters reported that according to Moody's Investors Service, Indianapolis was one of the nations worst commercial real estate investment markets. Joining Indianapolis in this distinction was Detroit, Atlanta, Phoenix, and Cleveland. Further, it was reported that these markets will continue to be weak and were unlikely to recover soon.

"Worse" indicates rents are not projected to increase any time soon and the rental market for office, industrial and retail space will remain soft. Bad for investors. Good for Tenants. In general, the soft commercial real estate market is allowing most tenants to capitalize on the market by entering into leases that will cost less than anytime during the last decade.

I have not been disappointed on how attractive the rental terms have been on Carmen Commercial clients' leases we've negotiated during the past year. Excepting a few unique cases, every lease negotiation we've undertaken have brought clients significant lease cost savings.

According to Moody's, the best five commercial real estate investment markets are: Honolulu, Pittsburgh, Las Vegas, Newark and San Francisco.

When To Exercise a Lease Renewal Option

2009-08-23T09:02:00.001-07:00

Lease renewal options are one of those rights often requested by commercial building tenants, but without the business owner or manager's full understanding of the detailed terms of a lease option. In fact, I've found while operating my business, Indianapolis based Carmen Commercial Real Estate Services, that it's not uncommon that notice periods, option rental rates, and length of option term are unilaterally inserted into the option language by landlords without the business owner or manager's understanding of these components and thus, the right is substantially watered down. It's not enough to request an Option to Renew. When negotiating this seemingly simple right in your lease, consider the many factors that will control the renewal terms and ultimately impact your business downstream.

One of the most critical components of an Option to Renew clause is the timing of when the tenant must pull the trigger on the option to extend the lease, known as the Notice Date. The following is a thoughtful blog post that appeared on the SquareFeet.com blog site regarding this topic.

When To Exercise a Lease Option Square Feet Commercial Real Estate Blog

Tenants Concerned About Landlord Financials | Square Feet Commercial Real Estate Blog

2009-08-23T08:46:00.001-07:00

I thought I would share the following blog post that addresses and reinforces a topic I've posted on before: The importance of tenants protecting their interests in commercial leases as a result of the U.S's economic downturn and the dramatic impact it's having on commercial landlords across the country. The post appeared on SqaureFootBlog.com in March of this year.

Tenants Concerned About Landlord Financials Square Feet Commercial Real Estate Blog

Uncertain Economy Causes Shorter Term Leases

2009-06-28T03:28:00.000-07:00

The Dallas Morning News ran a story this past Friday titled Uncertain About Future, Companies Signing Shorter Term Leases. The article indicated that the uncertainty in the economy is causing many businesses to sign-up for shorter lease terms. Clearly, without some indication of our economy's direction, business owners are indicating an unwillingness to make commitments for office or industrial space that will burden them with over capacity, and cost, if the economy continues to sag; or place them in an undesirable position if the economy begins to flourish from a combination of factors including government stimulus funds.

Small-privately held businesses in particular are the most influenced by economic uncertainty and have the most to lose if they are incorrect in their prediction of the economy's direction. My firm, Carmen Commercial Real Estate, is based in Indianapolis and works with these firms every day because the majority of businesses that lease Indianapolis office space are privately held small and mid-market businesses.

As I've stated in many of my posts during the past 9 months, the slow down in the U.S. economy and the related "credit crisis" has created a tenant's market whereas landlords are offering any viable tenant significant incentives to enter into a lease agreement for office or warehouse space. Ironically, it's just this type of market that a tenant should sign-up for as much lease term as possible in order to capitalize on the lease incentives and low rental rates prevalent in the market for as long as possible. In theory, it would allow the business owner or manager to capitalize on the soft market for as long a period as possible.

But the statistics aren't following the theory. Businesses continue to try to enter into shorter agreements, whether on new space or with extensions of existing leases. Essentially, they're willing to take a pass on gaining the long-term benefits (lower lease costs) of extended lease terms in favor of minimizing the risk (lack of lease flexibility) associated with longer term leases. Indirectly, this may be a commentary on just how volatile business owners and managers view the current economy.

Lease Auditing

2009-06-21T13:49:00.000-07:00

The economic downturn has brought many changes to the commercial real estate business...increasing vacancy, tenant defaults, landlord defaults, and more aggressive leasing by landlords to mention a few.

As mentioned in an earlier post, commercial property owners are looking for ways to support revenue derived from building tenants. Further, as with Indianapolis office space and Indianapolis industrial space, real estate taxes have undergone dramatic increases in most metropolitan areas over the past few years.

This weekend, I received an email from the a client of my firm, Carmen Commercial Real Estate, asking if I knew of a firm that could evaluate its operating expense statement received from the its building landlord this past week. The statement indicated a severe increase in most building operating expenses and required the business to write a check for the increases within the 30 day window we negotiated in this lease a few years ago.

Shame on me for not making it clear to my client that I will do this work within my expertise for no charge. If it requires taking it to the next level, I can do so by recommending an audit firm. But the question begs to be asked: What can you expect from a commercial lease auditing company and how does the average commercial tenant located in Indianapolis or elsewhere around the country locate a firm to do this work?

First, what does a lease auditing firm do for a tenant. Lease auditing helps tenants avoid overspending errors, whether in the form of simple math errors or lease misinterpretations. Whether your lease is based on percentages or you're dealing with sub-tenant billings, lease audits are likely to reveal savings for your business.Lease audits can also help you recover overages regardless of why the over payment came about. Depending upon the size of your firm, performing an annual lease audit is a sound business practice that safeguards the rights of everyone involved.

Now, how do you find a firm to perform such work? Here's a few tips:

1. Call you CPA. It is not unusual for accounting firms to perform lease audits for clients. But some advise, if your CPA is familiar with performing a lease audit, it probably makes sense to move on.

2. If you were a savvy tenant and hired a commercial brokerage firm to represent you in your search and negotiations for building space, it is likely this firm can also perform a lease audit, or at lease a basic audit to determine if landlord is following the term of your lease. If you used a traditional brokerage firm that represents both landlords and tenants it is likely they will not take on this work. Remember, if the firm (not the broker) takes on listings, the firm either lists your landlord's building or wants to list it. Therefore, how well do you expect to be represented by a firm that has more to gain by befriending the landlord. Move on.

3. OK, now it's time to Google...perform a search under "Commercial Lease Audit" and you'll see a number of alternatives....again, enlist your broker to help you. If your broker doesn't want to help, you should consider utilizing the services of a new broker the next time you consider renewing your lease or relocating your office.

Managing Tenant Lease Costs

2009-05-28T03:51:00.000-07:00

The condition of today's commercial real estate marketplace and specifically, the very difficult environment the commercial property owner faces in managing through today economic climate makes being a landlord challenging. The broad types of concessions offered to tenants to enter into leases in today's Indianapolis office space market, landlords may begin looking for alternative ways to generate income to offset costs. That means tenants need to be aware of how building operations and different facets of occupancy translate into ongoing costs.

One of the more common instances of building operating costs that catches tenants by surprise involves the many forms of general building maintenance, such as heating and cooling systems maintenance and general maintenance of the building common areas.are typical maintenance items in most building. However, if these items are not specifically defined in a lease, the door is open for landlords to consider it an extraordinary expense and subsequently, may charge extra for these items. As a tenant, you should take extra care in negotiating your lease terms to make sure there is no vague lease language relative with respect and standard building maintenance.

The square footage of your space is directly related to your monthly rent and pro-rata share of expenses so it is critical that you ensure your office is measured according to objective standards. The Building Owners and Managers Association (BOMA) has created extensive benchmarks for measuring commercial real estate, and they include a litany of guidelines that are often misinterpreted. Quite literally, you have money riding on the calculations; thus, it pays to double check square footage before signing a lease or accepting your space. Within my home base market of my firm, Carmen Commercial Real Estate, it is amazing how often commercial landlords have miscalculated the square footage of the office space they're leasing to tenants. For this reason, I've begun to have our project manager do an as-built calculation of my client's office area to make certain our clients are only paying for what they're actually leasing.

If your office is located within an office park or business center that might contain shared exterior amenities, your share of maintaining these common areas needs to be reviewed whenever an expense "pass-through" is billed by the landlord.

Office and industrial vacancy has steadily increased nationally and specifically, in the Indianapolis commercial real estate marketplace during the past 12 months. If the building operating expenses for your lease are abnormally low, down stream increases in occupancy can lead to significant increases in the variable expenses and subsequent pass-through amounts the landlord bills to tenants in addition to base rent. The best protection is doing your homework on the front-end of your lease by making certain the landlord is grossing-up the building operating expenses. Grossing up calls for you to request that the landlord set your base year on costs assuming a stabilized occupancy such as 95%, regardless of the existing occupancy when the lease is signed and the base year is established.

Finally, your right as a tenant to audit a building's operating account is a very valuable right to negotiate into your lease, as it can help you uncover evidence of incorrect or misleading annual pass through charges. This may be challenging for the novice, however, your real estate professional should be willing to perform such an audit, especially since they were partially responsible for negotiating the terms of your agreement.

Economy Caused Tenant's Market

2009-03-23T10:52:00.000-07:00

As reported by a wide variety of media sources and most industry professionals, 2009 will not be a healthy year for the commercial real estate market. Reports here in Indianapolis and across the country are indicating an increase of of available space, falling rental rates and vacancy rates not seen since the early 1990s.

And it's not unique to commercial real estate. Economic conditions of the past year have caused hardship for businesses across the board, as indicated by increased bankruptcy filings and increased unemployment. However, for tenants that have weathered the vicious economic conditions confronting our business owners and managers, there will be no shortage of attractive options available should a lease expiration be imminent.

And if a tenant's lease renewal is not imminent, many landlords are opening up to very early renewals at substantial discounts for the promise of occupancy until the market improves....commonly known as "blend and extend". The landlord's willingness to blend an existing higher than market rental rate with a lower current market rate in exchange for the tenant's agreeing to extend its lease.

Currently, as part of my work with Carmen Commercial Real Estate, I'm reviewing every one of my client's leases, even those that are not scheduled to expire for 3 or more years from now, to identify opportunities to capitalize on Indianapolis' softer office market. Simply said, there hasn't been a better time to sign an office lease in years.

While the national office vacancy has increased significantly over the past year, most real estate professionals are in agreement that vacancy statistics will worsen at least until the end of 2010. Rents for office space in some of the nation's most recognized markets--New York, Chicago, Atlanta, Dallas, San Francisco, Los Angelos--may be 20% lower than they were two years ago. A drop of this magnitude will send many landlords scrambling and cause a large number of them to go out of business altogether. Adding insult to injury, landlords are getting battered further by highly discounted sublease space that has been added to the market by tenants reducing size or closing offices.

Because of these factors, tenants may be in a position to enter into the most attractive commercial real estate leases in years. However, knowledge is power. Understanding the factors that will allow tenant to negotiate such deals, some of which are mentioned above, are imperative to capitalizing on today's market conditions. Therefore, tenants would be wise to entlist a commercial real estate broker that specializes in representing tenants, such as my firm, Carmen Commercial Real Estate Services, that can bring "real-time" market knowledge to ensure you're able to take advantage of this tenant-favorable environment.

Indiana Recognized as Best in Midwest

2009-03-16T12:30:00.000-07:00

State Positive About Top Ranking (Inside Edge E-Newsletter, March 16, 2009)

An Indiana Economic Development Corp. (IEDC) official says Indiana's ranking by "Chief Executive" Magazine as the best state to do business in the Midwest will help keep it on the radar screen of more decision makers.

IEDC Director of Media Relations Blair West says the rankings are based on the feedback of the people who most often decide on expansion and consolidation projects. It is the second consecutive year Indiana has been ranked by the publication as the top state in the Midwest. West says the survey should bring the benefits of doing business in Indiana to the attention of more chief executive officers. INSIDE INDIANA BUSINESS, Inside Edge E-Newsletter.

For my business, CARMEN Commercial Real Estate Services, which represents tenants that lease office and industrial property in Indianapolis and throughout the U.S., such reports provide the state and those individuals, myself included, that continually try to persuade businesses from outside Indiana to to do business here, with a significant boost in fullfiling such mission. Further, reports such as the one cited in "Chief Executive" Magazine, provide Indiana businessses with confirmation of our fortunes, as Indiana based business.

Tenants Should Demand Non-Disturbance Clauses

2009-03-15T16:06:00.000-07:00

I recently wrote about the importance of including "non-disturbance" language in commercial lease agreements, but thought with current economic conditions, doing so is becoming increasingly important. Therefore, I decided to add another post dedicated to this topic.

Let’s face it, the current economic conditions in the U.S. and specifically, the banking crisis is severely challenging commercial landlords. As a result of these conditions, many properties will be returned from owner to lender through the foreclosure process. Here in my home market of Indianapolis, where I own and operate CARMEN Commercial Real Estate Services, there is more than a handful of office, industrial, and retail landlords that have properties that are in the unfortunate “Deed in Lieu of Foreclosure process”.

As a result of these conditions, I’m recommending to my Indianapolis office and industrial clients that we demand "non-disturbance" clauses in all lease renewals and new lease negotiations, which should accompany subordination and attornment language in their leases. These lease components often accompany each other and are commonly referred to as the "SNDA" clause.

In essence, SNDA language safeguards a tenant's right to remain in its leased space should a lender foreclose on a property and take over as landlord. The "subordination" clause, common to almost all commercial leases, means that the lender's lien on leased space is the first lien, or highest priority lien. The majority of lenders require landlords' leases to include subordination clauses that give the lender's lien priority not only over leases, but all other agreements between the landlord and tenants, regardless of when any of them were signed.

After a lender takes over as landlord, it is "attornment" language that requires all tenants to formally recognize the lender as their new landlord. This is critical to the lender because it prevents a tenant from being released from its lease obligation when a new landlord assumes control. It provides the lender with the assurance that the building's revenues will remain intact during and after the transition, according to the previously agreed-to lease terms.

While the attornment language prevents the tenant from terminating a lease, a lender can still terminate a lease at its discretion if the tenant does not have the right protection language in its lease. This poses a particularly hazardous proposition for tenants that are paying below market rent at the time of the foreclosure or would otherwise be undesirable to the new landlord due to their usage of the space, business type or location within the building. It is for this reason why the third component of the SNDA language, the right to "Non-Disturbance," is so critical for tenants. It is this language that protects the tenant's right to remain in its space after a lender forecloses.

As part of the non-disturbance language, tenants should consider negotiating for terms that state the lender specifically agrees to assume all responsibilities of the landlord, which include the building's ongoing operation. This is especially important if the building was under renovation or the landlord was responsible for outstanding repairs to the building prior to foreclosure.

Most lenders located here in Indianapolis and elsewhere around the U.S. are going to insist your landlord include subordination and attornment clauses in your next lease. They are considered reasonable terms of any lease for commercial real estate. However, make sure your tenant representative properly represents your interests and negotiates for adequate non-disturbance language as well, especially as the nationwide rate of commercial foreclosures continues to rise.

Now's The Time to Use An Experienced Tenant Representative

2009-03-01T04:44:00.000-08:00

Today's economy is placing tremendous pressure on commercial landlords, which is presenting an opportunity for office, industrial, and retail building tenants to secure lease terms that haven’t existed since the early 90’s.

Similar to the mess in the residential market, many of today's commercial landlords are on a sinking raft in a rising tide of debt needing to be re-financed. Yet, as the banking industry reels in its own crisis, lenders have been unwilling to step-in and provide commercial property owners with badly needed financing. Landlords are being put in a position of survival, while scrambling to secure enough rental income to service their current or future debt obligations. These conditions cause financially healthy tenants that need space as the most credible road to safety for a landlord with available space. Needless to say, this, in turn, puts those tenants in a position to have substantial leverage when negotiating the economic and business terms of a building lease.

That is where a good tenant representative, a commercial broker who only represents tenants and buyers of commercial property, can add a tremendous amount of value in the leasing process. Landlords are unlikely to provide prospective tenants with a picture of their or a property’s financial health. A knowledgeable and experienced tenant representative should be able to provide a solid analysis of a property's financial picture and use the building's need for stability as way to craft a fair but very tenant-favorable lease.

Be cautious, however, of brokers that claim to represent tenants only, yet, work within firms that provide services to tenants and landlords alike. It's possible that these brokers and their firms may have more than “one dog in the fight”, so to speak, which can ultimately place tenants they represent at a severe disadvantage in the lease negotiations process.

Over the past few years, I observed instances where landlords rewarded brokers and their firms for representing large tenants to the landlord’s building with a listing contract on the building or another of the landlord’s buildings. Needless to say, the potential for conflict of interest is great, which is why my firm, Carmen Commercial Real Estate Services, and its professionals will only represent commercial tenants and will not represnet building owners. Our efforts are focused exclusively on representing firms that are searching for office space and negotiating new lease or lease renewal terms.

The bottom line is this: it's a tenant's market. And even though the economy has stacked the jury on behalf of tenants nationwide, the importance of proven, un-conflicted tenant representation should never be overlooked.

Sublease Negotiation Strategies

2009-01-28T04:02:00.000-08:00

In my last post, I addressed a few ups and downs of subleasing. One suggestion to ensure your sublease occupancy goes as smoothly as possible is to introduce a "non-disturbance" clause to protect against the sudden default of the sublandlord. This may include a pre-determined rent amount and the continuation of all lease terms as if the sublandlord was still in place as the direct tenant. A non-disturbance clause can be included in the sublease document executed by the building landlord or in a separate side agreement between the tenant and the prime landlord.

Clearly, in these situations, the most important issue to all parties is rent. Will you continue to pay your discounted sublease rate, the sublandlord's rate as the tenant under the prime lease or the current market rate? Like most things between a tenant and landlord, this is subject to negotiation.

There is no assurance the actual building landlord will agree to either scenario. But underlying these strategies is a looming crisis in the commercial real estate industry. In an effort to stabilize tenancy, the coming year should see landlords extending concessions across the board and opening up to tenants in ways few working in this market have seen in decades. Consequently, now is the time for creativity in negotiation and uncommon requests from those seeking space, and working with a tenant representation firm like Carmen Commercial Real Estate is rarely more critical than it is today.

Office Sublease Strategies

2009-01-23T04:03:00.000-08:00

The current economic downturn is creating opportunities for businesses to reduce operating costs through lower facility rental cost. This is true of not only tenants seeking entirely new space, but is also having a beneficial impact on businesses lowering the cost of existing facilities by negotiation of early lease renewals, which I recently addressed in this blog.

Not only are rents dropping for space being offered for lease on a direct basis but as a result of corporate downsizing, the postponement of expansion plans and complete operational shutdowns, the market for sublease space is presenting additional discounts to opportunistic tenants.

Since a sublease often originates from a tenant's financial hardship, it's critical that prospective subtenants understand the risks accompanying sublease scenarios. Typically, when tenants sublease space to other businesses and then subsequently default on their lease obligations with the actual building landlords, subtenants can lose possession of the space and find themselves without rights that were afforded to them by the sublease agreement. This can be particularly problematic if you have invested significant improvement dollars into your space or otherwise cannot afford, financially and operationally, to vacate your building on short notice. Despite the soft market, you could find yourself negotiating with little to no leverage.

One way to avoid this risk is to negotiate the tenant's buy-out of the direct lease and simultaneously negotiate a new direct lease between you and the actual building landlord. Typically, the tenant would pay a lump sum fee to the prime landlord in return for cancelling their lease. These dollars, in turn, could be used to "buy-down" the direct lease rate, giving you the financial benefit of a sublease while avoiding the risk of default by the sublandlord.

But remember, this strategy may not be possible due to the fact that financially distressed sublandlords may not have the cash to fund an adequately sized lease buy-out. In my next blog I’ll discuss a "non-disturbance" clause that can be a valuable tool in the negotiation of subleases to your lease negotiations.

Building Rental Rates - Free Rent

2009-01-15T14:04:00.000-08:00

The other day, I was on a property tour with a client who hadn’t had much experience in leasing commercial building space. It struck me the confusion caused by how building rental rates are quoted. I believe this is not unique to the Indianapolis office space and Indianapolis industrial markets, but also exists in most U.S. commercial real estate markets.

Confusion exists with the way rates are quoted. Landlords often quote commercial space as a list price, or the rental rate before any concessions are blended into the rate. For example, an office building’s Full Service list rental rate may be $21.00 per rentable square foot. However, if in order to get the tenant to relocate its office to the landlord’s building, the landlord provides the tenant with a rental concession equal to 5 months free rent prior to 60 months of rental payments, the true effective rate would equal $19.38 per rentable square foot.

Simply put, the effective rental rate is the average rental rate a tenant pays during the term of the lease. In the example above, the effective rate is calculated by multiplying the rental rate ($21.00 / rsf) by the payable months of the lease term (60 months) and then dividing the total by the number of months the tenant will occupy the space (65 months = 60 months + 5 months of free rent).

Lease Term

2009-01-10T04:07:00.000-08:00

In my last post, I discussed negotiating lease renewals well in advance of scheduled lease expirations vs. waiting out the lease term, thus creating a more competitive environment to renew the lease. In each case, the length of term of the extended lease, or new lease if a business elects to relocate, is a key variable that greatly influences the negotiations.

From a building owners’ perspective, the term of lease provides some degree of predictability on the cash flow and ultimately the performance of the building. This is very valuable for landlords and their lenders; since the Net Operating Income (NOI) for a building is a strong indicator of the property’s financial viability.

But what does this mean to the tenant that is negotiating a renewal of its lease or negotiating a new lease altogether? Simply said, it means that lease term will drive the economic terms of the deal; ie: the longer the term, the more attractive the economic terms the business owner or manager will be able to negotiate. This is compounded in a down commercial real estate market, which is the case to the extreme today.

Since the current market is depressed, business owners and managers should be entering into longer lease terms to negotiate as attractive terms as possible for as long as possible. For example, the business will negotiate better economic and business terms today than it will be able to later when the cycle swings back to a normal or even, God forbid, a landlord’s market. Therefore tenants entering into longer lease terms will pay less rent than businesses entering into leases at some later date when the market swings back to a “landlord friendly” market.

But before everyone gets on the phone with their landlord to begin renegotiating their leases, there are things that should be considered, which are:

Will the space be adequate in size and function for the lease term committed?

Is the business growing and if so, at what rate?

Can the building accommodate growth and can growth of the space to accommodate the business be part of the agreement?

Are any significant changes to the business operation, such as a sale of the business, predictable during the prospective term?

These, among others, are questions business owners and managers might want to ask themselves when considering lease term. Each business has its own unique set of considerations to be examined, weighed and balanced. Once the business vets these factors, it is in a much better position to enter into lease term commitments that best suit the business.