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Compensation takes stage in state leasing contracts: Meridian Asset, Resource to cap fees on state leases

February 6, 2006

New contracts between the state of Indiana and two local commercial real estate brokerages signal the beginning of an overhaul of how the state handles its real estate.

Resource Commercial Real Estate and Meridian Asset Development will, at least for the next year, broker leases on behalf of the state.

State agencies pay nearly $40 million each year to lease space in nearly every county. In many cases, agencies or the Indiana Department of Administration handle leasing duties, but IDOA may choose to seek outside help from a real estate brokerage on some deals.

Previous contracts with the local office of Los Angeles-based CB Richard Ellis and Indianapolis-based NAI Olympia Partners gave the state little oversight of deals it assigned to outside brokers to handle and no control over how much brokers were paid, even though such fees can indirectly raise the rental rate for tenants.

The prospect of the state's paying higher rental rates because of broker fees led the state to ask for specifics on compensation when it requested proposals from brokerages last fall, said Kevin Ober, IDOA deputy commissioner.

The new contracts are such a departure from the state's old way of doing real estate business that the IDOA elected to sign them for only one-year terms. Previous contracts were for three years.

"We went with a year [contract term] to see how it works and to test some new ideas," Ober said. "We can determine if we are going on the right track and see if there are ways to modify and improve in a year's time."

The contracts prohibit the firms from representing both the landlord and the tenant in a lease deal, something the old contracts didn't do. Although dual representation isn't uncommon in the industry, some say the practice doesn't give brokers an incentive to find the best deal for the tenant.

Resource and Meridian Asset, both locally owned, also can't lease space to the state in any properties they or their principals own.

The new contracts have one thing in common with the old ones, though: R.J. Rudolph will still be working on state deals, along with fellow Resource partner Timothy K. O'Brien. Rudolph also brokered deals for the state under previous contracts with his former firm, CB Richard Ellis.

"It's an important piece of business for us. It's a huge win," O'Brien said. "As an 8-month-old company, to have the state say that you're one of the best tenant rep companies in the state is a positive statement for our company."

Under the contracts, which took effect Jan. 1, brokers working on behalf of the state will still negotiate their fees with landlords, typically 4 percent of the lease's total value.

In its proposal, Resource dispatched with the percentage fee structure entirely. Instead, the firm will base its commission on the square footage of the deal. For instance, if the firm brokers a 15,000-square-foot office deal, it will cap its portion of the fee at $1.25 per square foot, or $18,750. That works out to 1.8 percent of the lease's total value, rather than the standard 4 percent. Any fees collected by Resource above and beyond the $18,750 would be given to the state.

Resource used the unconventional fee structure because it eliminates any incentive for brokers to settle on a higher rental rate to drive up commission, O'Brien said.

Meridian Asset will base its compensation on a percentage of the lease's value. However, any fees above 3 percent will be refunded to the state if the deal is in Marion or one of the surrounding eight counties. If the lease is in another part of the state and its value is less than $1 million, Meridian Asset will keep up to 3.5 percent.

The extra fees will help Meridian Asset retain brokers in other cities with more local market knowledge, said President John M. Bales II.

So far, IDOA has assigned three lease deals to the brokerages-two to Meridian Asset and one to Resource-under the new contracts, Ober said.

A third contract for property management and disposition of surplus stateowned land took effect Nov. 1. The state and Merdian Asset are now working to identify which properties are most likely to be sold first.
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