Leasing is the Business

WRITTEN by Christopher Garzony

Leasing is the most important thing we do at Lonicera.

It generates income while we own a property, protects against vacancy and creates value when we refinance or sell. Our business plan is to acquire underperforming assets and increase net operating income. At an 8% capitalization rate, every additional $100,000 of annual NOI can create approximately $1.25 million in property value.

Across Lonicera's six funds, we manage approximately 200 tenants in roughly 1 million square feet. Managing that many lease relationships requires a consistent approach: start conversations early, understand the tenant and their needs, and act before a vacancy becomes a problem. We aim to be proactive, not reactive.

For leases of 10,000 square feet or more, we generally begin renewal discussions at least 18 months before expiration. Larger spaces typically take longer to lease, require more capital if they become vacant and expose the property to greater loss of income.

Our first objective is to determine whether the tenant intends to renew. A clear answer allows us to begin negotiating rental rate, lease term, annual increases, tenant improvements and other material terms. An uncertain answer is also useful information because it tells us to begin preparing and marketing the space.

The best time to look for a new tenant is while the existing tenant is still paying rent. It is like looking for a new job while you already have one: time and income give you negotiating leverage.

For smaller suites, we generally begin the same process six to nine months before expiration. While these spaces typically have a larger pool of potential users, several vacancies at one property can quickly become material. At one of our properties, for example, 14 of 36 units expire in 2027. It is an extraordinary example, but it illustrates why actively monitoring lease expirations matters.

Before marketing a space, we evaluate what the market requires to make it competitive. That may include paint, carpet, lighting, updated restrooms, overhead doors, signage or landscaping. Rather than making improvements simply for the sake of making them, we focus on investments that meet tenant needs, improve the property and help keep vacancy and downtime low.

Every renewal or new lease is evaluated based on several economics:

• Contract rent vs. with market rent

• Annual rent increases

• Lease term and tenant credit

• Free rent and other concessions

• Tenant-improvement costs

• Leasing commissions

• Expected downtime

• Resulting net effective rent and NOI

Broker selection and accountability are also important parts of the process. We use market data to identify brokers with active listings and completed transactions in the relevant submarket and asset class. Once engaged, we meet with our brokers regularly to review inquiries, tours, proposals, prospect feedback and competing properties.

There is nothing especially complicated about the basic leasing process. We maintain an accurate lease-expiration schedule, start renewal conversations early, understand tenant needs and costs, hold our brokers accountable and act before the property loses income.

In real estate, leasing problems become expensive when they are addressed too late. Our job is to make difficult decisions while we still have time, income and options.