December 2023 | Volume 8
KNOWLEDGE HUB: INSIGHTS AND INFORMATION
How does Lonicera Analyze a Deal?
Commercial real estate investors evaluate several factors when analyzing a deal to determine its potential profitability and feasibility. Some key aspects Lonicera considers are cash flow and income potential, operating expenses, property condition, and financing options.
The use of cap rates as an initial filter is a common practice in the industry, providing a quick snapshot of a property's potential return. Creating a detailed model based on market data and assumptions is a prudent step. Understanding and projecting cash flow and rental income are fundamental in assessing the potential profitability of an investment. Market trends, historical data, and local economic conditions play a significant role in shaping these assumptions.
Occupancy rates and rental rates directly impact cash flow. Lonicera uses conservative, but realistic, assumptions based on market data for occupancy rates and rental growth. Cost considerations, such as tenant improvements and potential future revenue increases, are critical in accurately assessing the income potential of a property. These projections help in determining the feasibility of an investment and estimating the return on investment over time.
Reviewing operating expenses is another crucial step in the evaluation process. Understanding the ongoing costs associated with maintaining the property, including property management, maintenance, taxes, insurance, and utilities, allows for a more comprehensive financial analysis. Evaluating the condition of the property is crucial in this step as well. This knowledge helps identify maintenance needs, potential renovations, and structural integrity to estimate costs and assess risk of large future maintenance needs. By incorporating these factors into their model, Lonicera is able to create a detailed financial picture of the property. This thorough analysis allows them to make informed decisions about the viability and potential profitability of a commercial real estate investment.
Understanding available financing options is crucial. Lonicera assesses various loan types, interest rates, and terms from financial institutions. They compare and choose financing that best aligns with their investment strategy and maximizes returns while managing risk.
Each of these elements contributes significantly to Lonicera's acquisition strategy, ensuring a thorough evaluation process that aligns with their overarching investment goals and risk management strategies.
COMMERCIAL LEASING OUTLOOK
Lonicera has noticed an increase in leasing activity in December. The decrease in interest rates often stimulates economic activity, and in the realm of commercial real estate, it can have a direct impact on leasing activity. Lower interest rates generally mean reduced borrowing costs for businesses looking to expand or establish new locations, which can lead to increased leasing interest. For Lonicera, this uptick in leasing activity from potential tenants is an encouraging sign.
WHAT THE TEAM IS READING
Article by Haydn Zeis
"Poor Charlie's Almanack" by Charles T. Munger, late vice chairman of Berkshire Hathaway. More than just a financial guide, this book is a collection of 11 talks Munger gave over the years that blend his investment wisdom with life lessons, sprinkled with a little wit. Munger’s approach, integrating knowledge from fields like economics, psychology, and physics, mirrors the comprehensive thinking we value in our investment strategies at Lonicera. A standout concept in the book, the 'circle of competence,' emphasizes understanding and working within our expertise areas. This aligns closely with our philosophy at Lonicera.
Munger’s insights extend beyond typical investment advice. He stresses the importance of long-term planning, patience, and learning from not only yours but others' mistakes. Munger’s almanac offers guidance focused on ethics and simplicity in both professional and personal spheres. I highly recommend this book to anyone seeking a deeper understanding of smart investment and the application of these principles in broader life contexts.
FUTURE OUTLOOK
Since Lonicera Fund IV closed mid April, the team has been actively looking towards Fund V. Although we are currently in Columbus and Indianapolis, we continue to analyze deals throughout the Midwest to ensure we are pursuing the best opportunities for our investors.
If you have any questions about Lonicera Investments, our past performance, or our future, please reach out. We would be happy to sit down with you and answer any questions you have!
ANY ESTIMATES OR PROJECTIONS AS TO EVENTS THAT MAY OCCUR IN THE FUTURE, INCLUDING PROJECTIONS OF REVENUE, EXPENSE AND NET INCOME CONTAINED IN THIS VALUATION SUMMARY OR ANY OTHER OFFERING DOCUMENTS, ARE BASED UPON THE BEST JUDGMENT OF THE COMPANY’S MANAGEMENT AS OF THE DATE OF THIS VALUATION SUMMARY OR THE APPLICABLE OTHER OFFERING DOCUMENT. WHETHER OR NOT SUCH ESTIMATES OR PROJECTIONS MAY BE ACHIEVED WILL DEPEND UPON THE COMPANY ACHIEVING ITS OVERALL BUSINESS OBJECTIVES AND THE AVAILABILITY OF FUNDS. THE ESTIMATES AND PROJECTIONS NECESSARILY MAKE NUMEROUS ASSUMPTIONS WITH RESPECT TO INDUSTRY PERFORMANCE, GENERAL BUSINESS AND ECONOMIC CONDITIONS, TAXES AND OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. THERE IS NO GUARANTEE THAT ANY OF THESE PROJECTIONS WILL BE ATTAINED. ACTUAL RESULTS MAY VARY FROM THE PROJECTIONS, AND SUCH VARIATIONS MAY BE MATERIAL. THE COMPANY HAS NO OBLIGATION TO UPDATE OR OTHERWISE REVISE THE ESTIMATES OR PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING OR DEVELOPMENTS OCCURRING AFTER THE PREPARATION OF THE ESTIMATES OR PROJECTIONS OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.