As the CEO of TF Management Group LLC, affectionately known as “Big Mike” in real estate circles, Mike has led the company since 2009. A retired software executive turned successful real estate fund manager, he oversees funds like the Tempo Growth Fund LLC and Tempo Opportunity Fund LLC. Renowned for his integrity and financial acumen, Mike, a former political refugee from the USSR now proudly an American citizen, resides in Brooklyn with his family. With a Mathematics degree from Binghamton University, he actively participates in exclusive real estate and investor groups such as Collective Genius and Freedom Founders, showcasing resilience, intellect, and commitment to excellence.
Here’s some of the topics we covered:
- Mike’s Immigration From The USSR
- The Current State Of The US Economy
- The Current Inflation In The US Economy
- Bridge Debt and The Pain That Is Coming
- Possible Bank Failures In The United States
- The Office Asset Class and The Trouble They’re In
- Possible Recession In The Year 2024
- Recreational Land And What It’s Used For
To find out more about partnering or investing in a multifamily deal: Text Partner to 72345 or email Partner@RodKhleif.com
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Full Transcript Below
00:00:00:00 – 00:00:22:14
Rod
Welcome to another edition of Life Time Cash Flow Through Real Estate Investing. I’m Rod Khleif, and I’m thrilled you’re here. And I know that you’re going to get tremendous value from the very knowledgeable gentleman that I’m interviewing today. His name is Mike Zlotnick, and he’s the CEO of ETF Management Group. He also manages funds, growth funds, opportunity funds. And through a tempo Tempo is the name of the funds that he manages.
00:00:22:14 – 00:00:34:03
Rod
And he’s known as Big Mike because he’s a big guy. And I think I’ll leave it at that because he’s got a very impressive and varied background. Welcome to the show, Mike.
00:00:34:05 – 00:00:38:06
Mike
Thank you, Ira. Appreciate your invitation. Happy to be here.
00:00:38:08 – 00:01:03:06
Rod
Absolutely. So why don’t you give a little bit of background. I know that you’ve got a bachelor’s in mathematics and you’ve you’re you’re a political refugee from the USSR. And just just give us some background, some very interesting bio that I read. And so just tell us a little bit more about how you, you know, how you came about came into the fund business, the real estate business, and just give us a high level overview, please.
00:01:03:10 – 00:01:28:10
Mike
Thank you. Right now, I’ll run us through my life journey. Very well. Let me let’s say 3 minutes or so, just go through this stuff really quickly. So immigrated from the former Soviet Union as a political refugee in 1989, there was still Soviet Union. I actually came from Republic of Moldova, very small republic of the former Soviet Union, and I moved to Rochester, New York, upstate New York, and moved my mother.
00:01:28:12 – 00:01:51:06
Mike
And we settled there and my mother is still there. So and we are U.S. citizens now where US patriots certainly have experienced socialism, and the cause is called the evil empire. And you see how that world operates. And now Russia invaded Ukraine and the terrible impact on human life and so on. So United States is the greatest country in the world.
00:01:51:06 – 00:02:11:11
Mike
My view, I am a great paper. I’m a big patriot. And for those who have not experienced other countries, this is a great place. Still, even with all the challenges and political issues. Now let’s go back. So I came here in 89. I spent I got my degree in mathematics from Binghamton University, and I went into computer science.
00:02:11:11 – 00:02:36:22
Mike
I went in technology world, and I spent almost 14 years and I discovered real estate in 2000 when I bought my first apartment in New York City. I live now in New York City. I’ve been in New York City since 96. And make real, long story short, I’ve been buying apartments passively in New York City and some multifamily houses, just as a passive investor from 2000 until 2009 2009, I was done with my technology career.
00:02:36:22 – 00:03:00:11
Mike
I had a very successful career. Some technology exits. Really enjoyed it. Grateful for that. But I realized my passion was always real estate. It was both kind of be part of the constant zone. My genius on has always been doing real estate business deals, investing in real estate. So in 2009 I went into real estate full time. We launched our first fund and we launched a series of funds ever since.
00:03:00:13 – 00:03:33:21
Mike
So first it was slow and grind, but we’ve learned and discovered a lot of things. We’ve done a lot of hard money loans. We’ve we’ve built a lot of finance expertise in debt lending. And 2017 went full speed ahead on commercial real estate funds. So our journey has expanded quite a bit from there. We’ve launched Opportunity Fund Growth Fund Growth Fund to Income Fund, and we’ve helped raise CAP capital for a number of syndications in some multifamily space, shopping plazas and so on, so forth.
00:03:33:23 – 00:03:54:20
Mike
So I don’t know how exciting that journey is, but we’ve had a great degree of success and a lot of fun doing it, and that’s why I’m here. Happy to serve folks and happy to chat about what it is. And I’m mathematician. I’m also a chess master, so I’m not one of those geeks that spend my whole life sort of in inexact science is nice.
00:03:54:22 – 00:04:12:01
Rod
Yeah. So tell me a little bit about your team, Mike. You know, what role do you play and what are some of the other people on your team? Because obviously we all know this multifamily game is a team sport. And so how does that parlay into the fund component?
00:04:12:06 – 00:04:40:15
Mike
So we run our business fully outsourced. So we use third party fund administrators, third party orders. So our own core team is only ten people, but we utilize a lot of external counsel, a lot of professional fund administrators to help run that element of the business. So our job is to identify great operators, sponsors who we want to invest with, underwrite them first, then underwrite their deals, negotiate terms, then we write checks, and then we manage the investments over time.
00:04:40:17 – 00:05:14:14
Mike
And obviously part of the game is also raising capital for federal funds and syndication. So the people and we have heavy focus on asset management for folks on the team are heavily focused on portfolio and asset management. And we have some technology folks, we have some folks in investor relations, marketing and so on. But overall, I would say half the team is really driven by excellence in portfolio management.
00:05:14:18 – 00:05:23:05
Rod
So help me understand something. So you invest in other operators, but you’re actively involved in the asset management as well.
00:05:23:07 – 00:05:46:19
Mike
So let me take a step back. Our asset management is different from our massive management. If you are a an operator, Sean, I have a greater use of management and leasing rehab, construction, property management that’s also asset management. Our asset management is understanding our portfolio. Where do we have investments, where where are the big checks or bigger checks?
00:05:46:20 – 00:06:06:22
Mike
Where do we have concentration, where we have risk? Where do we have a big footprint of visiting assets, visiting, spending time with sponsors, understanding how these projects are progressing. So asset management doesn’t mean dealing with tenants and toilets and property management. It means managing the investments from a point of view of a capital allocator. Does that.
00:06:06:22 – 00:06:31:00
Rod
Mean Gotcha? Gotcha. Yeah, no, totally. And that’s that hasn’t come up on this show before. And guys, you know, when I talk about asset management on the show, you hire a third party property manager and you’re managing that third party property manager. So he’s talking about it on a different level here, which I appreciate you clarifying. So I assume, you know, you’ve got super analytical people that are analyzing deals, are analyzing.
00:06:31:00 – 00:06:39:04
Rod
Marcus So that’s the that’s the asset management component is, is that they’re analytical underwriters and so on and so forth on the team.
00:06:39:08 – 00:06:58:03
Mike
Pretty much what you said. So substantial amount of it is analytical work. So underwriting a lot of it is under analytical performance. But at the same time, we do take our field trips. So we do want to see assets, we do want to see how they’re run and seeing is believing. You know, I don’t know how much experience you’ve had working with.
00:06:58:04 – 00:07:28:07
Mike
I mean, I’m sure you have a great amount of experience, but we come out and you see the difference between class-A or top of a line operator, and so let’s just call them so classy operator when the property is not as well maintained, not as well managed. So we certainly learn from our experience. We constantly evolve and focus on working with people who are top operators, who know out best of best practices in the acquisition property management disposition world, especially during these challenging days.
00:07:28:07 – 00:07:43:18
Mike
Environment has changed. Used to be easy to make money. Now we have to focus, so we are taking field trips. I’ll give you example. I took a trip to Indianapolis where we have a very big footprint and we also went to Saint Louis, spent time with the CEO of the company that’s got a couple of billion dollars in a year.
00:07:43:18 – 00:08:02:00
Mike
And we are one of the large investors without and spending time and understanding the assets. The numbers speak, but going onsite at times adds a lot of value. We have other folks on the team. We actually obviously visit the sites. But I want to come out myself, especially when we’re a big check. So I don’t know how else to explain it.
00:08:02:02 – 00:08:22:00
Mike
When you look at a turnaround community in progress where there were challenges in the past, some drug dealing dealing and you’re turning around your community and you make it into Class B, it’s a heavy lift in seeing just the occupancy numbers. If you just got to going to do it based on a spreadsheet, you’re going to see 30% occupancy and you’re going to you’re going to start pulling your hair out.
00:08:22:02 – 00:08:42:02
Mike
When you go to the site, you see what’s going on. You got rid of all the bad apples and now it’s more selling, renovating and then leasing up. And there’s a waiting list of tenants because these units have class AA finishes, but they are class C units. It’s a remarkable transformation. So this is what I’m talking about is making an impact and being there sometimes helps.
00:08:42:04 – 00:09:11:03
Rod
Oh, no question, No question. There’s nothing like site visits. You know, I’ll tell you, just as an aside, I’m a little apprehensive about Class C units now that your scenario that you just describe, where you’re taking it and upgrading the class based on the finishes and and, you know, the reposition, that’s that’s a different story but just straight class, the units scare me right now I’ll be candid with inflation as high as it is and gas as high as it is, you know, I’m recently separated and so I had to go buy groceries recently.
00:09:11:03 – 00:09:33:18
Rod
And I went to the grocery store and I said, $150 for that. Are you kidding me? And it’s like, I talk to the cook. I’m like, how to how do people afford this? So she just shook her head. And so, you know, that as that demographic is getting their butts handed to them right now, Mike and so that, you know, I’m kind of making a flight to quality or, you know, I’ll buy a sea asset in a big area that we can upgrade.
00:09:33:18 – 00:09:41:05
Rod
But I’m a little worried about C, definitely C minus and D, those people are dying on the vine with with this inflation. Do you agree with me?
00:09:41:09 – 00:10:03:06
Mike
Yes. Agree 100%. Yeah. Yeah. Who sees most of what we do? A Class B’s. You don’t want to be in the class in general. Unfortunately, inflation has been very hard for the folks that that just make ends meet. They don’t have any disposable income beyond the necessities. And when the cost of necessities goes up, they begin to struggle.
00:10:03:07 – 00:10:22:19
Mike
And I feel their pain. And it’s a challenging demographic. And certainly you don’t want to be investing in that part of the market as it is very difficult lift. But so sometimes there is an exception. That project is an exception. It’s a major imposition that’ll basically the area is actually beer. You drive around, you look at this area and perfect area area.
00:10:22:21 – 00:10:26:10
Mike
But the answer to sell was a key asset in that area. That’s, that’s, that’s the point.
00:10:26:12 – 00:10:48:01
Rod
I like that. I actually like that you convert it and if you’ve got a beer, you convert it. You just describe the finishes to me. That’s that’s a home run all the way down the line. You know, I saw a headline here, actually got it right here. This is about six months old. And actually, I apologize. This is a year old, but I believe it’s gotten worse.
00:10:48:01 – 00:11:08:14
Rod
There’s a year ago there were 20 million U.S. households behind on their utility bills. And, you know, that’s when this whole inflationary run up started. But, you know, I think there is a lot of pain out there. But let me ask you this. Let me shift for just a minute. Are you involved any deals with bridge debt right now?
00:11:08:14 – 00:11:27:22
Rod
Because, you know, when we were at the I am in mid-market conference, I saw sweat beading on the foreheads of quite a few operators. There that are in this bridge debt where, you know, the rates have gone up and you know, they have and and and and loans are coming due. I mean, I guess there’s 1.6 trillion in debt coming due by the end of next year.
00:11:28:00 – 00:11:52:05
Rod
And at least half a trillion of that is multifamily. You know, I’d like to talk about that a little bit with you. You know, your thoughts on, you know, some of these distressed assets. I know you have a fund called an Opportunity Fund. We have a fund we’re throwing out next week, an opportunity fund as well. You know, are do you see some opportunity in that environment with these operators that got bridge debt there And, you know, the water is going out.
00:11:52:05 – 00:11:57:09
Rod
We’re going to see who’s naked, what’s the water is all the way out at this point. You know, I just I’d love your thoughts on that.
00:11:57:09 – 00:12:20:03
Mike
So if you remember my presentation at the conference where we chat, it was done just surviving economic downturn, Learn how to thrive. And the main point in the presentation is exactly that Many deals have this type of a problem and we do have investments. A lot of value add deals were bought with bridge that it’s almost an industry norm.
00:12:20:03 – 00:12:43:22
Mike
I don’t know what percentage, but I’ve heard numbers 90, 95% of value deals were bought. What was some kind of bridge that and when when when when these assets come to a basically from the time that they started a year and a half ago or two years ago until now, they’ve they’ve improved their occupancy. They’ve renovated these assets.
00:12:43:22 – 00:13:04:03
Mike
Their rents are up 30%. Debt service is up 100%. Right. Right. Though the pressure is immense. I’m completely with you that the it’s a race to refine. There are four use cases and I talked about them. If you look at your portfolio, every single portfolio should be looked at and you should look at these deals and the four primary buckets.
00:13:04:03 – 00:13:26:12
Mike
One, if rates debt underperforming, that’s the worst one. You didn’t execute value that well and you can’t even refi and you have a bridge that maturing or ETF expiring. This is a potential scenario. It can sink. This is the worst case scenario and need to know the difference between these two use case scenarios. Some are war fighting is to survive and some are just going to sink.
00:13:26:14 – 00:13:59:02
Mike
Next case scenario, you have underperformance, but you got a fixed rate debt. At least you don’t have that pressure. You just need to focus on potential, bring in additional capital to finish renovation well or changing the the manager of the operation. But you don’t have the the debt pressure. Next one is you have a scenario where you have variable rate debt so the payments are up, but you executing well, so you executing well and you can finish innovation and you can basically take the property through we MGC refi Fannie Freddie, that point the property can be stabilized.
00:13:59:02 – 00:14:11:05
Mike
So the last two cases that I mentioned, they’re worth the fight most likely you can you can you can have them survive. And then a beautiful case, of course, is you have fixed rate debt in a performing property of nothing. Right.
00:14:11:06 – 00:14:12:16
Rod
That’s the best it’s the best job.
00:14:12:16 – 00:14:33:18
Mike
But you got to think about all these. So my position on them is, of course it’s property, but property analysis and raise are focused on operating excellence really can’t state enough. So the path to sell or the path to refi is the same. You have to get the property to that 90% magic number occupancy. Once you get it there, you’re in a beautiful position.
00:14:33:18 – 00:14:52:05
Mike
You have options. Until you get there, you don’t have that many options. You only option three, find another bridge loan. So we’ve seen some bridge to bridge refi, refinancing with still capital cost. They’re still worthy projects. They just took longer. They over under the budget in a capital court we’ve dealt with some of them we’ve provided the capital they’re working.
00:14:52:07 – 00:15:15:19
Mike
Of course we will provide the capital and then they’re going through the the drive to stabilization. Then we will have options and some projects that are underperforming the game. This is what I started this whole conversation. It’s all about property and that’s a manager as a capital allocator, we put a lot of pressure on the operators. If there are if they’re underperforming, I want to spend time with them.
00:15:15:19 – 00:15:18:09
Mike
We want to both babysit their.
00:15:18:11 – 00:15:19:03
Rod
Coach them.
00:15:19:07 – 00:15:40:15
Mike
Their support and if they need money, provide capital it, make sure that and if they’re not right for the project, replace them politely, ask them to leave. So at the end of the day, if you execute from operating perspective, you could deal with that bridge debt that’s maturing, rate cap expiring and so on. But if you can’t execute well, then unfortunately you’re in terrible shape.
00:15:40:21 – 00:15:57:01
Mike
The other big question is how well did you buy the properties? You bought a really well, then you have safety cushion. That example of the property that I mentioned to you there is a 30% occupancy was bought so deep that even with all the problems and getting rid of all the difficult tenants, the project will still be a home run.
00:15:57:01 – 00:16:06:02
Mike
They just required additional liquidity to take it through the more difficult cash flow period of time of lower. So you have your renovations.
00:16:06:04 – 00:16:09:14
Rod
But you so they did they did a capital call on that one. Gotcha. Okay.
00:16:09:14 – 00:16:12:16
Mike
Yeah, they did. They had to bring in additional capital to sell.
00:16:12:18 – 00:16:13:11
Rod
And I’ll tell you what a.
00:16:13:11 – 00:16:19:09
Mike
Capital call it was more of a additional bridge deck. The property had enough room for 4000.
00:16:19:10 – 00:16:35:10
Rod
That’s oh that, that’s, that speaks to it. Yeah. If they were able to do that that was a good deal. I mean they bought it right. You know, I will tell you, you know, I work with an attorney in Dallas that’s huge in the business. And he told me half of his practice right now is capital calls, forbearances and foreclosures.
00:16:35:10 – 00:16:57:20
Rod
I mean, half of his business. You know, it’s really you know, the you know, what is hitting the you know, what at this point. And and, you know, the the other thing that that I’ll mention is, you know, with these people that can’t go can’t refinance into conforming debt, they’re they’re in a world of hurt because not only in most cases will they need to buy down the loan.
00:16:58:00 – 00:17:21:03
Rod
So a lender will even sniff the deal. But the the rate caps are insane right now. I saw an article this happened about six months ago where if you wanted $100 million rate cap 3% for three years, in 2020 it was $23,000. Okay. I’ve hard hard to imagine that six months ago, that same rate cap, forget three years for one year for 3% was 2.3 million.
00:17:21:08 – 00:17:40:04
Rod
So it’s not just getting the loan down to a debt service coverage ratio that works. It’s also that rate cap, which is, you know, and then we’ll talk about sales so they can either refinance or sell. Sales are down 75% as a first quarter this year. I haven’t seen the second quarter numbers yet, but I my guess is they’re worse 75% year over year decline.
00:17:40:05 – 00:17:45:09
Rod
So, you know, I think there’s going to be opportunity. I’d love your thoughts on that.
00:17:45:10 – 00:18:05:13
Mike
Yeah, agreed. In real estate, one man’s trouble is another man’s opportunity. And at some point, you know, you don’t want to think of it as zero sum game, but sometimes it is. Yeah. So the best way to think about this, of course, as an investor, you have to be focused on and support the assets that are strong and still worthy.
00:18:05:15 – 00:18:29:21
Mike
But on the buy side, you’re looking for deep discounts. There are no more good deal shopping. It’s great you’re shopping, right? The way to think about this is the way we some of the discussions I’ve had with some of the top operators is they’re talking to banks, they’re talking to lenders, they’re talking to insurance companies who provided them financing and they know them as a high quality operator asking the question, what problem files do you have?
00:18:30:02 – 00:18:55:04
Mike
Oh, I’m in this market. I’m in Indy, I’m in Detroit, I’m in Saint Louis. What other problems, situations you have and I would like to be the knight on a white horse for rescue. And they have the ability. But the situation with with banks, you you you are 100% correct. They have they’re beginning to see a lot of problems and many operators are just not able to solve those problems.
00:18:55:04 – 00:19:11:01
Mike
They can’t raise the capital. The capital call is just not happening. So it become the default hit. Then what do they do with default? There’s two possibilities. One, they want to keep the asset, The other one, they play the game, extend and pretend. Yeah, I’ve seen enough of that already happening.
00:19:11:03 – 00:19:34:03
Rod
Both are happening right now, you know, And I’ll tell you, you know, if you’re an operator and you’re listening to this, you need to have complete transparency and be over communicating with your lender right now because you know, that’s what they need. And, you know, you saw the Fed came out with that directive to be more pliable with I think the word was creditworthy borrowers and be more accommodating.
00:19:34:03 – 00:19:53:08
Rod
I don’t know if you recall that that that note they put out. And and so, you know they realize and and a lot of that debt. I think a third you know some of these things that I’m throwing around I’ve read and who knows if they’re completely factually accurate but like a third of all of that commercial real estate debt is held by smaller and regional banks and large banks as well.
00:19:53:08 – 00:20:08:01
Rod
But I there’s a big component, small and regional. And so, you know, I’m wondering is if the Fed doesn’t actually spend money again, which I hate the thought of because it’s going to increase inflation, are we going to see more bank failures? What are your thoughts on that?
00:20:08:04 – 00:20:29:21
Mike
So your observations? That is exactly correct. Most of the real estate has been financed with small and regional banks. Big banks blame this base. But but it’s not your traditional apartment complexes. We’re dealing with maybe a billion, $2 billion large buildings in Manhattan get financed by cheap Morgan Chase’s of the world. But other than that, a lot of them have been financed by regional or smaller banks.
00:20:29:21 – 00:20:56:15
Mike
So the balance sheets have a lot of risk and banks are playing the game and they want to look strong. We don’t want to have another March type of problem where multiple banks fail. They’re certainly going to try to instill confidence. But behind the scenes the system is very shaky. In addition to that, as ten year Treasury continues to rise, the bank balance sheets continue to look worse and worse because they bought those bonds when the rates were very low per directive of the Fed.
00:20:56:17 – 00:21:15:15
Mike
So they have really terrible balance sheets that they are trying to solve. Now. They have access to the discount window and all that stuff. Meanwhile, the Fed is telling the banks, tighten up the credit lending. They definitely want to tighten up the credit. They’re fighting inflation in two ways. I know it’s a deviation from your main question, but they’re fighting off.
00:21:15:15 – 00:21:16:05
Rod
No, no, no.
00:21:16:05 – 00:21:45:21
Mike
It’s a crisis, obviously, right now. And the thing to control is Fed funds rate. And then they also have to credit conditions and guidance for the banks. They do that as a way to also fight inflation. So they’re doing it to the best of their ability. And I think honestly, behind the scenes, as much as they’re saying and they’re signaling that they may not be done hiking rates because inflation is sticky behind the scenes, they’re probably thinking when they can start loosening again.
00:21:45:23 – 00:21:59:22
Mike
This is because they know all these problems are brewing. They know that we may suddenly usually these problems, they don’t just happen gradually. It’s all everything is normal, fine, good. It looks like there’s no recession. But we have.
00:21:59:22 – 00:22:18:16
Rod
Suddenly and there’s a light switch. It’s like a frickin light switch. That’s what happened in 2008 nine. It was like everything shut down overnight. I don’t know if you recall that, but I don’t know. You know, you don’t know my story. You’ll hear it when I’m on your show. But I lost $50 million in 2008 nine and I was only at a 30% loan to value and I still crash and burn.
00:22:18:16 – 00:22:40:06
Rod
I’ll dig deep on that later. But. But yeah, it was like a light switch back then, and I think that could happen again, you know? And we’re not even we’re just talking about multifamily. I mean, I’m sure you’ve seen what’s going on. The office environment. I think the average occupancy in office in the six major metropolitan areas, the big ones is like in the low seventies, you know, and those assets are there.
00:22:40:06 – 00:22:59:04
Rod
They’re all in default. So, you know, I don’t know, man. I think that we could be facing some serious headwinds economically as a result of and it’s being driven, in my opinion, not by the single family in the residential space like it was in 089, but it’s being driven by the commercial environment. I don’t know if you feel the same way or.
00:22:59:04 – 00:23:08:19
Mike
If yeah, I don’t like to use. I rarely ever curse. So the worst word is the it’s dog crap. Okay. Pardon me. Uh huh.
00:23:09:00 – 00:23:09:19
Rod
Right, right, right.
00:23:10:01 – 00:23:28:15
Mike
Office spaces is the worst of all asset classes. FEMA dislocated because of it. And I live in New York City, and I have I don’t go to Manhattan often, but I have a lot of friends who work in Manhattan. And the stories like this, a story like this. I work on Grand Central. My office building is right over the Grand Central.
00:23:28:17 – 00:23:53:20
Mike
And you know what? Half the building is empty. Maybe they’re literally, maybe, literally, maybe figuratively. But the problem is broad and deep. Not only that, I speak with other business owners and they are waiting to terminate their lease when the lease matures. They don’t need the space they used to have. Yeah. So at this point, the demand for office space has been fundamentally dislocated and that asset class is.
00:23:53:20 – 00:23:54:13
Rod
In big trouble.
00:23:54:19 – 00:24:16:04
Mike
Very deep recession, Big trouble. Yeah. Classes may hit a recession if if things continue to go where they’re going, but overall, we certainly we’re not in recession yet. But I am a believer that the recession has been delayed. And by the way, the reason recession has been delayed is not that the Fed is not trying to induce a recession.
00:24:16:06 – 00:24:31:07
Mike
They have been trying to reduce this recession and they’ve done a lot of damage. Yeah, production has long been variable X number one. Number two, we’re dealing with unprecedented unemployment. Picture this low unemployment is so historically not normal.
00:24:31:09 – 00:24:32:14
Rod
That’s unusual.
00:24:32:16 – 00:24:45:03
Mike
Exactly. Forcing a recession with this low. Unemployment is hard, but it’s happening. It’s going to happen over time is just going to take longer. So recession is coming. Just not happening in 23. Probably we’re looking at towards 24.
00:24:45:05 – 00:25:08:06
Rod
Yeah. And then the layoffs will happen and businesses will cut back and that’s all coming. I really believe that. But this is the June-July issue of Forbes okay. And occupancy in office, they say it was 80% occupied in New York. Chicago was 73, Los Angeles was 73. But most of these other cities, San Francisco, oh 67 I think it’s worse than this, honestly.
00:25:08:08 – 00:25:25:16
Rod
Houston, 70, Washington, 78. I mean, none of these assets are performing. And so, you know, if they’re with bank debt, big trouble. And so and again, that’s just office duty. You’re not in any other asset classes, Correct? It’s just multifamily. No retail, no industrial, no.
00:25:25:16 – 00:25:27:20
Mike
Self-Storage, a bit of other. So we have to.
00:25:27:21 – 00:25:29:22
Rod
Talk about that, talk about that.
00:25:30:00 – 00:25:43:03
Mike
So we have very little in office, thank God. Right. And I can tell you one one final comment on you on your comment on office space. Yeah, the occupancy may look maybe 80% on paper because those leases haven’t rolled yet.
00:25:43:05 – 00:25:43:23
Rod
Exactly.
00:25:44:02 – 00:26:01:15
Mike
Are all these are all kinds of downward pressure for the occupants in the drawer. So there’s a lot. Now let’s shift into the asset class. Yeah, we’ve done quite a bit. This is one of our major strengths and I’m not trying to promote anything. We’ve done this because this has been my fundamental belief. I believe in the broad diversification that we’ve done this from the very beginning.
00:26:01:15 – 00:26:18:00
Mike
We’ve always tried to diversify across multiple asset classes within real estate, different locations, different operators, then an equity. We mix things up. So what we like, obviously storage has been sort of a fundamentally solid asset. Class has done well. We’ve done although.
00:26:18:01 – 00:26:36:10
Rod
Although, although, although I’ve been reading that just recently, it’s starting to slip a self-storage, I mean, I’ve been seeing some articles around that and maybe you haven’t experienced that in the assets you purchased, but I know a couple of my students who have thousands of units have have complained about it as has it slipped for you or has it been fairly stable?
00:26:36:12 – 00:27:01:19
Mike
We have not yet seen declines. Most of our investments in storage have been few years out and they’ve been that were well bought. So we’re seeing strong cash flows. Maybe the cash distributions growth is stalling, but at least we’re not seeing any substantial issues yet. And you may be right, there are some issues brewing, industrial or office flex, kind of a smaller spot slash industrial has done pretty well.
00:27:01:21 – 00:27:04:12
Rod
Love that space, love that space. Yeah.
00:27:04:14 – 00:27:31:09
Mike
We’ve done also some shopping plazas. We absolutely love open air shopping plazas, and we’ve bought them very well. We work with the top of the line group that specializes in buying these properties. We did even an investment this year with them, a very substantial investment. They bought two shopping plazas, one in Fairfax, Virginia, the one in Orlando from a distressed street that was liquidating publicly traded.
00:27:31:09 – 00:27:53:17
Mike
Right. And there it had to liquidate. They looked over 100 assets, picked five, they won four bids. And we looked at those and we were picked too. So then over day it exists. If you have open air, not, you know, not in close proximity. Right. You have very strong anchor tenant or set of diversified tenants, ideal. You want to have a good anchor.
00:27:53:17 – 00:28:09:09
Mike
If you have a strong anchor, that helps quite a bit. And obviously the supply demand is critical in that area. A lot of shopping plazas have been around, but they haven’t been built. So because of the fear of Amazon effect of the e-commerce effect.
00:28:09:14 – 00:28:10:08
Rod
Sure, sure.
00:28:10:08 – 00:28:29:19
Mike
That’s been has left. So what’s really interesting is there’s this plenty of demand and very limited supply in a space. So high quality assets are very well worth if you can pick them up at the right price from a distressed seller. So that’s my response for that industry. We’ve also done a good amount of additional investing with folks who buy recreational land.
00:28:29:19 – 00:28:31:14
Mike
That’s been a very interesting story too.
00:28:31:16 – 00:28:34:12
Rod
Could you elaborate on what you mean by recreational land?
00:28:34:14 – 00:28:59:14
Mike
So normally land is infill like you want to build, want to develop multifamily property or you want to develop a house as an infield? So these lots, let’s just call them commercial lots that they used for you for some kind of real estate construction. It can be storage, industrial, multifamily, residential, anything that’s, that’s that, that’s industrial or commercial land.
00:28:59:16 – 00:29:26:17
Mike
The recreational land is it’s led the Lebanese people buy them to run the dirt bikes to set up shooting range, to go camping. That land is not used as a it’s not typically not in big cities. It’s somewhere away from cities. And folks buy to own piece of their own America, to enjoy their own privacy. And that land is typically traded really, really cheap.
00:29:26:19 – 00:29:45:22
Mike
So some of the folks we’ve done business with, they’ll they’ll go buy a lot of cash for four grand. They’ll sell it on seller financing as receivable for 25,000. So we’ve said we’d like some of those strategies because they’re niche strategies and there’s no financing available. So seller financing, $400 dollar down, $400 a month works really well. So those.
00:29:45:22 – 00:29:46:05
Rod
Are great.
00:29:46:05 – 00:29:48:00
Mike
Place business.
00:29:48:03 – 00:29:53:16
Rod
But go ahead. I’m sorry. Sorry to interrupt. Forgive me. My friend Jack Bosch does that. You know Jack.
00:29:53:21 – 00:30:10:11
Mike
I know Jack really well. Yeah, He’s a great friend. Jack is actually an investor in many of our deals. We’ve done quite a bit with Jack, so Jack and a close friend. And I know he actually educates folks how to do that. And yes, it makes a lot of sense that business is very solid now.
00:30:10:12 – 00:30:31:15
Rod
It’s a good business, good business that he and I have been great friends forever. I think we’ve initially met at an MHC in a four or five years ago and been great friends ever since he was in my mastermind, actually was a member of my mastermind. So. Yeah. Awesome. Well, so, so was there anything else recreational and was that the extent of the additional assets?
00:30:31:16 – 00:30:51:13
Mike
I’m trying to think there’s some other new strategies, but they are on a smaller scale. So obviously multifamily is a large footprint. We do like just to be clear, we do multifamily. Everybody has gone to Sunbelt and I have nothing against somebody but loss on. But we have some assets in Sunbelt generally demographic growth, population, migration, all those things are good.
00:30:51:18 – 00:31:06:10
Mike
But we also love Midwest Steady, 80 markets and there’s a lot of value that you can actually add in those markets if you buy, right. So again, multifamily is a great asset class, but we you definitely want to operate in a business friendly states and cities for sure.
00:31:06:10 – 00:31:27:11
Rod
Oh, no question. You, I stay out of blue states. I mean, it’s not political. It’s just a cost of doing business and and brain damage. But no, I love what you said. Steady, Eddy states. I like that because, you know, even through the 0809 crash, those states didn’t suffer as badly. I mean, I saw a 70% decline in my asset value here in Florida in 2000, nine and ten.
00:31:27:15 – 00:31:58:02
Rod
Okay. And of course, Vegas and California and Phenix all got crushed as well. But the Midwest was I love that steady Eddy. It was definitely was so so, you know, I don’t know if you want to I mean it’s it’s talked about quite a bit on this show here. But I mean, if you’ve got any insights as far as value, the value add component of what you do, you know, is there any any enlightenment there that that I mean, you kind of spoke to it on that first deal you described as well.
00:31:58:04 – 00:32:18:17
Mike
I’m happy to elaborate. So folks have. Okay, so what do you guys do? I mean, what is your business like? Well, my folks invested and I just kind of explained the difference between direct operators and folks like us. Right. So direct operators certainly have feet on the ground. They execute and they often the success or failure of a project depends on them.
00:32:18:19 – 00:32:38:20
Mike
Our job is actually to pick some of these best operators and there are a lot of folks out there. It takes years of experience and building these strong relationships to know the difference between the average Joe and the tough Joe. And we focus on these relationships that we go deeper so we allocate capital accordingly. We also have a bigger buying power.
00:32:39:02 – 00:32:59:04
Mike
So when we come to a deal and let’s just say a sponsor wants to raise capital and they put together terms for investors, so they do sort of $100,000 investment to a whole bunch of them. It’s a much bigger overhead for them and they offer different terms. We bring in a $10 million check, $50 million check. We generate substantially bigger economics, better economics for our investors.
00:32:59:06 – 00:33:23:12
Mike
So our job is to negotiate better terms for our funds because we can bring larger checks, we can bring programmatic systematic checks. We can also provide support when they have an issue. So it’s a lot easier to work with us. For many investors, but many sponsors who are not in the business of raising capital from individual investors. And there are those people.
00:33:23:17 – 00:33:35:20
Mike
There are plenty of folks that do both. They try to do individual deals and they try to raise capital. We love to work with folks who don’t want to raise individual capital or a little bit as possible, and they want to get bigger checks.
00:33:35:22 – 00:33:39:12
Rod
I sometimes are you sometimes the only investor in a deal?
00:33:39:14 – 00:33:40:19
Mike
Sometimes, yes. Exactly.
00:33:40:21 – 00:33:48:08
Rod
Okay. Interesting. Interesting. Now, you know, you hear the term private equity. Would you be considered private equity in this regard?
00:33:48:12 – 00:33:59:18
Mike
Yes, we are private equity provider. Okay. Okay. If you ask me, what do we do, we don’t have family or real estate funds, but effectively what we do is also private equity and real estate. That’s a lot of what you got.
00:33:59:20 – 00:34:35:01
Rod
You now as part of that private equity, you know, you hear some and I have never utilized private equity. I’m the guy that does the 100,000 a pop when I syndicate deals. And I’ve raised you know I know probably all in if I was guessing close to 80 to 100 million but but on this private equity front, you know, you hear stories about exerting control, what levels of controls do you implement, if any, when you when you invest in somebody deal and you put a decent check in, give me an idea of some of the controls you may implement.
00:34:35:02 – 00:34:53:11
Mike
So we’re getting better. This and this has been an evolving journey. So we’ve had we’ve not had serious issues with most of the folks. We invest with because they are proper operators. So it becomes a tug of war, how much control provisions they’ll give you. So if you got the top operator, they don’t want to be removed from the deal.
00:34:53:15 – 00:35:10:11
Mike
If you go to somebody entry level, they’re so desperate for money they’ll agree to anything. So we’re not looking for perfection, but we certainly are looking for folks that give us some language in case of certain default provision. So, for example, if they default on debt, we can remove them, right? I mean, there’s certain control provisions.
00:35:10:11 – 00:35:14:16
Rod
Oh, yeah. Hello. Of course, on that one. If they default on debt, good Lord.
00:35:14:18 – 00:35:40:07
Mike
But if they continue to run the project, we don’t have the ability to generally remove them. But we definitely want ongoing reporting. We definitely want a number of provisions that in the operating agreements that our attorneys kind of inject with the secret sauce. Now, it’s a it’s a it’s all negotiated. It’s not real or all or not. It’s more like depending on each point, there’s a little bit of negotiation.
00:35:40:07 – 00:36:05:19
Mike
Yeah, this is acceptable. This is not. But within reason. We try not to be active operators because that’s not our business. So we certainly want to pick and choose people who are very competent in the execution. But if they get hit by a bus and they don’t have a team and most people who we invest with, they have substantial teams, their organizations, we don’t have that problem, but we insert control provision stories and I will extend without stepping on their toes.
00:36:05:21 – 00:36:26:21
Mike
So it’s kind of like depending who your audience is, if they’re entry level operators, you have to have massacre trial provisions if they institutional quality $2 billion a year and they won’t, they’re not going to give you heavy control provisions because they know what they’re doing. And you can actually go through litigation, you can go through other sophisticated mechanisms if there’s an issue.
00:36:27:03 – 00:36:40:01
Mike
Most of the times there’s issues that are solved without any heavily litigation. But we’ve seen a situation where the sponsor was too much. And at some point you just going to say, listen, thank you, But. But no, thank you.
00:36:40:03 – 00:36:56:03
Rod
Right, right, right. By the way, guys, he says 2 billion A.U. and that means assets under management for those of you that are brand new and that’s a large operator, obviously. You know, I will tell you, we bought an asset in Lexington, Kentucky, a beautiful asset that we went full cycle on, but the seller did not want to sell.
00:36:56:03 – 00:37:16:06
Rod
He had private equity was making himself because it just fit their plan. That’s why, you know, I asked the question, well, listen, I really appreciate you coming on the show here, Mike. And guys, if you want to check him out it’s big Mike fund dot com and he’s also got a podcast called the Big Mike Fund on I believe that’s what it’s called, Right.
00:37:16:06 – 00:37:29:14
Rod
Big Mike Fund on on your podcast, which I’m going to be on, but listen, I appreciate you coming on, Mike. You’ve added tremendous value and, and I look forward to reciprocating and seeing if I can add some value on your show.
00:37:29:16 – 00:37:55:01
Mike
Thank you kindly. I do like to correct this joke. Yes, the primary corporate website is temple funding dot com, but the easiest one to remember is big mike fund dot com. I know it’s a little cheesy, but it’s easy to remember name that’s why it’s stuck so big Mike fund dot com and if you forget the deer den where you misheard me and you forget the Dean event and you just go to Big Mike fund dot com I promise it’s not a can’t site.
00:37:55:03 – 00:37:59:16
Rod
Thanks for having thanks for coming on the show my friend and we’ll talk to you soon.
00:37:59:18 – 00:38:00:01
Mike
Thank you.
