Lead-Lag Live

Understanding Distressed Properties and the Dynamics of Commercial Real Estate with Shlomo Chopp

• Michael A. Gayed, CFA

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Ready to peel back the layers of the commercial real estate market? Get ready to grasp the concept of distressed properties with Shlomo Chopp, a seasoned player in this arena who transitioned from tech to real estate. We discuss Shlomo's journey, which was sparked by the 2009 economic crash, leading him to represent borrowers in CNBS debt negotiations. We also shed light on the role of technology in shaping the retail logistics landscape and the correlation between inverted yields and property values.

As we navigate through the complexities of commercial real estate, we uncover how technological advances and the inability to adapt buildings quickly have turned this field into a reactive business. We evaluate different asset classes to understand how they've been affected by these changes, with a special focus on the office sector, which has been shaken up by the remote working trend. We further zoom in on occupancy rates to determine their influence on property values.

Wrapping up our insightful discussion with Shlomo, we delve into the potential for distress and contraction in the commercial real estate market. We assess the impact of profitless startups on the balance sheets of individuals and companies, and how this overflow can affect industry players. Our exploration extends to the tribalism between lenders and borrowers, and its impact on the CNBS market. Finally, we discuss how social media platforms like Twitter have become an excellent avenue for sharing and learning about Shlomo’s experiences in commercial real estate. This episode will surely equip you with valuable insights on the commercial real estate market from a seasoned industry player. So, tune in, and let's unravel the world of commercial real estate together!

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Speaker 1:

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions. Don't forget to follow at LeadLagReport on Twitter to join these conversations live and check out the LeadLagReport at wwwleadlagreportcom. Use promo code podcast30 for two weeks free and 30% off to get access to award winning research and anticipate stock market crashes, corrections and bear markets. And now on to our LeadLag Live discussion hosted by Michael Gaiad.

Speaker 2:

My name is Michael Gaiad, publisher of the LeadLag Report. Joining me for the hour is Shlomo Chopp, who knows a little bit about the CRE CNBS market and, as you can tell me from his Twitter feed, does indeed say the quiet part out loud. Shlomo, introduce yourself to the audience. Who are you at your background, how did you get involved in real estate and what are you?

Speaker 3:

doing early. Well, thank you for a sense, michael. I appreciate you having me here today. Background wow Dropped out of college, went to work for a family member, then my dad was in tech so we used to help him out after hours.

Speaker 3:

Then got ultimately an offer by a what I guess at the time was beginnings of a prop tech company and worked for them on the sales side, selling software to commercial real estate brokers, just organizing their deal, their document, their contacts, etc. And after a while said you know what? I'm not selling this $5,000 piece of software to a bunch of people that don't want software. Just broke once up with the stuff until a company system. You know all that stuff. So I'm going to get into what they're doing and start a wheeling and dealing literally just like buying deals, brokering deals, you know, convincing people why they should invest in me.

Speaker 3:

I knew Jack, but the reality was I was just out there willing and dealing. Then I learned I just, you know, started doing a learning, understanding the various debt structures and property structures and the types of properties. And then 2009 hit And I was like oh, holy crap, there's no one deals to be done. And an attorney friend of mine is like. So I'm looking through the CNBS thing. I think you could help borrowers And you know about that time. A lot of borrowers were investing in properties and taking CNBS debt because it was high leverage, relatively low, low interest rates. But they didn't know what the heck they were signing. And I went and I just downloaded the documents that SEC's website told myself to bond structures, so myself, what is that lenders need to do in order to work out these loans?

Speaker 3:

and convince a couple of people to work with me and start representing borrowers, and that's about in 2010. And then 2016 got out of that business, for the most part because there wasn't much opportunity. The bond holders became opportunistic. I just wanted to own the properties. My clients wanted to save the property. It just wasn't a match. Just on the issue of retail logistics, and was able to secure two patents so far, another one that's about to be awarded, we believe, and probably another two-year after. Probably we should be having, i believe, within another six months or after, about combining retail logistics.

Speaker 3:

I really dug deep on the issue of malls and the issue of fulfillment and the changes in technology And now, with how the market has turned, decided this time around, in addition to the advisory work that I'm doing for borrowers that have the stress real estate is that we're going to invest in the actual underlying bonds, take advantage of this, connect between the bond markets and yields, how the inverted yields have the inverse relationship to values with zero value adds to the up or the proper.

Speaker 3:

Sorry, the cost of the bond needs to go up or down in order to create return. And if you compare that to a property, where you have a property and it's not about the cost of the bricks, but it's a rather what you could do with it and the rent you could charge for that bricks. So there's this relationship where you potentially go buy things cheaper in the bond market and if you can convert it to property, you could be in a property at a cheaper price. So we're focusing on investing in those types of assets, including property, debt and bonds behind it. So I know that's mouthful, i know that's the background, but that's all what informs what I do on a day-to-day basis. So the debt isn't spinning yet. I'm sure I'll be able to get to that soon.

Speaker 2:

All right. So I feel like we need to quantify or somehow put our arms around the term distressed when it comes to real estate. So what is considered a distressed type of property?

Speaker 3:

I guess it's sort of a relative term. It's a question of distress. Distress is when it doesn't perform to business plan right. So distress could be a macro distress in the market or a general, you know, just like distress to everybody. I mean, you have all of his bills and it's not leased. That technically is distressed from a lease perspective. But if you end it for zero basis, then is it the stress right. So I guess the stress could be looked at that way. And the flip side of I'm an investor and I bought a property that I'm assuming can be 95% occupied and it's 85% occupied and the market is 70%. Technically that's distressed for me but maybe not for the market. So distress is really a relative term. It really relates to the business plan at hand and as to, you know, the opportunity that comes out of it becomes the distressed opportunity, so to speak.

Speaker 2:

Right. So there's obviously a lot more idiosyncratic aspects to commercial real estate than a lot of other kind of more liquid ways of investing. But at some point, you know, the concern becomes idiosyncratic distress by some property owners to something that's maybe more systemic. Now a lot of people will say and you know I probably agree that commercial real estate is going to be potentially a tail risk for the economy, for anybody that's invested in stocks. Do you find that those concerns have merit or they're a lot more nuanced?

Speaker 3:

as a no, i think, as huge merit than I think the just connected the dots. You know, the stress is very personal thing or very personal to the asset, a personal to the investor. But when banks and lenders standardized their investing based on their understanding of the markets, business plan and that turned out to be bad or wrong, ie, we index to 2% interest rates and we lend based on values, that index at 2% interest rates because everybody is becoming a GP and saying, well, treasuries are a three and I'm going to invest at five. So therefore it's a great, it's a great opportunity. But obviously real estate is a five to 10 year play and you haven't really a business plan. All of a sudden, treasuries go up. Well, you need to sell the end of your term and treasuries go up at the end of your investment term and treasuries go up. That becomes a massive issue. Now the problem with that is is that the immense growth in transaction volume and accordingly debt and as a result, debt and just the growth in values have come from entrance into the market as a, which has been a result of a lot of interest rates. Right, so the chase for yield.

Speaker 3:

We have institutional capital going to commercial real estate saying, well, hey, we've invested in the debt behind it, great, now we can invest in the equity because, hey, office building one, office building number two, they look the same divided X dollars per square foot. So that's, you know, good investment. Well, in reality, if you talk to a tenant or a tenant broker, i'll tell you no, that building doesn't have a 90 degree angle wall. Inside that building, you've got great views. That building's got the elevator on the side of the building, which blocks the views on one wall. That building got the elevator in the middle, which means I got views on all four sides, right? So there's a lot of things that institutional markets, by just making macro investments, is really not following and not understanding, and walked right into a double whammy issue where a they tried standardizing real estate, which is case by case basis, and be like I said they have this in duration issue.

Speaker 2:

Right, and actually that point, i think, is a valid one, right. When you have zero percent interest rates and basically free costs of capital, you end up having with cold on. The educated speculators are getting involved in any number of asset classes, which means they don't themselves have the unifying credit knowledge to know if they're overpaying.

Speaker 3:

Yes, and who would think that it's the original capital would be a speculator. speculator, the guy that you know, that the worn out jeans plumber by day and speculating on some homes by night. All of a sudden, your pension fund, your retirement, is out there trying to do the same thing from behind. Yeah, that's a recipe from the master.

Speaker 2:

There's the argument also, though, that the reality is a lot of these institutions they may have overpaid, they may not know all these nuances, but they have a still a shit ton of cash right That it's hard to sort of get on mass distressed valuations in commercial real estate because there's so much sort of itchy money that can be deployed. Do you think there's any merit to that idea that you know that provides a buffer?

Speaker 3:

Absolutely none. Try having the solution in the faxhole right. Is that who you want to send you? The first guy to raise his hands, raise the white flag and say I surrender. So may ask the chief. I don't buy it. And besides the point you know it's funny they're liking lots of capital to dry powder. You know what happens in the storm with dry powder. It's a nerve.

Speaker 2:

Right, and it's where I'm trying to go with on this.

Speaker 2:

Okay so now, okay, so you're broadly negative, bearish. There's always sort of the question of timing. Yeah, on the one hand you can argue that it's going to be a prolonged process of pain and being a headwind. On the other hand you know, you never know it can become maybe systemic situation where suddenly it's the full premiums in bonds, it's really spikes. Which do you think is the more likely past? sort of a slow, steady, frustrating, painful path or more of a kind of shocking event like what we saw in the GFC, for example?

Speaker 3:

So it's hard to come Okay. so it depends from what perspective you're asking. if you're asking from a perspective of institutional capital and what's going to happen on that front, i think we're going to see a massive decrease of potential elevation of commercial real estate And I think that will happen in a swell. I think that'll happen pretty quickly. I don't think that it's going to affect the total system very quickly because it's a couple of degrees. there's a couple of degrees separation from losses that they'll realize, you know, practically within a balance sheet and what will, and the actual issues at the property level.

Speaker 3:

What I mean by that is we'll start seeing first some issues on the on the balance sheet side and issues on the PNL side and that'll trickle, and slowly, as these losses are realized, and then I think finally there'll be a ground swell of that that's that'll hit the market. that's from institutional capital and from other capital that have had aggressive performance and aggressive business plans And that I think will come in a big and you know it'll, you know pile one on top of the other. So I do think that's going to be that that'll happen quickly, but the effect to the system I think will happen slowly. I'm just foreseeing, just if I would to guess that the assets will come after the effects to the system, because no one wants to spell out quickly enough, so to speak, before they're forced to, so to speak.

Speaker 2:

Right goes back to that line I used when it comes to housing, that if you want to solve the housing shortage, a little bit of fear will do that, because it would unleash some of these secondary and third homes that are just sitting there and not getting rental income. I assume it's a similar dynamic with commercial real estate, but with in-commercial real estate there's all kinds of other nuances. Right, there's the office side, there's the retail side. Maybe to the audience, some of the different parts of the commercial real estate market that you think are going to play out.

Speaker 3:

So I think commercial real estate, generally in the built asset, is facing headwinds like never before, and the reason for that is because, to fault number one, it's technology the overarching reason, but some of that. There's two issues with it. Issue number one technology moves so quickly and it's very easy to iterate a website, right, you just take it down, update a page, do what you need to do, and I think when it comes to a building, i know when it comes to a building you can't do that, number one. Number two the second thing is because of technology. It was never a period historically where you could do things without being somewhere, right, if you want to work, where you're going to meet somebody right Now, you can shoot them off an email. Or, yes, there was a phone call previously, it was not the same thing, right, but you shoot them off email like it was Zoom. So, for those two reasons the cost of building a property and the fact that you can't iterate it easily, and because, hey, your commercial real estate is a reactive type business where you react to what your tenants want. However, the problem being that you are reacting to what your tenants want is only good so long as they want you as a baseline and then you need to modify it for them. Those are the two challenges, and I think that's generally the biggest issue in commercial real estate right now. Now you can't live without it, because even the data needs a data form right. It's a certain form right, so you really need to have things somewhere. The cloud isn't some abstract thing of rain up. When you look up, it's actually a server form somewhere, like I said. So that's it.

Speaker 3:

Now, with the Pick-A-Bart, the asset classes, let's talk about multifamily. Multifamily is unique in that everyone still needs a place to live, but historically it's well. Multifamily is the most prevalent asset class because everyone needs a home. You don't need a place to live. For that reason it's considered a very safe investment but sometimes goes over to rails. With regards to supply, people keep on developing it and with regards to values, as a result of increase in rents, increase in demand, and that's compounded even now. With regards to demand, with some of the here-B and B stuff which we'll talk about. Hospitality had that effect, hospitality. But that increases the price for these homes because people now can buy a second home, not for vacation purposes but rather for business purposes. So I think multifamily is its own animal. It's the safest of investments but also the one that could have the most speculation as a result, because people have them field and heritage security.

Speaker 3:

When we're dealing with hospitality, it's okay to have that for a second I like to say we don't live, we don't sorry, we don't travel, work or by the way we used to, so let's just go through those right. We talk about. Hospitality has its challenges because now they lose to here-B and B as competitors. I think hospitality, on the hand, does have the benefit of being a business that has big money behind it, and if they were to get better at their hospitality here quotes, then I think it could be with here-B and B, but I don't know necessarily that they want to do it. And that goes to the iterative issue with regards to modifying a lot of these hotels. They have the set types of concepts to use and that becomes a challenge. Then, if we go to the work side of it, the work side of it is a big one because the work side of it is something trend. That's not a trend that happened over time. It's not something that people over time say, well, we're gonna make a decision and we're gonna go from being someone that worked in the office to someone that worked at home. No, it happened abruptly, it literally happened overnight And, as a result, you now need to adapt to that, going from zero, from 100 to zero and now zero back up to something, and that something is the question.

Speaker 3:

Now here's an important point to know about Office and very important point to know about Office. They talk about Office declining by 30%, office declining by 40% Office. They don't know what they're talking about because no one knows. But here's the way you should think about it. If your market, if your office rents are $16, the footer costs $20 a foot to operate it, which means you're not playing with $60 a foot in rent, and if rents are down 10%, then your value is down by 10%. No, you only have the incremental difference of $40. If your rent is down by $6, it's six out of the 40, not six out of the 60. So occupancy hits in a very big way because traffic tax is a static they don't go with currency. Insurance is static for the most part, even could go up if it's vacant and all these issues. So let's talk about these values. Declines We're going to see massive declines. As a matter of fact, we're going to see less declines in values on an incremental basis as much as we'll see some assets go to zero and other assets even maybe even rise. So there's going to be this great bifurcation and that's going to be tied directly into experience and technology and how you're able to adapt to it and how you're able to deal with some of the issues I mentioned before. So that's all. Just that's worked. If we were to go through.

Speaker 3:

Now move on to retail and industrial, because that's the. We don't shop that way, right? So retail and industrial has been dealing with this crazy trend where they introduced e-commerce and I'll say this out loud to a very large crowd and I've said it multiple times and they're going to be shocked, they're going to be engaged, they're going to want to pass out, but e-commerce is not a profitable venture. Period in the sentence. I don't care what you're going to say. You're going to bring me edge cases and tell me e-commerce is not a profitable venture. Add e-commerce to any retail business. You can't live with the e-commerce without it, because if you don't have e-commerce, your customers don't get what they want, but if you do have e-commerce, it drops your profitability. So the pure play.

Speaker 3:

E-commerce companies are in issues. Now let's analyze retail and let's analyze e-commerce right. And let's analyze industrial. On the retail front, stores don't need to be as big as they were before. Your stores need to be differentiated because you have more competition online from e-commerce as well. Now you're going to tell me Amazon, the Amazon, the Amazon, it's all that you want to make a lot of money. That I saw online. They're not going to have businesses, they're not storing your profitability. Yes, so what I was saying was on the problem with retail. I'm going to try to make this very quick to trust in sweet and quits. The problem with retail is that retail has to have an event in the face of the headwinds of e-commerce, which is not a profitable business, and the problem with industrial is that it's a rising tide as a result of e-commerce, which is not a profitable business. That's offset one against the other. So, all in all, i think there needs to be innovation around how commercial real estate a physical asset that's very expensive to iterate interacts with the new technology.

Speaker 2:

And it doesn't seem real, like you think, that there's necessarily enough distress because pricing is not updated in real time in the office side of things to make it really worthwhile for interest to start swooping in and buying cheap assets.

Speaker 3:

Then to the first part of what you said. I don't think there's enough distress because pricing isn't adjusted, but the reason pricing is adjusted because the commercial real estate leases are not day by day. Hotel is day by day, residential is year by year, multifamily is year by year, but in commercial real estate it's multi-year. And if you look at leasing volume, what's going on, especially in the office side, it's an issue. And I think there's also the separate issue that a lot of lenders you have to understand. Commercial real estate lending is a business where the few that make the loans take out themselves. So it's also something that, as long as they can keep it up and running and propped up, they're going to do what they can.

Speaker 2:

Since you had mentioned the Airbnb briefly there I want to get your thoughts on, just in general, how Airbnb has changed the structure of market dynamics of housing and inventory. I keep going back to I get it folks, a lot of Airbnb's are areas that most people maybe normally have a primary residence, but the reality is, by some estimates, there's like 10 million second homes, many of which are used as rental properties by people that are not real estate moguls right And have basically now have a liability if they don't get enough rental income, which means you can have the inventory shortage problem resolved very quickly with just some marginal players sell some of their concentrated real estate holdings So long set up there. but what are your thoughts on the nature of the housing market with Airbnb and if things really do get out of hand with commercial real estate, presumably there's going to be all kinds of knock on effects on housing.

Speaker 3:

Well, i think the first issue you have is on lenders. It's professionally capitalists. I don't care for the full capital, i don't know Anchorage, alaska, the full time is in Miami, florida. I mean that's the first issue. If you got to the second thing you say with regards to inventory, i mean people flock to it is homes, people flock to it is infrastructure, and if you're adding on Airbnb infrastructure as a result, then yeah, people will ultimately take there. And if people don't take there, it does actually have. If I have my investment just separately not talking the inventory, but separately back, using the debt point that I made, the equity if I have my money tied up in investments in Airbnb, i can't lease it up anymore And I could take it right now, like I've seen this with people that have, at least you know, like months in advance, don't have at least don't have sorry reservations then that's going to affect your cashlist and have a ripple effect on the economy.

Speaker 3:

Now here's the thing no one single thing will take down the economy, but all these various pieces, Okay, the reality is what is concentrated in real estate, right, real estate is one of the biggest sources of wealth in this country And I think, with you know, those things all add to a perfect storm and you see everything going on. So here's the thing that I think people don't realize and I hate to be a beer on this, but after periods of massive expansion always come, contraction is just the way it is And everything's been expanding for a very long time and trun some inflation, another crap for the while inflation, but over, you know, hyperinflation, all that stuff, you're going to have real issues moving forward And then if you add in another component, then we think well, in history it doesn't repeat itself, but it certainly looks the same or rhymes. I think it's Mark Twain, something I'm probably bastardizing as well. But essentially, if you look at the fact that people's balance sheets are the source of their wealth, you know the VC side of things. You have so many unprofitable startups that are dying at crazy numbers And that's adding wealth to so many doctors and lawyers that the part time invested in stuff.

Speaker 3:

The concept of dumb LP money used to be. Those guys were just in commercial real estate and 1031 funds. Now they're just a guy that invested with some person that would go on to produce a video and some people would have a nice return with and everybody would flock to them. There's so much exposure right now, not only in traditional level but also on the personal level, and I think you know with time that's going to really affect who's going to bring down. I mean, i don't even know what that means, but is it going to affect in a big way no-transcript.

Speaker 2:

I got a super slow mode, that just giving your business model. You know, maybe and it's okay to say this maybe you're a little bit biased in terms of wanting to see distress right, because, yeah, you can make a lot of money and that's kind of where you focus your efforts. And, by the way, i have a bias too. I actually want to see distress too, because that's kind of what risk on, risk off is ultimately about. What kind of timeline would you put towards? you know, kind of maxed the stress? I mean, people have been talking about commercial real estate for a while but, as I always say, path matters more than predictions. Things might be building, but when do you get super excited?

Speaker 3:

So I'm super excited now to be honest with you. But here's the thing. First off, i am biased towards distress and yes, but it's not just that. I'm looking for the ability to buy cheap because it can ultimately make the values out. I've been uncomfortable with the values for a bit and I've been looking to buy things at the right price.

Speaker 3:

Now, the way I analyze investments is not by comparable sales, which a lot of people do say hey, so what's up with this? It's great to go. Right, i don't look and saying the market, i literally pull apart the financials on an asset by asset basis. Right, i'm really an asset by guy. First and foremost, i'm not a trader. At heart, i'm an asset by guy, by artist. So I'm seeing deals that year that I can buy at good prices based on sustainable rents and sustainable expenses. Right, that's how I look at them, saying hey, if I had to lease this up, i give myself enough time for downtime and enough time for costs. But if I had to lease this thing up, what could I do in it? And I'm not going to lever that up too much beyond what I think I'll take to execute the business once. So I think that's a different perspective than many others have. I don't know when it's going to hit, but I'll tell you this I hope to God it doesn't fall apart, because then I have zero liquidity to buy my stuff right, and then it's like I have to buy all cash and I have to really buy investment every step of the way. It's a real headache, and you know what Business is an headache? right, it's not easy. It's not meant to be easy. It's easy. I want to try to do it. Everyone does, but everyone would do it right. So I hope it doesn't fall apart. I'm actually happy where it is right now. I'm glad for it to go down a bit more.

Speaker 3:

The only reason I wanted to really tank a little more than we were in Israel right now is because I think a lot of people haven't gotten the bullishness knocked out of the system yet. You have a lot of Johnny come lately with the stress cycle that think, oh, everything's great, right, you know? you see some guys that have made a crap load of money. They've bought assets I never touched And they're all excited Real estate's amazing, Real estate's great. I mean, you get also the. That's what I'm talking about. By the way, the guys that Instagram I forget about those guys that used to be advertising. You know they're. Hey, you can buy house for no money to happen. You can buy stem and houses and just keep on levering it up and make the credit cards and put everything like on a personal guarantee type loan, right. Or let's just go for you owning a two family after developing 17 units. Like I said, I'm excited now. I think there's opportunity. I think it will tank a little more. I don't want it to completely fall off a cliff because then we have zero liquidity and it really is not going to do something to deal with me.

Speaker 3:

Okay, so my first thing, with my first thing I would say is that if you're investing commercial real estate, do it as an investment. Don't do it as a business, right. Unless you're an expert at commercial real estate investing, you want this to be a side gig. You don't want it to be a primary thing, because then you know deals sometimes take some time to pay out. You know you're not going to make money, right, you're not going to make money for a bit potentially, or not make serious money. You can live on December 1. But you mentioned you're going to have this business. That's great. What I would do is I would do a one year lease. I think rents are going up, so I would do a short term lease and then see what happens from there To get into commercial real estate as investor, as somebody that wants their own property to rent it out.

Speaker 3:

Don't do it now. Don't, as a newbie, do not do it. You need to be skilled in the arts, so to speak. Right, you have sharks swirling all around. You will be taken for everything you got. But on the flip side, if you want to invest, partner up with someone that's experienced. Partner up with someone that is experiencing commercial real estate and has a lot of and understands what's going on.

Speaker 3:

Now, as a user, i'm differentiating a user from an investor, and a user doesn't be the cat rent out some use-base, but that's not the primary mission. As a user, there will be no better time to buy than now. Don't jump the gun. Wait until you see the white in their eyes And you know you'll know it when you see it. They'll get too excited too early And you're going to have to buy, likely all cash, and then, once you're in it, and once you're in it enough, maybe as a user or maybe as your partner with someone else. You know you'd be the money, they should be the expertise, but you micromanage the situation and ask as much questions as they can. Once you're in it, give yourself a year and a half from yours in the cycle. We'll see what the traps are and see what's going on. We'll count, see if we can make them up. I think we're headed into the biggest transplants of wealth we've seen since the days at RTC.

Speaker 2:

That's a big statement, given that we already had a tremendous transfer of wealth post COVID already. It's like I put out that tweet before. Whatever, the very wealthy got rich about 2.1 trillion. Everyone else got fucked with inflation. I mean, i thought about transfer of wealth. It's already happened, but, as we know, these things keep on getting worse and worse.

Speaker 3:

Well, actually, michael, what I mean by that is zero-sum game. I mean guys that are free, that will go to nothing, and guys that have nothing will be your only. That's what I was saying. Don't buy today unless you want to see the largest decline in your investment in the next couple of years, before it starts picking up. I would tell you, least today, hold on to your cash. If 40, 50 percent down, then you have to know, probably be 70, 80 percent down in a couple of years.

Speaker 3:

So I'll tackle the Blackstone deal first. So first off, trollage is one of the smartest industrial operators out there, beerish on the business, on the asset class, but there are as good an operator as you're going to find. So I'm going to put that out at the start and just, i don't know have any insights what's going on, but I can read that press release. The press release said they bought a full cap and in place and a 5.75 year mark, while their assets to market. I don't think for NADO is marketing their assets to market, i'm sorry, marketing their rents to market. So I think if Renato is a marketing their rents to market, renato is a usual office landlord, then I don't think Trollage should be marketing their rents to market either to justify a deal. So basically they bought a full cap.

Speaker 3:

I've heard theories that it was a defensive move because it's a huge portfolio they were competing with. I've heard a lot of different ideas out there. I don't know the answer, but it is what it is. It works like a duck and talks like a duck, walks like a duck. So at the end of the day it's a duck. They bought a four cap in today's market. I don't know why. So there's likely a reason for that Occam's razor. I'll just vote the fact that it was on some other calculus. I'll use Occam's razor once again to talk about the SL Green Deal And I'll also add the other line, which is never assume your adversary is an idiot. Assume he knows as much as you do. So let's just assume these guys that invested in it are not idiots And they therefore either have a plan that they've bought into that in their mind that weren't investing in. They have some capital consideration and the reason that we're seeing it 4b eb is the conspiracy theory that you anyways exposed to acid.

Speaker 3:

Another way to try to drop up the buttover, or maybe from equity. Maybe they had a piece of bond, they sold out of the bond, that a discount, they sold out of the bond and maybe a profit or, and then they bought into that equity. I don't know what the angle is over there, but it makes sense. So if it doesn't make sense, it's got to be reason we're not considering. Then I'll add two points. Point number one Blackstone seems to be selling stuff. There's no question. I saw news that the Bellagio is down the block, so that usually that news comes right through. Something is a deal, and that's the first thing we need to consider. So if Blackstone is selling, that's great. I don't think we'll see panic. I think that's trying to do it smartly And if you read Stephen Schwartzman's book, you know that when they saw issues before, when they see issues in the market, they start selling out of assets. So that's the first thing I'd say.

Speaker 2:

The second thing I'd say if you want to know that the Bellagio and Blackstone are great, just look at the two transactions they just pulled off, just on the surface, just the kind of mechanics of what you do on the advisory side, maybe just some examples of really interesting clients and deals that you worked on and the ones that surprised you in the way they played out. I've got to assume that what you're doing is very specialized, so you must come across some really specialized situations.

Speaker 3:

Yeah, I'd like to speak more generally about it as well as specific deals, obviously.

Speaker 3:

So I think the first thing that surprised me when I got into this business back in the day is when I dug into financials and operating procedures of real estate investors that I thought were really intellectual and really smart and really great at what they did. I was shocked by how messy the books were. I was particularly shocked by some landlords that when they couldn't track down the lease documents would call the tenants for it, or borrowers that couldn't find the specific loan document would call their lender to send it to them. It's really the facts in the end. So I think that some of those things that shocked me and I'm not here to talk down about commercial real estate owners, i'm just saying next time you see someone who seemed very successful, just understand it's 90% luck and some people that maybe sometimes have some issues it's not because they're negligent. So I think that's an interesting takeaway that I've seen and it sort of informed my work generally, my investment generally, and really need to dig into who you're going into bed with. The photo speak.

Speaker 3:

Another thing that has really perturbed me and been shocking to me is the tribalism between lenders and borrowers. I mean by that is not as to whether a lender could bend over boards to give a borrowers a sweet heart deal. Obviously that should not be the case. That fiduciary. But it shouldn't start off with you're a borrower, make your payment over foreclosing on you. You're a borrower, something happened, it must be your own bed and therefore screw you. The approach is way too aggressive and tends to take the risk out of the lender's decision-making. Hey, that guy's an idiot, that guy's a crook, so we're not gonna give him a deal. So I'm just now going to go with the most harsh scenario I can and go after him and no one can have a second guess it because, look, he screwed up right. So that's another thing that's really been surprising to me and something that I think needs to be addressed, because if you are maximum recovery, you cannot take your best option for a great recovery off the table. Say whatever you want, but the people will chase their investments more than the third party will come in to buy it anew. So I think the tribalism is a massive issue and something that really needs to be addressed, and it's not addressed in any of these companies And the senior guys in the companies don't want to do on a tactical level because they don't want to be seen as pulling favors on specific deals and the you know, therefore, you know leaves and on a strategic level is just if not enough attention paid to it.

Speaker 3:

But I think there will be specific on the CNBS front, because CNBS is finding itself in a bit of a predicament right now because the small borrowers almost never go to the commercial mortgage-backed securities market because of its lack of great customer service, which means that your lender is adversarial to you from the word go. When you want to pull a disbursement of reserves meaning money that a buyer puts up into an account to specific uses, and you want to pull that money, if you're not doing it exactly to the T, they just deny it. A lot of them don't help you with it. A lot of pencil-pushing, sorry, denied, so to speak. I want to say you're applying for a visa there in World War II And I think as a result of some of that, they've ended up not with a bunch of diversified small loans in trust, but rather a bunch of huge loans in trust.

Speaker 3:

And what are those usual times? huge office buildings, these portfolios as well, but then portfolios of multi-family, but obviously they're competing with the GSEs on that. So they end up with a pool of assets that are probably not ideal, and it comes directly from people just not wanting to deal with them. So the only guys that really go to CNBS are guys that ultimately either too big to go to other sources or just catching out. That is really not the best clientele that you want from a borrower perspective.

Speaker 2:

You mentioned the two patents that were filed and obviously went through. What were those patents covering and how involved was that process? I mean, as I understand it, that could take many years to go through the USPTO.

Speaker 3:

Yeah, we saw the process in 2017 and it covers the integration of micro-fulfillments for e-commerce and shopping centers. We're essentially the store has all the product on hand in the on-site micro-fulfillment center and also the fulfillment center with all the products is micro, as a misnomer has significant amount of product. It's closer to the customer as you save on shipping and it basically solves some of the issues on e-commerce and on the retail front. The process is pretty legal process. You come up with a concept. You could explain it all you want, but if it looked like something from a legal perspective to the patent office, then you go back and forth refining what the claims are that you're acting for. So essentially, a patent consists of two components. One is the specification, which is the thesis or the story. The other one is the claims what you specifically asking for. So the thesis could be I want the store to buy milk. The claim could be the buying of milk. The claim is what you're protected against, or you're protected against other people doing, so to speak. So the process could be cumbersome, but I had no choice.

Speaker 3:

I came up with this great idea to combine retail e-commerce and solve the issues of retail e-commerce in a period of time, when everybody thought retail was dead and e-commerce was the way to go. I saw it a little differently. The world was like slowly out of your mind, this won't work. Well, still will tell me. I'm out of my mind. I'll get a counterpoint to that claim. I'll just go and protect myself. I had no choice but to go and do the patents and just building on it. The various companies whether it's Amazon now I think they're going to be using local businesses to deliver or if it's Walmart, fulfilling from store and integrating different components that come pretty close to where we are right now. I think we're in a very good position. The market is coming towards us as opposed to us chasing the market.

Speaker 2:

So, for those that are interested in following a path maybe to yours, or focus on the advisory distress side of real estate, what do they even do? I mean? it sounds like where you are today is a function of a lot of unique aspects of your life, your trajectory, which is not easily taught.

Speaker 3:

Well, the way to do it, i think, is to sort of not have somebody paving an easy path for you. So, every step in my way, i have to fight and claw to find what's my angle going to be. How am I going to differentiate myself and then using what you've learned to come up with a conclusion and believe in that conclusion, not just oh, i'm doubting myself every step of the way. Then now let me go from one thing to another. It also means that if you're in an industry like Israel State and you believe that you know what you're doing, don't leave it when the market changes, because it's an opportunity to go somewhere else. I have a unique career path, but it's not as a result of me doing whatever I can help. It's a result of, quite frankly, just following my conviction, being a real obstinate SOB and having some really amazing people around me. Not people who are, you know, hey, i'm a huge player and I, you know I could open doors for you, you know but people that were foundationally sound, that had good theories about businesses, that were willing to spend the time and indirectly train me. And then the last thing and the most important thing, the most important thing to do is read. Don't read honestly. Don't read about from people's autobiographies. You don't want to read PR. You want to read PR? take a, you know, read MoveWire, you know. You want to read retrospectives on people, right? You want to learn from others that have previously done. Like a classic example.

Speaker 3:

Here I'll give you a classic example of how to chart your own past and I'll tell you how. I didn't mind. Like for me, when I do distressed workouts and I negotiate with lenders, i negotiate for positional weakness In the loan documents. I've given the lender every remedy. They pass through the loans In the loan documents and, sorry, in court the law is shaped by the lenders. The banking lobby created the laws. I am thoroughly screwed.

Speaker 3:

When I start, okay, i read a book called Franklin and Winston, which is the best book about negotiating for weakness. It talks about how FDR basically pitched. I'm sorry how Winston Churchill got FDR and with zero leverage, quite frankly, other than a mutual threat that was less, less threatening to the US at the time got FDR to do what he needed them to do what he needed FDR to do. Right, winston Churchill negotiated for positional weakness and achieved what he had to achieve. That's a lot Like things like that is how I learned. I learned So the career path. Everybody finds their own career path, specifically to commercial real estate. You know in my moment, but for other people the moment was two years ago. So I just think it's just a matter of sticking to your guns, becoming an expert at something and yeah reading.

Speaker 2:

Reading is massively underappreciated. in a world of fine six second videos, tiktok influencers telling you how to leverage up your properties and keep making money, reading good old fashion books is, i think, a lost art. So for those that want to learn more about what you do and some of the things that you provide from a services perspective, aside from Twitter, what do you point people to The best?

Speaker 3:

honestly, the best way is my social media, because websites are stale and you go to my websites terrashradgescom, kcpscom, i mean, those get stale And that's just a whole lot of you know contact info, my experience. You want to read that? that's great. You want to interview me? read my Twitter posts I post every day about my interactions that I have with people. I don't name it, I don't talk about specific deals. For the most part, that's where you want to interview me, that's where you want to learn what it is that you want to do it. So I would just say, if you have any questions around commercial, we'll stay in the stretches, the ME, and I think that's the path and the best way to go about it.

Speaker 2:

Good place to wrap this Twitter space up. I've got another three today in between all the other things that I'm trying to do to get my content schedule all finalized. Everybody, please make sure you follow FOMOChop here and hopefully I'll see you all later. I appreciate you all Well thank you, michael.

Speaker 3:

I really appreciate this opportunity and you're a great interviewer. Thank you, cheers everybody.

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Michael A. Gayed, CFA

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