WS1976 New Investment Strategy For 2024 | Mike Zlotnik

Rising interest rates are shaking up commercial real estate (CRE). Guest host Alina Trigub had the pleasure of speaking to  Mike Zlotnik (TF Management Group), they explored the challenges and strategies needed to thrive in this environment
 

Mike offers insights into the impact of rising interest rates on commercial real estate, urging caution as transactions slow in 2023. With banks reducing loans, there's a shift towards equity investments and alternative financing like mezzanine debt, essential for troubled projects. Investors must assess risks carefully. Heading into 2024, the focus remains on cautious investment, high-rate lending, and the potential for valuable buys later in the year.


Key Takeaways:

• Market cautious in 2023: Fewer deals due to uncertainty.
• Debt down, equity up: Banks are lending less, so explore private credit solutions.
• Rescue capital emerges: Mezzanine financing & preferred equity can save struggling projects. (Investors: Do your due diligence!)
• 2024: Cautious optimism: Expect higher lending rates and opportunities in mezzanine financing.
• Deep value buys possible later in 2024: Attractive for investors seeking value and tax benefits (bonus depreciation).

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Transcript

Mike Zlotnik: And the banks tightened up financing on existing deals, refinancings or new money. So the need for secondary financing, for mass financing, for preferred equity became obvious. So what we are observing today is pretty simple. These higher for longer rates are causing pain in the commercial real estate industry.

: This is your daily real estate syndication show. I'm your host, Whitney Sewell. Thank you for listening to the show. My goal is for you to become a savvy investor by learning from some of the best operators and investors in the business. I'd like to hear from you. If you have questions you'd like us to ask on the show, or if you have someone you would like me to interview, please let us know by emailing info at lifebridgecapital.com. Please leave us a written rating and review. I would be grateful. Do not hesitate to let us know how we can best serve you at LifeBridge Capital. And now for another amazing interview with my friend, Alina Tregub.

Mike Zlotnik: Hello and welcome to our daily syndication show. I'm Alina Tregub, WITNESS co-host. Today we have our repeat guest, Mike Zlatnik. Mike, welcome to the show.

Mike Zlotnik: Thank you, Alina, very much for having me.

Alina Trigub: Absolutely. Mike is CEO of TF Management Group. He's been a fund manager for over a decade now. He's actually a retired software executive who began investing over 20 years ago and has been very successful. He runs a very successful a private equity company and is very knowledgeable not only in real estate but also on topic of economics. He plays chess and has many other very diverse interests. So since Mike is a repeat guest, we're not going to go back to his bio. Please refer to the prior podcast to read the detailed biography of Mike, but we'll dive right into the questions today. So Mike, obviously 2023 has been an interesting year for many investors. I'm sure that includes your company. Can you share with our audience what kind of strategy did you implement in 2023 in terms of investing? And then how does that strategy change now in 2024?

Mike Zlotnik: Thank you, Alina, for the kind introduction and we'll skip the pleasantries. 2023, the overall strategy was sit on your hands. I don't know how else to put it. It's a very slow year because the market was shifting and let's just call it blame the Fed or thank the Fed. but they withdrew fast and furious the drug called Zerb Zero Interest Rate Policy, took out the low interest rate, put us in an environment where a lot of uncertainty was the norm. So this uncertainty created difficulty in doing deals. So 23 was a year of a massive drop in the transaction volume. So as an investor, as a fund manager, we were very careful. We did really only one significant investment throughout the whole year, while other years we would have done four or five. and as well as invested passively. So it's a slow capital raising year, slow deployment year, just watch and see what happens and prepare. That was the kind of short summary of what happened in 2023. With interest rates rising, the general shift was from looking into equity into looking into debt. that was written in kind of on the wall. As interest rates rise, and I'll just have one more point. On my podcast, I just had a brilliant guest. And one of the very interesting observations that she made, again, being an expert, that the increasing interest rates have been tightening credits. So banks have been lending less and less and less. Lower LTV, fewer dollars, higher interest rates. All that has been happening. But what's the side effect? The side effect is the bank liquidity dried up and then Fed withdrew massive amount of liquidity out of the system, which flows through banks. The alternative became private credit. So we saw pickup in activity in more lending at a high interest rates. So it's a substitution effect, but where the equity was less attractive, the debt became more attractive.

Alina Trigub: So with that gradual shift, how is your strategy changing or has changed already for 2024?

Mike Zlotnik: Well, it's a continuation of 23, right? That fees is continued. So one thing we did on our lending side, where we loaned the money and firstly loan kind of hard money loans, we increased the lending rate, which is pretty basic. Similarly, we saw a significant amount of opportunities open up. in the mass financing was secondary loan or similar, where the interest rates have gone up and enabled us to charge higher rates of return. And the borrowers had to pay higher rates of return for the liquidity needed because liquidity became difficult to drive from the banking system. And the banks tightened up financing on existing deals, refinancings or new money. So the need for secondary financing, for mass financing, for preferred equity became obvious. So what we are observing today is pretty simple. These higher for longer rates are causing pain in the commercial real estate industry. It's causing pain a few ways. Number one, it's causing pain from the floating rate debt mortgages. The loans that were taken out, even with a rate cap, the point where interest rates were low, now the rate caps are expiring or the rate caps didn't even exist. So these higher rates just causing more and more pressure on many sponsors and operators. And we invested in a number of these projects. And the consequence is you start seeing the pressure accumulating. It's not the fact that the rates gone up. It's how high they stay and how long. Because they're staying higher for longer, we're seeing liquidity drying on all these projects. Capital that was set aside to do renovations. Capital that was set aside for other things. is servicing the debt. So liquidity is what's causing problems and even worthy projects with strong sponsors and operators, if they don't raise liquidity, they're going to run out of cash. And that's creating an opportunity for mass financing or preferred equity or additional capital that comes in what I call them in a LIFO, last in first out type of a format, other than the primary debt. That money is what's going to rescue these projects, but it needs to be senior to previously raised capital. So it's a fresh, I don't know what you call it. Some call it rescue capital. Some folks call it continuation, but it needs to be there. Without it, a lot of projects just run out of cash, whether they're good or bad.

Alina Trigub: Yeah. So Mike, you brought a couple of points that I want to discuss and kind of unpack for our audience. since this so-called rescue capital, which essentially it is, how does that impact the existing investors in a deal?

Mike Zlotnik: Lena, it's a great question. It's not a happy question for existing investors. We've heard this question many, many times. It's a, to existing investors, the best way to describe it, they're sitting on thin ice. And if they don't get rescue capital, mass financing, or additional capital, that ice will sooner or later crack. And they're going to fall and the investment is going to sink. So how it impacts them, it dilutes them. It pushes their capital back on a capital stack. So when the new capital comes in, may it be in the form of MES debt, MES equity, preferred equity, anything you want to call it. It becomes senior on a capital stack to the previously invested capital. The only thing that's senior to this rescue capital is typically first in mortgage. The first in mortgage doesn't get subordinated, they're obviously in first position. If the borrower can't pay, typically the first in lender takes the asset. So it's not a fun position to be in, but it is a necessary medicine. Without that, the patient is sick and getting sicker.

Alina Trigub: So it's more or less a temporary injection that will allow the patient not get sick for whatever duration that injection can last him for, essentially, if I were to use medical terms.

Mike Zlotnik: Yeah, and I'm not a doctor, but it is a critical medicine that will give the patients time to recover. It's almost like the medicine that might feel painful, that might have additional cost to the project and dilutionary effects. But what it does, it gives the projects liquidity to do a few things. Number one, can actually pay the first mortgage, service the debt. Sometimes you can even negotiate some level of forbearance and say, hey, what if we bring new capital to the deal? Can you give us some forbearance, defer some interest? So ability to bring fresh capital gives the sponsor some negotiation leverage, may give the sponsor some negotiation leverage with first lien lender. Even if they don't, even if the first lien lender just wants to get paid, additional capital puts them in a safer position. And usually it may mean an extension, might mean some other cooperation from a first lien lender. Second thing, besides keeping the first lien loan afloat, provides additional capital for construction. A number of these projects have experienced COVID inflation, costs have gone up, and if they don't have that budgeted, then they are over the cost, and they're short to complete their business plan. So the liquidity comes in, gives the first afloat, provides critically needed capital to complete renovations. How does it help existing investors? It helps if you have a renovated unit, which you can't really lease, so you're leasing at a low rate, versus when you renovate the unit, you can actually lease at a higher price. So it helps execute business plan. Next, what it does, it also can solve some of the past bills. What I've seen under the stress conditions, taxes could be delayed, insurance could be somewhat, well insurance usually is a must, but you could fall behind on taxes, you could fall behind on payables. If you have a project and you have some payables due, the vendors don't want to service the property because the payables are not paid. So it's a combination of all the required, let's just call them sources and uses, that set the money aside to bring the property current, to give it liquidity to execute the business plan plus budget enough payments until the property gets to a breakeven point. That's the time, that's how you rescue the patient, because the patient is bleeding. The breakeven point is a critical point in the future, but how do you get there? And how do you get there? You need to have enough budget to have the cash to get to a breakeven point. If you can't get to a breakeven point, and by the way, the breakeven point, it has to include keeping the first afloat, of course. And the break-even point will change if you can refi, but you can't refi until you stabilize. It's kind of the chicken and the egg problem, right? If you don't get the stabilization, you can't refi, you're forced to borrow at a bridge loan type of a cost of money, versus if you stabilize the property, now agency debt becomes available or similar, and you can lower the cost of money significantly, and then that lowers the break-even point.

Alina Trigub: Yes and no. I mean, we're in a higher rate environment, so not necessarily you'll be able to lower it in the first place, but… So bridge that, using an example, right? Only if you're talking about bridge that.

Mike Zlotnik: Yeah, in that case… Bridge the permanent. What I'm saying is you would bridge the permanent, which lowers the rate by a significant amount.

Alina Trigub: That's fair. Okay. But let's go back to rescue capital and look at it from two different positions. Let's first look at it from the principal position, the sponsor. How does the sponsor decide whether to make a capital call to existing investors or call a fresh capital from outside? What's the determining factor for them?

Mike Zlotnik: So that's a brilliant question. Really, I have to say that because the first response make the capital call, good luck, and see what happens. And we've seen this rodeo before. So what happens is when the sponsors, operators, start seeing liquidity crisis pressure, what do they do? For a while, they can float liquidity, and then they say, well, I've financed the project, I've supported the project long enough, now I can't get it done without investors writing additional checks. So they can try a capital call. And I have seen the compliance to be pretty weak. So, and I may be wrong on some projects that might make sense, but a lot of projects it does not make sense. So, I've seen capital calls that, well, we're just bridging the liquidity for three months. Well, I would put in good money after three, bad money. Three months later, you still have a problem because you're not thinking comprehensively. You're thinking for three months time horizon, we need to be thinking a year and a half or two years. So the capital call scenarios will vary. And of course, it becomes a conversation between the sponsor and investors. and explaining to them the purpose of the capital call. And then the big question, what happens is if 50% of investors write a check and 50% say, I'm sorry, I'm not able or unwilling. Two possibilities. Unable means I give you IRA money I don't have anymore in the IRA account. Unwilling simply means I just don't believe that this money will actually get the project to the finish line. So the unable or unwilling becomes a significant conversation. And then folks also, this is my observation, instead of looking at how much capital you need, planning out to get to the finish line, then multiplying that by 50%, increasing it, Why? Because whatever you think you need as a sponsor and operator, you are thinking optimistically. Most sponsors and operators are optimists. The reality is going to be harsher and tougher. So the budget has to be increased. and then whatever you raise from the investors, and then you're short, you still have a problem, maybe a little bit smaller. But how do you do it fairly between the old investors and new investors? Think of it this way. You raise the money to a capital call. That money went to the back of the capital stack, right? Now you're going to new investors, and the old people are going to say, wait a minute. My money is now sitting in a capital call where you're raising the fresh money in the man's debt. It's not fair to the old money. That's why, in my view, You give the opportunity to existing investors the same way you would give an opportunity to new people. In fact, you give them the priority. But you as an existing investor have an opportunity to participate in something that's coming in ahead of the previous capital. And if you don't participate, somebody else will step into your shoes.

Alina Trigub: Excellent. That's a great point, Mike. And now let's look at this from the investor's standpoint. So they received this offering, which is a mezzanine. Let's not go into debt or equity for now, but let's just say it's a secondary loan. it has behind it, whether it's debt or equity, regardless for this question. But how does investor existing when you approach this, let's say it's an existing investor, how do they approach it and how do they make determination whether it's a realistic investment for them to make? In other words, whether it still makes sense to inject additional capital in addition to their original capital into this deal?

Mike Zlotnik: Another great question. The answer is, got a review on the writing. At the end of the day, there are projects that are, let's just call them worthy or the projects that are not worthy. And you can't tell the difference. We've seen sponsors who are desperate to rescue every project that they have or they are struggling to be not biased, to differentiate. So as fresh capital gets raised, it needs to be reviewed and underwritten whether it actually makes sense. Is it good money after bad money? Or is it good money that feels pretty strong to get the project to the finish line and the chances of recovery are pretty healthy? So I'll give you an example. So we're not talking about completely theoretical numbers. So we just did for a project that we funded in June of 2000, right after COVID, called Riverbend Apartments in Indianapolis. And that project has done well. It has executed its entire value-add plan. All the apartments have been renovated, but the leasing has been a little bit slower, and it's a big property. So it's sitting at 80% occupancy, and it needed liquidity to get to 90, 95, so it becomes eligible to refinance. And on a capital stack, it's, let's just call it first lien mortgage, or it's the senior money is about $117 million between, the first is broken into two components, but I'm not going to spend time on this. Imagine the senior is $117 million. And then the mass debt that gets the project to the finish line is $7 million. So all in at $124. And the as-is value of the property, if you look at this today, not as stabilized, is about $160 million. If you have enough equity and you feel comfortable reviewing the project, that between the last dollar, $124, $125, and $160, if there's a significant margin of safety, then that investment appears to be attractive. And just so folks understand how attractive it is to fresh money. So even though on an LTV basis, it's only about 75%, but we charge the borrower 20% annual rate with 11% current pay, 9% deferred and charging two points and ask for a small equity kick, a small piece of the promo. So what this is, is it feels expensive, but at the same time, there are no cheap money available. So to the sponsor, it's a necessary evil. And the best way to think about this, you borrow $7 million at 20% per year, right? That's 1.4 million per year. Say it takes you two years, that's 2.8 million. That's the cost of money. You have some points, you have $3 million. Long story short, right? But what's the upside? The upside is that if the project is sold today, it's $160 million sale price and better environment. two years from now it could sell what is projected 185. So you're increasing the value by 15 million at a cost of three million dollars. Does that make sense? The trade-off feels healthy enough.

Alina Trigub: Absolutely, thank you Mike for that. So in addition to the value of the property be significantly higher or the loan and the equity of the existing investors representing up to 70 to 75% of the total project value. Are there any other potential red flags that passive investors can see when they're deciding whether to invest in this rescue capital or secondary loan, whatever it is?

Mike Zlotnik: Sure, well, it's comprehensive underwriting. There isn't going to be a simple answer to this. So you have to look at, obviously, as is value or a stabilized value. One of the important points on the properties that are closed to stabilization, that that difference is going to be small. The renovations have been done, they're just leasing up, but the heavy lifts have been changed. On the projects that still need to do a lot of work, That's a big variable. So you could have an as-is value versus a stabilized significant difference. So you're putting in money into an as-is asset. Will the business plan be executed and executed well? So from an underwriting perspective, what you're trying to assess is, does future value look realistic? one gigantic uncertainty in today's environment. What are the cap rates going to look like in two years from now? So we know the interest rates are higher today. If you do the math based on the current interest rates, you would assume the cap rates are higher. If you do the math based on future value, where the forward interest rate curve says interest rates should come down, and we know the Fed will ease, we just don't know when and how fast. But over time, the interest rates come down, So should the cap rates. So today you could look at this project and say the math is tough. If I have to run the math at six cap rate, but in two years from now, if I apply five and a half, just that half a percent difference could be big enough to figure out the future value. So it's important to underwrite, and obviously you want to look at a conservative case scenario, but you also have to be realistic. Because if you look at an ultra-conservative case scenario, you may be at a non-starter. You're going to say, well, I want to use 7-cap today. And at 7-cap today, the math doesn't work. So at 6, maybe it works. At 5.5, it'll work really well. So that's the point. You have to look at valuations both conservatively and realistically. Now you're asking me about other factors. There are many other factors because this is the whole exercise is just to go underwrite these deals. Execution of the value-added strategy. What's the capacity of the sponsor? Have they been able to execute in the past? Do they have the crews? Do they have the materials? How have they done? If the sponsor has struggled in the past and they're still struggling, That's a consideration. So the money doesn't solve the problem itself. It's also your confidence with a sponsor or operator, how they can do it. But there are many other variables on top of that. Next variable, right, is going to be rents. So we're going into recession, potentially, right? Recession is on the horizon, whatever that means. So you got to look at the rents objectively. And I've seen performers, people come up with these performer rents, and they think they can push the rents to a certain level. Then they realize they can't evict the people in a given area. So you really have to look where the property is located. I just had a call, I just had a discussion at the mastermind with an operator who does Atlanta. And they said properties in certain counties are so difficult to evict. Yes, theoretically, post-renovation rent is here, but you can't get the people out, it's so difficult. So you really have to look at the business environment, where the property is at, all the challenges that have been discovered, and draw proper conclusions. So the underwriting process for mass debt is difficult as if, it's almost like this. Imagine you're writing fresh equity. Would you write a fresh check today at a lower valuation? So an example is like this. This property, Riverbend, I just gave you an example. Would you write a $7 million check into a property that is worth fresh equity at the current valuation? And if you can come to the conclusion, because mass equity might wind up being the defacto equity if the property value drops. So the property of a value drop from 160 to, I don't know, 130. then that would be the equity. So you need to go through the mechanics of underwriting. In addition, now you're stepping in with fresh dollars. You need to have more control provisions. In the past, investors wrote LP checks, sponsored, do whatever they want, just give me the return. Today, you want to have the right to force the property on sale. Sometimes you may require to be able to take over the project, which is not easy to do. And many sponsors will not allow this. And the first thing lenders will not allow the mass financer to be able to take over a sponsor. But can you built in a forced sale clause if the property is not doing what it's supposed to? So all those provisions make a difference as part of the whole exercise of underwriting mass debt.

Alina Trigub: Excellent. Good points, Mike. Thank you for that. So, by the way, the mere fact that you said that rents are hyperlocal, that applies to the cap rates as well. They're also hyperlocal and where 7% works, only 5.5% may work and so forth. You and I both know, being in a a low cap environment living in New York, New Jersey area that has an extremely tight cap rate. But anyway, so going back to the mass debt and looking at it from the sponsor perspective, how does one decide what structure is appropriate, whether to make it an equity or a debt, or maybe a combination of the two?

Mike Zlotnik: It's another great question. It's a conversation, right? So you are approaching as a sponsor, you're approaching sources of capital organizations. Ideally, you want to go within your existing relationships. So folks that help you raise equity capital, can they help you raise that capital today? And the discussion becomes, what is acceptable to the first lien lender too. So you really have to understand your capital stack, your existing loans, what is possible, what's acceptable. So mechanically, under some circumstances, the first lien lender may say, absolutely, under no circumstances, you can't borrow a dollar. You just cannot. If you do, you blow up provisions. But even blowing up those provisions, will the first lien lender force foreclosure if they're getting paid? Highly unlikely. In today's environments, the banks are actually happy to be paid. So it's kind of like this, you need to understand the legal documents of what you got in your hands, right? Second, you got to approach people who can provide either mass debt or mass equity. and then work with them to negotiate the terms and then figure out what will work for the project. It's not a binary type of environment. It's more of a, if the capital is needed, if the project is worthy, then you discuss with the sources of capital, what kind of capital and what the terms and how it needs to be structured so it works within the existing current first lien, And then in addition, obviously, you really have to disclose to your current investors. So this is not an easy conversation. It's a conversation where, as a sponsor, you have to deliver the news to your investors and say, we've got a little problem here. We're running out of cash. We just cannot… If they try capital call, they could say, hey, we raised 30% of the capital call. If they didn't try capital call, they could say, we don't believe capital call is going to work, but we believe this mass round will help. So in the mass round, we are structuring like this. you as an existing investor, you get, let's just call them first right of refusal, or first dips, or first opportunity to participate. And whatever we can raise from you folks, we will go to the external sources. And you can have those conversations in parallel, so that existing investors feel like they have a chance to participate in this round, and you're not putting them under the bus. But at the same time, if they choose not to, then you don't have a choice but to go to alternative sources. And having some more of your existing investors ready to write a check into the deal might reinforce and strengthen your case to get external capital.

Alina Trigub: Awesome. Thank you for that, Mike. So it sounds like the mass position or rescue capital is one of your primary strategies for this year. Are there any strategies that you're implementing in 2024?

Mike Zlotnik: Sure. So the hope and the desire is to buy deep and go back into equity, maybe later part of the year. So why that? A lot of our investors are real estate professionals. And I just came from a mastermind from the CG mastermind. And many people still knock on my door and say, hey, Mike, I need the bonus depreciation. And I hear the Congress will extend bonus depreciation and Wonderful. Yes. So we would love to do those deals, but a later part of the year when it's a deep buy. Today's environment, if you're not getting a deep buy, it's very difficult to raise equity capital. You really have to build a case. So it's a hard case for mass debt, but you're coming in in between and you have some equity behind you. It gets super hard if you have to raise fresh dollars. So you can do that. And at the moment, we don't have anything immediately knocking on our door with a phenomenal deal. But we hope and expect that some deals later part of the year will be deep buys where there's two possibilities of a deep buy. One, let's just call it bank takes the asset. So an asset where the property just underperforming, the debt service, the out of liquidity, the value of the property dropped below the bank loan. That's the best way to describe it. It was very close and the borrower is just walking away. At that point, it's either foreclosure or cooperative transfer of the title to the bank. And then the bank wants to get rid of that asset of the books and they're willing to take a haircut. Alternatives to that, some kind of equivalent of a potential short sale, which is not necessarily happening today at all. The banks are very, what's the word for it? They don't want to take a big haircut. They're not prepared for this yet. The pain has not built up. So as time passes, more of this pain will accumulate. Then you're going to see more of either commercial short sale, which is not very, very common. But if the bank is given an option, listen, you're owed $10 million. You've got to take eight to get the deal done. It's a harsh choice. They may agree. Alternative to that, you take the asset. Now you're operating the asset. It's bleeding. You may even take less than eight. You may wind up taking seven. So that's the deep buy scenario where, but it has to be like this. Otherwise, I'll give you one example. I've seen some of these transactions that have come through the pipeline where the buyers buying subject to the existing loan. An existing loan has three more years of fixed low interest rate. Well, that's wonderful, but the problem is it's not deep enough discount. Typically, the seller is selling you the asset. with a great existing loan. It's not a shortcut on a loan. It's not a haircut, not a short sale on a loan, number one. Number two, it's probably giving the buyer the confidence to buy. The problem is, is they're not getting deep enough discount. That's my two cents. So we'd love to see these deep buys when they happen, but they're not yet happened.

Alina Trigub: Got it. And that's primarily for the bonus depreciation so that investors can claim a bigger deduction on their tax returns.

Mike Zlotnik: Let me state this again, not being CPA, not playing one on TV, you should not be investing for just tax benefits. Every investment should have great sound fundamental reasons. So reason number one is it's a sound deep buy where the property, I'm just going to throw some numbers. You have to trade for 20 million. The bank loan is 15 million. You're picking it up for 11 million. And $11 million today, based on the massive adjustment from $20 million on a significant reduction in the value, feels like a strong deal. You buy at the bottom of the market and you want to participate in the recovery. Then you layer the cost seg on top of that. You don't do cost seg as the main driver of the investment. It's the other way around. D5, then equity and raise, cost seg, bonus depreciation.

Alina Trigub: Absolutely. Assuming it's all worth the while and the sponsor has the ability and the team to execute upon the deal.

Mike Zlotnik: That's right. That's another critical point, especially heavy value-added projects need ability to execute. And a lot of projects have run into problems because the sponsor was a thousand miles away. They thought it'd be an easy lift and it became a hard lift. So getting confidence that a given sponsor can actually execute is even more important today than ever before. Before, the market took care of everything. You bought badly, but the market kept going up. It didn't matter. Today, it's a critical part of the requirement where investors writing a check, they better have super high confidence that a sponsor can actually execute in that market, in that environment, in that asset. Like you said, all real estate is local.

Alina Trigub: Sure. Thank you, Mike. Speaking of investor confidence, have you seen a change recently between last year and this year?

Mike Zlotnik: So it's like this. It's a very bifurcated experience. I don't know how else to put it. People who've written checks in, let's just call the last few years, 21, 22, into equity of the deals, it's painful. It's tough. It's not about they're not confident. They may be confident with new money. The problem is they have a very difficult current portfolio with problems, and these problems are impacting fresh decisions. So folks who are in the deals that are experiencing capital calls, experiencing distribution, frozen distributions at minimum, a number of other issues, and they're beginning to feel like they may take losses. These folks are very, they're hurt, both physically and psychologically. Physically, they're losing money. Psychologically, it's a mental state, right? That experience is there. The second group is fresh dollars, people who are coming in and they don't have the paid for last couple of years. That's the group that should be the most rewarded because they're coming in sort of at the bottom of the market, but near the bottom and they'll participate in the recovery. Now, how do you convince existing folks who have a cut here and a cut there to write fresh checks. It takes courage. It takes strength for these folks not to get all upset and say, I'm staying away from this damn private real estate. I should have been in the stock market. The stock market is doing well. Well, the contrarian view, if you are a contrarian investor, if you're a value investor, that's the time to come in. When others are greedy, you need to be fearful. When others are fierce, you need to be greedy. That's what Warren Buffett does. But the counterintuitive kicks in. The stock market has been so good for me and the checks they've written in these private deals and they're suffering. And well, yes, that's what happened last couple of years. And what's really interesting, if you look even in the stock market, there's a study that the Morningstar top 10 funds for the last 10 years or last five years. If you go look at them and you write a fresh check today, they're the funds that actually underperformed and the funds that were lagging, many of them overperformed. It's called reversion to the mean, the crazy part most folks don't understand. The beaten up things, the difficult things have a better chance of recovery versus the things that have been performing well. Of course, if you're a leader of a space and you're dominating AI and you're creating incredible wealth through new technology that's very different. But in value investing, you're looking for beaten up opportunities, for beaten up situations to buy deep, to get into the investments when everybody is staying out because these investments have been beaten up. Does this make sense?

Alina Trigub: It does. And do you by chance know what the average return has been for these 10 funds?

Mike Zlotnik: I don't know, what I do know is I was reading, I think it was one of the famous books, it's either Richard Weiser Herpia, one of these very, very prominent books with studies have been done where the top leading funds based on a Morningstar category, that were leading for the last five or 10 years, have the reversion, significant reversion, and they become at best average, and some of the underperformance wind up overperforming. And the logic is pretty simple. If you genuinely bought, if you made good investment decisions, and the market has just not been your friend for a while, at some point you're sitting on deeply undervalued investments. Again, I'm not a stock market investor, I'm more of a real estate, but the same principle applies. The only difference is stocks don't trade on the same leverage the way real estate. In real estate, because of a leverage, a lot of equity has been hurt, may be wiped out. And the experience could be significantly more painful today, but that's the time to come in. These great deals are bought right, at the right market, with the right capital stack. They could be, let's just call them generational buying opportunities.

Alina Trigub: Yeah, it's all about risk and return, risk and reward, essentially. The higher the risk, the higher the reward. And the same applies, you know.

Mike Zlotnik: I'll add one comment. I was talking to Jeremy Roll, and you know Jeremy pretty well.

Alina Trigub: I interviewed him this past week, last week.

Mike Zlotnik: So wonderful. And I had him on a podcast and we talked and just one simple wisdom from Jeremy was you got to respect market cycles. And the market cycle was that 21-22 was the peak of the market cycle. And it was difficult for people to stay away. Everybody was throwing money at the market, and then the sponsors were just buying because the investors just had so many years of success. It was difficult to respect, but the market was at the peak. And it's difficult without looking backwards. At that time, it looked like great opportunities. But the market cycle was that when I talked to Jeremy, he said he started to stay away from a lot of these deals even pre-COVID because he thought the market was approaching the cycle. And of course, it hit the peak of the cycle and it has gone through a severe recession fast. And now we're beginning to look like we are maybe approaching the bottom of the recessionary phase and may go into recovery soon. So from that perspective, that's a consideration.

Alina Trigub: It is a consideration, although these cycles may take a while. They're not equally spread out and one cycle may last much longer than the other. So buyer beware, essentially. Thank you, Mike. As we're approaching the end of our show, one of the questions we always like to ask our listeners is, how do you like to give back?

Mike Zlotnik: It's a great question. I don't have a wonderful vision. Some people volunteer, a lot of their time to the best of their ability. I try. I have put it this way. As they say, charity starts at home. I have four kids. So I try to make sure I give my kids enough time and make sure they grow up to be hardworking and focused. But of course, the way I give back is some continuous contributions to the charitable causes. As you know, we contribute to part of the mission within our funds to contribute some amount of revenue to charitable organizations. Two, I do spend time, folks reach out from time to time and they ask, hey Mike, you're an expert in this field, you've set up funds, you know the capital stack, you know all that stuff. If there's somebody who needs a little help, I'm happy to give them a little time to give them a little bit of what I call them, I don't call it free coaching because it's very valuable, but I don't charge them for the coaching to help. So number of aspiring, let's just call them fund managers and other folks who are looking to raise capital or build in this space. I'm happy to help them with at least some thoughts. I'll just call them not for free, but Let them make a donation to the good cause, I'll give them the time. So sort of that way.

Alina Trigub: Wonderful. Thank you so much, Mike. Mike, thank you. This has been an amazing interview. And for our listeners, thank you for listening to us today. Please tune in tomorrow for the next episode. Bye, everyone.

: Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.