Today, my guest is Mike Zlotnik. Mike is known in real estate circles is Big Mike, due to his stature. But more importantly, He is known for his personal integrity, and for having a keen understanding of the financial aspects of successful real estate investing. Mike is the CEO of TF Management Group, LLC, and is a real estate fund manager. And in just a minute, we're going to speak with Mike about the best commercial real estate investing opportunities coming out of COVID-19.
I'd like to ask you, Mike Zlotnick, what is the BIGGEST RISK?
So great there. And thanks for that. Three, three ways to manage to kind of risk avoided. mitigate it and obviously transferred. I when I grew up being a mathematician, so we've looked at risk too. And I've learned there's two elements to risk. Number one, it's likelihood. Number two is impact. So what what I do is I look at risks and try to figure that figure that out. So likelihood, and impact are the two key variables that drive all the decisions. And I would say the number one risk on a grand scale of things, and for the entire real estate market. And I think about it, it's not necessarily my biggest fear, because I feel that the the impact is huge, and likelihood is low, very low. But the interest rates going up a lot. So take a look at what has happened to the 30 year bond, where we are recording this February 10. I don't know when it's gonna come out, maybe it's live. But I looked at the data since the beginning of the year, and the 10 year Treasury and in a 30 year Treasury moved quite a bit. The yields have gone on on a 10. year from from point 94, up to 118. If I if I'm committed fluctuating obviously on on a 30 year from 1.66 to 1.9697 in that range. And these are very substantial moves. If you're a bond investor, you lost 20, maybe even more percent of your investment in 30 days. This is how sensitive this stuff is. And the whole real estate industry is heavily dependent on low interest rates. It's like a fuel when the rates drop, it's a fuel for real estate fire. When the rates climb, cost of capital goes up cap rates go up now. This is directional moves. But what the United States is doing, they're printing huge amount of debt basically borrowing and spending the money for the stimulus and everything else. So our debt to GDP ratio is getting out of control. Nothing new here, right? We've known about this, but it's getting progressively worse, it's that the risk is accelerating. So there's only one solution, unfortunately, that we've seen it in the world out there to Japan model there is going to go negative. Now, as crazy as it sounds, it's the opposite of the risk that I'm talking about. So the rates go negative probably will be pretty good for a lot of real estate investors, as the cost of capital will drop. But there's also a possibility of effectively runaway inflation, as the government continues to spend without the brakes, unless fat comes in, that's basically manipulation of rates, that the Fed has unlimited checkbook, and they can buy all the bonds that are issued by the Treasury and push other rates down. But at that point, what do we have, we have a central bank that buys everything, just to get the rates to the point where they can service the debt on, you know, one, the liabilities of the United States government, unfunded liabilities plus the real debt. So the problem is, this could turn into a runaway hyperinflation. And the rates will actually jump substantially. And it happens, it will be essentially devaluation, massive devaluation of the dollar. And it can happen, I've seen other countries do this. So your strategy of artificially keep the rates lower and lower and lower. It works until it doesn't. And if it doesn't, that becomes a cliff. And that cliff triggers hyper inflation. And it could cause substantial grief on the on the older all the lines, everything rolling the debt service, it'll be massive squeeze, because of the debt to GDP ratio is so out of control, that if rates climb, we have a massive collapse of the of the of the over oversized debt portfolio, the whole the whole national debt plus all the private debt. So it's a possibility to risk, what can you do about it? It's hard, it's hard to come up with a great strategy, obviously. likelihood is, is pretty low, I do think that the Fed will not let that happen. In the long run, it's just they can't, I mean, we're gonna have a bigger crisis, a different type of crisis than we're dealing with now.
You could, you could sort of play some, some derivatives to protect yourself, you can build in if you're, if you're if you're an expert trader, you could hedge against that. But in the short run, I would essentially caution people who don't think the rates can go up, they actually can, and they are showing some movement today.
Today, my guest is Jonathan Feniak. Jonathan is an attorney and partner at Colorado LLC attorney.com. In his position, he helps business owners at nearly every level in nearly every industry with asset protection, estate planning and business formation. And in just a few minutes, we're going to speak with Jonathan about asset protection, and how to keep your assets.
J. Darrin Gross
But if you're willing, I'd like to ask you, Jonathan Feniak, what is the biggest risk?
I think the biggest risk is failing to budget for asset protection. When you are an owner of commercial real estate, you know the numbers you know how much it's going to cost you for your your garden or how much it's going to cost you if you're if you're including the heat, how much it's going to cost you and to budget for all of these things to figure out what the cash flow is going to be on on the business and I think you need to budget for asset protection. And as your empire grows, as you're making more money from your investments, your asset protection should grow. Increasing your policy limits to more than the minimums. Having a, you know, an auto policy with the minimums that are allowed by state law, I think is insanity. How are you maxing out on insurance in some areas and there's a lot of my clients are maxing out on insurance on the most they can get, right? It's $1,000,000.02 million or $3 million policy with a million dollars max per claim, how can you get more insurance? How can you protect yourself, limit your downside, and say, this is a this is an expense of running this business empire, it's it's incredibly important to re evaluate that just like you're going in reevaluating your service providers to reevaluate an ongoing basis, you talk to your insurance agent, what more can I do? If you're maxing out there? And then you start thinking about what structures can I put in place to protect my assets in the event of one of these credit events or, you know, catastrophe striking, and it's gonna cost you money, there's a business decision to be made there. But continuing to to increase over your protections, revise your structure so that you add in more protections. I think that's the biggest risk that people have is they're not properly budgeting for asset protection and risk management.
Today, my guest is Scott chop and Scott is the CEO and founder of the Urban Pacific Group of Companies along the Long Beach, California based real estate development company, founded in 2000. They focus exclusively on workforce rental housing communities throughout California. And in just a minute, we're going to speak with Scott about multifamily opportunities for workforce housing in California.
But if you're willing, I'd like to ask you, Scott choppin. What is the BIGGEST RISK?
Scott Choppin 57:16
Yeah, no, great question. You know, like I mentioned, when we before we began the interview, like real estate development, and you could say a real estate investment really is entirely a risk mitigation, you call that minimize? So I'd say squarely in the in the middle there. Really, at the end of the day, you know, investing and development are a risk you like there require risk to be taken to produce these returns that we're describing. Right?
Always the trade off. And so really where I've arrived in my career, where I am now, is to be risk mitigating everywhere we can and so like, I'm not, I'll fill in the answer some more. But, you know, there's many, many places that we've mitigate risk. But here's, here's my answer. Is it really around a philosophy and a style and approach to how you mitigate risk? And I'll give you an example what I mean. And by the way, this like this risk mitigation is a fundamental tenet of our business. In fact, I would say it's probably the most important one because we have so many different exposures to risk in so many different areas, right? market demand with tenants, interest rates with like, debt, return here six with, with investors, governmental agencies who oversee us, right? talked about California, right, that's a that's an increased risk. So when I was a young project manager, I worked for my costs. And basically, part of my job, the way I work with Mike and the way he had his project management team structures, as a project manager, you basically were responsible for the full life of a project, from finding the land all the way through to completing it and handing it over to the asset management team after his lease. Right. And that was very unusual. You know, maybe call it cradle to grave, you know, beginning to end have your describe it. So what that did is that threw me as a young project manager into, like, you didn't have to find new deals if you didn't want to, but I was, like, incredibly ambitious, to, to grow my knowledge. You know, I knew I wanted to be a developer, you know, running and forming my own company, like I knew that, you know, to have the wave, you know, since I was 18. And but what I remember was looking at land, and I had good teachers. But when I would look at stuff, it was everything, I couldn't make it work. There was no project that I looked at that I couldn't figure out or thought I couldn't figure out how to problem solve, right? There's no deal. I can't figure out the hairiest deals with environmental issues, tough neighborhoods, tough cities, whatever, right? I go, Oh, I could go in there. I could figure out a way how to do it. Right. And what I figured out dawned on me years later, is that by having that approach, I took on an incredible amount of additional risks now when I worked for the company was their risk. And of course, they were smart about it and only gave me so much, you know, rope to hang myself on a deal. But when I got out on my own, you know, I continue to learn these lessons. And now it's, in fact exactly the opposite. There's almost no deal that makes it through the underwriting, right? And I'm, in fact very fast. And we can talk to our internal teams who bring us deals, people, partners, people bring the like, I'll No, no, no, no. And why that's important is because it's a philosophy, philosophical approach to mitigating risk, meaning, acknowledgement of a risk and a willingness to mitigate it. And I'm willingness to say no, if it's unmitigated, right, that's up for us, there's some risk that can't be transferred. Right, the construction risk, under a personal guarantee to a lender is not, I can't shift it to anybody else. In fact, it's funny, in the old days, we was used third party GC is right to construct our buildings. And then in 2005, the market was really peaking and we had a hard time getting GCS. And we brought all of our construction operations in house, like our project managers are superintendents, they'll work for us, you know, we were the, you know, became the default builder, if you will. And I remember a headhunter does to you don't do that, you have to shift the risk to the GC. And this is what I told them. I said, at the end of the day, I hired the GC as the developer and I give the bank a personal guarantee, I sit in between those two people, or those two companies. And if the GC screws it up, I still own the risk. I mean, it may look like I shifted it to him. And contractually, I did shift the obligations of building a building. But if he screwed up enough, or in the, you know, time or money, like it's gonna flow back to me. So where I told this headhunters I go, look, yes, I'm bringing some of these risks in house, but it also allows me to control and get direct access to the field, to the subcontractors to the owners of the subcontractors, because the GC that sat in between me, he had his own agenda, he had his own profit to increase, he had his own stories that he told the subs, you know, and, you know, sometimes that was good, but if the person didn't have good ethics, or they were trying to, you know, manipulate which people do in that business, I mean, all business suppose, I found it to be incredibly like it was I took on more risk that I could then not even control, or I had to, like, go through people to try to control it. And of course, when they have their own agenda, they're not gonna let me control it if it's against their agenda. So this is a way for us to can control really minimize that risk, we still took on risk. But by having that direct access, we minimize that. So if you take that story, and then you apply it to every possible facet of the real estate development process, at every time we underwrite, every time we buy land, we build the building, we rent units, we're looking to constantly always look at it from the standpoint of what if this fails, what if the spread doesn't achieve what we think it's going to achieve? Maybe we better look at it at a lower rate to be more comfortable that we've mitigated that risk. And why save that way is because people who are entrepreneurs are naturally risk takers. And you're, in most cases, your own worst enemy. And that, you know, in other words, you're a risk taker, you're built to take risks, and you do take risks, then the job becomes how to take risks that don't blow you up. And that's your own learning. That's, in fact, networks of people around me that I use that my teams internally, like, I encourage people like, dude, you got to tell me, no, more of the famous saying, I'm as I'm a great problem solver, I cannot solve a problem I don't know about, bring me all the problems, don't hide anything, don't cover it up or try to mean you know, if I can help solve, you solve a great, I'll do that. But I want everything fleshed out. Because you know, when you then get all the full picture, it's then I mean, my job, our job as a company is to problem solve and mitigate risk. And we do that 1000s of 1000 times in a deal to every day, you know, over you know, the two or three year lifecycle of that development project. So I know that was a really long and winded answer, but it's really like, it's like having a mental model of how you approach risk and you do it, you know, every day in your business, you know, as you know, your insurance and underwriting risk. But I would always advise, particularly people who are coming new into the business to like, you know, hear these words. And you know, a lot of times go here and they go, Well, I'm different, I can do better. I'm a better problem solver than these guys. And that's fine. But like know that that risk doesn't go away just because you think that way. In fact, arguably you increase your risk because there's stuff you don't see. You can't admit to yourself that you have blind spots and need help from others to go dude, you miss that thing. Better watch out for that right and, you know, got all kinds of betters around me that you know, I'm like, dude, tell me like, donate it. You know, I don't like bad news. I don't like surprises. But you know, what I like worse is, you know, bad news and surprises that now I'm late to the game on.
Today, my guest is Eric Voyles. Eric is the Executive Vice President and Chief Economic Development Officer of Tex America Center, which operates one of the largest mixed use industrial parks in the United States. in Texarkana, Texas. And in just a minute, we're going to speak with Eric about the COVID effect and the opportunities created from COVID in rural markets in an in an industrial and flex space properties. And, but be first.
J. Darrin Gross:
I'd like to ask you, Eric Voyles. What is the biggest risk?
For you? No, I'm looking at it from the perspective of my clients, you know, the people I work with their biggest risk is potential for failure. And if you fail, when you expand many times you drag your entire company down with you. And so I always try to help people understand that not only is being in charge of an expansion if you're in a larger company, a potential career limiting assignment. But, you know, you you could you could actually if it's your own company, you know, you could have complete financial failure of your business, if you make the wrong choice. And so that's why we focus most of what we do. I'm trying to help people drive down that risk of relocation. You know, we began the process I mentioned I come out of economic development. So we began the process of once I got here of assessing the property. We looked at what are our costs, and really have tried to understand our cost structure. Then we've and we've tried to understand what companies need that structure. Then we've tried to understand what, you know, the political risks that might be involved with our property. And so there weren't really incentives available. So we have worked aggressively to put incentives on the footprint that you can get access to. And again, that that kind of ties back to financial. But you know, it also demonstrates that we are 100% committed to your company, to work with you, in the long run to achieve not just profitability, but stabilization in the shortest time frame possible, then we'll work with you to grow profitability. So all of this is really important when people are making decisions, we try to understand our market so that you can build a business plan that you can have confidence in, you can take it to the bank, you can take it to your board of directors. So you know, we many times are helping people collect the data that they need to put into their business plan. And you know, if it's good, and you can make your decision favorable for us, that's great. If if it doesn't match up to something else, that's great, too, because we've helped you make a decision. So you can move on, it allows us to focus on other things. So my entire our entire thought process in this is risk mitigation. And by doing this, when someone decides that we're the right place, what we've seen is those companies tend to be successful, they usually are willing to come back and provide testimonials for us about what we've done, that they didn't realize they needed help with at the time, but the things we did made a difference in their startup and their stabilization and in their long term profitability. So that that's what we focus on. I think that is the biggest issue that that corporate executive or that business owner has to address when they're trying to expand, they need to think about what are the risks associated with making this decision, and they need to choose the right place.