Shlomo in Thirty: Recent Episodes
Shlomo Chopp
Welcome to Shlomo in 30. In 30-seconds Shlomo Chopp will share thoughts and opinions guidance on topics such as real estate, finance, debt restructuring and reinventing retail. A bot about Shlomo, in 2003 he started my career in a sector that ultimately became known as PropTech. Since then he's been investing in commercial real estate and restructuring complex loans. In 2021 he was granted his first patent for the reinvention of the shopping center and e-commerce - with others pending.
I love this quote from the Oracle of Omaha.
Amazon found that giving things away for free isn’t a business and Shopify capitalized on wannabe-ism.
Facebook’s a better business than either of these but they’re paying $3Bil to terminate leases chasing a fad. So you take a bet but can’t stomach the wait?
Hey Zuck, are we jumping the gun while the jury is still out on the future of work?
I’ve helped many borrowers. Hard times are here. Get your house in order. Go through your loan docs. What you see may surprise you AND save you lots of heartache.
Uninformed common sense reactions will kill you. Lenders will pursue personal guarantees - even though your loan is non-recourse.
It’s not about winning. If you’re in a PG case with a lender, financing other assets will be almost impossible. In commercial real estate, if you can't finance deals, you are up a creek.
Many if not most employers see value in the office space, but not the old model of sardine canning workers into the smallest cookie cutter space from 9-5 every day.
Beyond that however, nobody seems to know, or at least be willing to have their balance sheets take a bet as to what the future of office actually looks like.
Landlord’s with the misfortune of negotiating leases during this time of flux are getting allot of ask but being offered very little value in return and the sustained physics of such an arrangement — it’s impossible because landlords have expenses, tenant improvement costs and a mortgage to pay. A short term lease with low rent may be a necessary defensive move, but not many owners have the ability to fund it.
Companies like JP Morgan, Goldman Sachs and Apple - they’ve all mandated a return to office but they all have heavy bets in the space and lots of leverage with their employees. In talking with friends and colleagues such the amazing Ken Ashley and the always ‘cut through the cluttered data’ Neely Tamminga, it’s apparent to me that the question isn’t as much the future of office as its reintegration. We need a bridge to tomorrow.
One would think that if technology has made the home a place from where you can work, then the technologically equipped office should be that much more efficient and effective in its own right.
Solving this problem by just kicking the can is going to invite carnage. You need a proactive approach and that’s the only way that landlords will save their properties from a death spiral.
How do we get landlords to provide experiential, useful space at a low cost?
How do we provide tenants the optionality they need while extracting a commitment to a building?
How do we train middle managers to guide employees into effective hybrid work efforts, so that return to office isn’t more of what you were anyways doing at home or just a day of social interaction that hurts productivity.
Sam Zell made the ultimate office trade years ago — and it paid off in spades! Finding the right formula this time around will result in similarly massive returns.
Jessica: Why are commercial real estate market reports wrong?
Shlomo: How do investors use it? I think investors, they call you up, they say, oh, where do you think interest rates are going? Where do you think this, where do you think that? Who knows what's going? Look at what's going on in the moment, right? When you look at a commercial real estate report for the second quarter of this past year, you're a quarter late. So you need to actually see what's going on right now in your market. The only way to do that is to be part of it. Then the past educates you and then you predict the future, and good luck predicting the future because if you know the future. I want that secret. I'll buy some of that stock.
Shlomo: It's a crazy thing. Retail properties, they're not getting refinanced and retailers are pulling back.
Jessica: Yet landlords are touting the highest occupancy rates they've had in a decade, and rents are astounding, at least in my market.
Shlomo: I don't know. As I see potential acquisitions, I see values in the Billions even, but then Macerich can't refinance $537 per square foot loan on Santa Monica Place.
Jessica: We're in the Twilight Zone, Shlomo. That's it. The reality has nothing to do with it. Once these reports catch up to what's going on in the market, it's going to be a different story.
They say “Buy Low” but using what metric?
If you underwrite an office property using yesterday's rents and TI requirements, yeah, you may be buying low. But if you consider that the calculus of office space has changed, and in reality, we don’t know where it’s going to settle, is buying comparatively low, enough?
And it’s not limited solely to office - we’re in a state of technological flux.
It may seem that you’re getting a steal of a deal “with leases in place” but consider that you’re making a 5-10 year investment and the next buyer, well, they’ll have to pay you more than you paid for the property.
creinvent #crepodcast #cre #shomointhirty #buylow #TI #officespace #investment #therightinvestment #cretech #cretips
1 Denial: The Lender doesn’t want the property!
Irrelevant - they will exercise their remedies.
2 Anger: They’re not dealing in good faith!
They funded. Now they’re in collections mode.
3 Bargaining: OK, Let do a deal.
You didnt influence the lender. You fought. Times up.
4 Depression: The Lender is out to get me.
No. You didn’t give a reason for a borrower with no equity to guide a falling knife.
5 Acceptance: OK, Who can help me?
Now it’s too late- You should have aske this question 90 days before the problems start.
CREINVENT #distressedassets #distresseddebt #crefinance #realestate #cmbs
There are times to decide whether or not to cover the payment or expense shortfall on your loan. 10 days prior to the payment being due, is not one of them.
Before you can even consider this decision… Do you have a good workable proforma? Do you have recourse exposure? Do you know whether you're going to have to come out of pocket to prevent recourse exposure? Do you even want the property, and if so at what price?
Then, depending on your decision, do you understand the process on the lenders' side? What are the foreclosure procedures in the property’s jurisdiction? Are you giving yourself sufficient time or will the process get out ahead of you?
creinvent #crepodcast #cre #shomointhirty #loantips #proforma #forclosuretips #commercialrealestate #mortgage
Distress is here, make no mistake, but dealmaking is still a bit away.
Lender's workout teams are staffing up, and owners are seeing the first cracks but we’re in the frozen stage. Prices have yet to fully adjust, lenders do not have clarity and therefore financing is generally either unavailable or you're going to get re-traded.
Everyone’s taking a wait-and-see approach, fully expecting things to get worse. However, there is no desire to jump the gun. For borrowers of CMBS loans where the Lender is required to start enforcement action, buying time is key to working out your loan.
frozen #cmbsloans #crepodcast #cre #creinvent #ecoconscious #economyshift
Anytime Amazon makes a move the news is abuzz, and this time it's no different with a quick delivery service from retailers. Here's the business model. Retailer’s pay retail rent to your landlord then use a space partially as a warehouse to deliver from it quick #ecommerce orders delivered by Amazon.
Somebody’s gotta eat the cost! Did you ever think the pizza delivery guy was actually a profit center?
Here's the bottom line. Mall owners and real estate owners you've known these tenants forever. You could have provided this service but now Amazon is coming in and nibbling at your margins from all sides.
retail #commercialbroker #business #amazon #warehouse #commercialleasing #amazonfresh #profitcenter #creinvent
Amazon Retail has yet to spring a profit and its side businesses are keeping it afloat.
In 2021 if not for the advertising business they would’ve lost over $20 billion.
Before you tell me I can’t pick apart the businesses, bear in mind that the advertising business cannibalizes Jeff Bezos customer first focus for the sake of profits which he didn’t want to be judged by.
Whole Foods seems to be stagnant, and Amazon Fresh early reviews are abysmal both on the experience and performance side.
Why don’t they just invest it and juice profits?
amazonretail #cre #20billion #jeffbezos #creinvent #advertisingbudget #wholefoods #amazonfresh
We see the news about rates rising and distress is increasing — funds are being raised, and the war drums are certainly rattling.
Distress buying opportunities are not yet here and Lenders are not yet taking major losses. Here are three indications that winter is coming.
1. Deals that supposedly traded are back on the market
2. Hard money lenders are very busy
3. Lenders are getting very slow on draw requests
If you are seeing the leaves changing in your market, please comment below
winteriscoming #cre #funduncertainty #creinvent #lenders #recession #fund
Fortunes are made in a downturn but more than capital requires expertise to get to the right assets at the right price.
It's called a downturn for reason -- resolution will not be overnight, it'll take some time.
It's possible to buy cheap in a downturn because it doesn't look cheap to the rest of the world. To them, it's a falling knife.
So you must ask yourself three questions:
1. Do I have the tools and relationships to find the right deals?
2. Do I have the ability to restructure complex messes?
3. Do I have the patient and knowledgeable funding sources to execute my strategy?
capitalmarkets #cre #downtown #creinvent #funding #strategyexecution #strategyconsulting
How does one resolve a problem they can't even identify?
Work from home is here to stay and the office is necessary. We don't know, however, the level of blending. Sure the labor market is loosening and yes, companies are pushing employees to come back to the office, but to even know what an accepted buildout looks like?
And even if we did, would they give the landlord enough term to amortize those high construction costs across?
Until we identify the problem we will see continued financial stress and collapse of downtowns.
workfromhome #backtooffice #office #downtown #cre #crepodcast #creinvent
Following the herd is extremely dangerous place to be. Let’s analyze the major food groups.
Residential, like a former New York City mayoral candidate said ,the rent is way too darn high and so are values.
Hospitality, it still hasn't recovered completely from COVID and that followed a period of major development.
Office, COVID’s decimated office and we have a new way of working.
Retail, well we all know e-commerce to the way of the future and retail is dead -- just don't tell the people in e-commerce who can't spring a profit.
Industrial, well if e-commerce is dying industrial is declining.
herdmantality #ecommerce #creinvent #crepodcast #downtown #residentialrealestate #commercialrealestate #industrial #retailrealestate #hospitalityrealestate
Industrial real estate is white hot and now that Amazon is subleasing millions of square feet it's pound for pound hotter than before.
Did you know that pureplay e-commerce as a whole is not a profitable approach to selling?
Amazon would have lost over $24 billion in 2021 if not for the advertising business.
I guess investors I'll just blindly riding a wave. After all Shopify has got a market cap of $41 Billion.
Winston Churchill and FDR didn't just wake up one day and said let's storm the beaches of Normandy.
Over the course of a couple of years countless operations deceptions and preparations were made just for D-Day.
Despite all that work, Eisenhower prepared a speech in the event things went South.
Your loan documents are terribly one sided, banking laws were written by the banks and a borrower has very little chance prevailing in a foreclosure.
So if you call me once the banks already attacked, miracles do happen but your chances of success are very slim.
A real estate loan workout -- it's like a boxing match. It requires months of preparation and heavy work. Then you get knocked down in each of the first three rounds and you can still come back and win the match.
Attempting to work out the loan on your own, well, that can be slow acting poison. You'll never know you failed until it's way too late.
Actions you take six months before you default can have positive or negative implications three gut wrenching years down the road.
If the Fed starts selling off commercial real estate loans from its balance sheet, it will drive up rates even more on new loans, because of a bond buyer can realize higher return by buying at a reduced price from a Fed sale they'll demand the same from a new loan issue.
The double whammy effect however is that institutional real estate allocations, if they're eaten through, along with them will be the appetite for lower yields and what do you have left, but opportunistic funds and investors that will drive prices down even more, to increase rates and returns even higher.
This time it’s different.
It’s not just the economy or the classic run up in values that’s causing a decline.
It’s the disconnect between rigid bricks and mortar and the fast pace changes in technology.
Retail - I can have a store on my phone. Office - I can work from anywhere. Industrial, is in fact classic overcompensation.
It’ll take property innovation, not just time to get us out of this mess. No, I don’t mean garbage tech, I mean real business process innovation.
No, I’m not suggesting that you always feed a property, and certainly not without a strategy.
But here’s three things you need to know about special servicers
0. The lender must address major loan issues
0. If you are not in default, they have no choice but to be constructive
0. If you do default (often without knowing), you lose almost all your leverage.
The key is to use the lenders rigidity in your favor. This is not an overnight play nor is it for the faint of heart. It’ll probably the most complex negotiation in which you’ll ever participate.
The devil didn’t really go down to Georgia, it’s right there in the trap language in your loan docs.
Even the most skilled attorneys will have a hard time convincing lenders counsel to remove such language - and for their client to kill a deal over it because it’s well hidden and the money is just way too seductive.
Carl Icahn just filed a lawsuit that exposes how CMBS works behind the scenes. Every real estate borrower and counsel needs to read this cover to cover.
Amazon video, Netflix, Hulu, Disney Plus and so many more of these streaming services make it easy to stay home to skip the theater.
Traditionally, theaters were really solid rent payers as expensive buildout costs are amortized into the lease. Furthermore, many of these theaters take up upper floors, paying far beyond what a replacement tenant, if it exists, would pay.
Some of the most dynamic properties boast theaters, and along with mall cotenancy issues, are one of the biggest threats to the retail real estate today.
We recently took the family to Disney where the have this stiff dog leash with presumably an invisible dog at the end. People were petting it, and I even saw somebody run away from this imaginary dog.
Cryptocurrency, unprofitable futuristic businesses and many others dream are being crushed by the market. In the crossfire, solid assets are getting hurt. This is an amazing opportunity to pounce and get aggressive.
Oh, you want a formula?? well, if I had that, I wouldn’t be recording videos, would I?
Given the fast moving changes brought on by technological innovation and venture driven valuations landlords can no longer rely on all traditional metrics in assessing a tenant.
The term Billion dollar valuation has practically lost its meaning. Delivering a tube of toothpaste in 15 minutes?? Is that a viable business?
Yeah, a lender may finance it, but unless you strategy is to shift risk via non-recourse debt it's time to roll up the sleeves and learn your tenants businesses and their future potential
Nine years before WWI broke out, Field Marshal Alfred von Schlieffen developed the plan to invade France with a six week war. The movements were planned to the day and allowed for various contingencies but one, the unknown. The war lasted four years
Over a century later, CMBS still hasn’t applied this lesson. Trusts are rigid and asset managers are not empowered to be creative and therefore follow a strict game plan.
Amongst other things, this contributes to outsized unnecessary losses to bondholders and Borrowers alike.
What are you doing to expand your retail tenant base?
While proving physical retail relevancy, we’ve forgotten that the consumer voted against many of our tenants. The ones they voted for, however, they often lack the credit or even know-how to get into retail.
So, what do you do? There are steps to make it easier for Digital Brands entrance to retail. A good start is recognizing that national may fill space, but Digitals Brands bring excitement and customers. Without excitement, all you have is a property that once upon a time was hot.
The Cash Management waterfall is often structured to pay interest before property expenses. If cash flow deteriorates, the loan can remain monetarily current for months, while in non-monetary default because bills aren’t being paid. Be careful, if a vendor places a lien, or if the property decays from a lack of maintenance - your supposed non recourse loan is now at least partially recourse. Whats the point- negotiate your terms with the guy trying to sell you the loan - at the term sheet level. It can be the difference between success and failure.
Welcome to my new feature- Shlomo in Thirty.
In 30-seconds I'll share inspiration and guidance on topics such as real estate, finance, debt restructuring and reinventing retail. A bit about me, in 2003 started my career in a sector that ultimately became known as PropTech. Since then I've been investing in commercial real estate and restructuring complex loans. In 2021 I was granted my first patent for the reinvention of the shopping center and ecommerce. email me with any questions - shlomo@shlomochopp.com