← The TreppWire Podcast: A Commercial Real Estate Show
The TreppWire Podcast: A Commercial Real Estate Show
351. CMBS Loan Workouts Unfiltered with Shlomo Chopp
00:45:33
Loading summary
Transcript31 lines
- [00:00]
Shlomo Chop
Foreign.
- [00:06]
Hayley Keen
Welcome to the Tripwire podcast, the show where commercial real estate meets data and insights. This is a special guest podcast. I'm Hayley Keen with trep, a data modeling and analytics firm for the CMBS commercial real estate and CLO markets. I'm with Lonnie Hendry, Chief Product Officer. Today we're joined by Shlomo Chop, Managing Partner of Case Equity Partners. With more than 20 years of experience in commercial real estate investment advisory, Shlomo has built a strong reputation for resolving distressed property and debt situations, repositioning assets and unlocking value in complex scenarios. In 2010, Shlomo founded Case Property Services, a specialized firm that assists borrowers and guarantors with distressed real estate loans. Leveraging deep expertise in structured finance and cmbs, Shlomo provides strategic analysis and fosters proactive lender borrower communication to create leverage for clients. Shlomo is also part of a family office that manages a diverse portfolio of roughly 70 properties nationwide. His expertise spans the full capital stack, from bonds and loans to direct property investments, with a focus on value add opportunities and distressed debt. Shlomo, that was a mouthful. You do a lot for this industry and your insights are always so valuable. So we're very happy to have you back on the Trepwire podcast.
- [01:29]
Shlomo Chop
Thank you. Wow. I'm actually blushing here and wondering like, who this guy is you're talking about because you made it sound like, wow. Thank you. Appreciate you having me.
- [01:38]
Hayley Keen
Well, we're so excited to have you and I think the proof is there. If you have not seen Shlomo on social media, then you're missing out on a lot of his insights and expertise. You've had a lot of great content and coverage on the CMBS market and distressed debt and workouts. So we're going to dig into a lot of that today. But maybe from your perspective, I know you've been on this show before, but why don't you kick it off with a quick overview of your background and who you are and why you're in this market?
- [02:08]
Shlomo Chop
Yeah, necessity is the mother of invention, right? So 2010, there was nothing to do except try to solve problems. And thank the good Lord I didn't have too many of my own problems other than trying to make a living. So followed my attorney's advice, opened up the underlying documents on CMBS and taught it to myself and got a shot from some people and was able to capitalize on it and grow it now to being. You know. You know, the way I look at it is like my expertise right now is probably the most challenging assets. So, like the most complicated issues only, like, if something is simple, it's like bringing Howard's return. I fight almost, but I'm not for everyone because I'm very direct and could be blunt. But, you know, I convinced myself I'm the best. So there we go. So I'm glad, I'm glad to do it. Start. Adam PropTech got insight into people's brokerage businesses to sort of understand how that works. Been involved on the investing side putting together deals and just my, My passion is problem solving because, you know, I don't come from a long line of money. My great grandfather didn't, didn't. Didn't invent the corkscrew. So it's not like I'm living off of this type, some type of wealth. So I had to do something else, differentiate. And I've been able to establish a nich. And, you know, all this, all this is great, but I couldn't do it without people such as you guys. You know, Lonnie, Haley, you guys have been amazing friends and sort of help me anytime. I have a data question. I'm trying to figure out, okay, how do I present to a lender why they should do this deal? And, you know, I'll ask you guys for some data, and it's right there, like, this is why you should do this deal. And it's all in the data. So data is like, they say garbage and garbage out. But it's also like, once, if it's, if it's good data in good data. Apple, what are you going to do with it? Cause data is great to just look at it, but what are you going to do with it? And that's key. So I'm grateful to you guys and everyone else who's helped me in my career, but you guys are just really great friends. Thank you for having me again.
- [04:00]
Lonnie Hendry
Yeah, we're excited today, Shlomo. And, you know, like, the feeling's mutual. I mean, it's. You say you said that you come across blunt sometimes, but I think in the business you're in, that's required. You know, I mean, borrowers, lenders, there's a lot of challenges. There's a lot of nuance. You have to kind of cut through all the stuff and kind of get to the reality so that your clients can move forward. And I think that's one thing that's helped you kind of differentiate yourself, is you're not afraid to say the tough things. You're not afraid to make the bold predictions, and you Work your tail off. I mean, I've known you for a while and you're always putting the work in. So people respect hard work. People respect people that can, can shoot them straight and they know they can trust even if the news isn't great. So, you know, I, I, I want to jump in. You, you've had some, you know, Haley mentioned this on the lead in, in terms of just like your social media presence and your continue growing following there. You know, this last couple of months you put out some really great white papers and some other, you know, posts that have gotten some insane traction. I think you posted a LinkedIn statement maybe a month or two ago about that. Your, your, your white paper that was coming out. I want to say I had 600 or so comments on it like almost in the first couple of days. Just great traction. Obviously we got a copy of the white paper, we provided a little bit of data for the white paper. So maybe just walk me through the thought process behind like starting the LinkedIn post without the white paper, getting people to engage and then what? The response has been that now that you've pushed it out, you know, we don't see all of that. But how, how has that response been post publishing the white paper?
- [05:26]
Shlomo Chop
Yes. I think there's a few things that you're touching on over there. The first thing is the social media presence. The second thing is the white paper generally, you know, as a concept. And I think the last part is just the reaction and the content of the white paper. So let's talk about LinkedIn and social media as a whole. So like I said, grandpa didn't invent the corkscrew. So I had to create the relationships that I have on my own through actually showing people that I'm worth knowing, I'm worth dealing with. Right. And one of the ways to do that is to actually go out and add value to people. Now I could beg for meetings with people like, hey, I'd love to compare notes, but you know, I turn down for those day, I don't know which one's going to pan out, which one's not going to pan out. But if you go on social media and you say something that has value, right? For example, hey, you know, I don't know, just any, any tip, any tip. I had a manager problem that someone has, they're thankful and they appreciate and they say, hold on, this guy actually sees something, know something. So this the singular best way for me to explain to people that I'm good at what I do. It's not about saying, oh, I did this deal, the next deal, the other deal, because we're all part of deals that some of them were tangential and some of them we actually did stuff. It's actually to give, to give advice and to provide information. That's the first thing that was great. What I did in that white paper that was really interesting. And this is the thing that I decided I'm just going to put out there, right? So in 2010, when I got into this business, it was basically a lone workout, was a relationship. The problem is in cmbs, there's no real relationships at the end of the day. And even the people you have relationships with, these relationships upon relationships, there's consent rights. There's different types of hurdles you need to overcome to make that relationship work. The fact you golf with the guy on the golf course, I mean, it's nice. It means you'll get it, you'll talk to you. But you know what? If you're a borrower, the guy's going to talk to you too. And if you make sense and you could provide him with a value, he'll talk to you as well. So the biggest misunderstood factor in CMBS was that there's actually a formula for CMBS lenders that they follow to work out a loan. The question is, can you capitalize on that formula? So way back when I came up with a very simple blocking and tackling. It wasn't an end around. It wasn't the. What was that? What was that? That wasn't the forgot the football move that was all popular years ago, Tim Tebow's line. What was it? You'll get back to me. But did there still some like. It wasn't an end around. It wasn't hail Mario was like, you know what? It was a jumbo, a jumbo formation up the middle type of thing. But it's blocking and tackling, right? There's nothing that's genius in that white paper, but it's understanding what the other team is doing, what defensive set they're in and what set you need to be in. And every once in a while there's a play action, pass for sure. There's no question. So we put out exactly how we do it. And if someone believes that they could do it on their own and they can, more power to you. There's no need for me to take your money. There's plenty of business out there. And if you think you know and you don't know how to do, then I probably didn't want you as A client to begin with. So at the end of the day, all I'm doing is basically showing people, hey, we have a plan, we have a path. This is our approach to doing this thing. And we put that out there. The response was resounding. It was great. It's the first time anyone has done anything other than lecture. Everybody talks about, oh, when you talk to your lender, do this, and I do that too, I lecture with the best of them, but we actually put a path out there. So the response has been great. People want this information and it's only added value long term. And that's what I try to do for everybody. And I try to talk about various scenarios and go into that. And thank you guys. You guys will help me. You guys actually help me with data specifically around the time from default to modification or reo, which is very, very important, you know, so it could take a year or two to work out a CMBS loan. But here's the thing. Typically it's because the lender decides to take that approach, not because they're waffling on how they're going to go about it. Your first three, four months are the most impactful. That's when the lender decides what to do. And that data was very helpful in showing that, hey, you have a long path over here to save it if you have to. But make no mistake, every day that goes by, you're more behind the eight ball.
- [09:29]
Lonnie Hendry
Yeah, I think that's great perspective. And we'll get into the white paper throughout the podcast. And I appreciate you. You know, when I saw the post and then I saw the activity, it was like, amazing because to me, I highlighted a couple of things and I'll have you circle back to this. Like, one, there are a lot of people that maybe still just don't quite understand, like, what loan workout really means, like definitionally or in practice. Right. So maybe you can give us some guidance. You talked a little bit about that in your answer, but maybe just 101, what is a loan workout and what is the business you're in? Right. And then two, for those that do understand to your point, they're looking for, like a game plan, you know, And I can tell it's still end of the preseason here because Slo Mo is making football references. And here about week six or eight, him and I both, after the Cowboys and the jets have like, probably tanked, we won't be making any football references. So I appreciate the football reference today. I may not appreciate that here in a couple months, but yeah, just give us some, some understanding of Workout 101. And then, you know, just, just highlight on the fact that those that understand it, you know, the people that, that have gone through the process or have some working knowledge, they may have actually worked with someone else in your space that does this. And what is their response been to kind of you laying out that game plan for them.
- [10:40]
Shlomo Chop
Okay, so what's a loan workout? Well, what's a new loan? Let's start there. A new loan is when the lender assesses the financial viability of a property and says, I want to lend you money. Will you pay me back? Will I get the yields that I need to get? And they underwrite it and decide that they're going to do that. How do you convince the lender to do that? Well, you put together this beautiful package. You tell them about the property, you show them the new windows, you show them the new floors, you show them the comps in the market and you say, listen, this is a good bet. And you know what, Lucky you, you're going to make 6% on your money. How exciting. And the lender's like, yes, this is so great because I'm deploying 3% money. I'm going to make this arbitrage of 3% over here. It's great. I'm going to slice and dice, I'm going to make this money, I'm going to have my bonus and all that stuff. And they're all excited and they do that deal. That's a new loan. What's a loan workout? Hey, buddy, you got your 3%, you made your arbitrage. Now your investors are pretty upset because they're not going to get the money back. Property's not performing as you anticipated. You decided to take a risk on a deal that didn't make sense. You put remedies into the document that you could foreclose on the property. We don't want you to do that. Well, hold on. The deal was you pay me back or I take the property. Yeah, but you don't really want the property. Okay, why not? Oh, it's never going to make again. Like, why am I letting you keep the property or stay in as the borrower of the property if you're not giving me anything for it? I could do a better job than you or. Well, you haven't. So a loan workout essentially is a re underwriting of the asset in the reverse manner, saying, listen, I know you have your rights and remedies. I know that you could go after, you could foreclose you could put a receiver in place. Here's why I as the borrower am the solution and not the problem. Here's why I'm going to earn the right to stay in. And usually that's money. That's the business we're in, in the business of finance, right? Usually that's money. What am I going to commit? Additional. And for the average borrower that doesn't understand this, you could have a totally piece of garbage loan trading in CMBS for 60 cents on a dollar and they extend you out for three years and you put in a million dollars and that price of that debt, the person that owns it will be able to trade it now. So for 80 cents on a dollar and before you come at me and say how could I buy at 60 cents on a dollar before that happens. No, it's not that easy. Not impossible, but not that easy. So the point is like the commitment from a borrower tells a lender that they could rest assured because this guy sees something, so they could take a bet. So this loan workout is basically a re underwriting and explaining to the lender why them taking an additional risk on you or potentially writing down the loan or giving you some type of something in return is a benefit to them. That's what a loan workout is. As to the competition and all that, I mean, the truth is nobody does what I do. And that sounds like a very, very slow MO statement to say. I get that. Okay. I am a management consultant for real estate that solves problems. It's very simple, right? I don't say, oh, let me see your loan, let me see your financials and let me talk to the lender. Let me call in a favor. No, it's not what I do. What I go in is figure out how you're going to pitch the lender on your property turnaround, how are you going to get them to buy into it and how ultimately once you do that, you're going to be able to keep to the terms because by the way, you're probably going to put the deed in the box, if you will. You basically can commit to giving them the property in the vent. You default again. Now, you may have leverage again, they'll come back, they don't want it. All those dreams are nice and good. It goes right next to the dream of when rates come down, which it may, but maybe not. But the point is you need to, you need to be able to come up with a plan, convince them of a plan, close the plan and execute the plan. Otherwise the whole thing was worthless. There's nobody else out there that does every part of that. We're talking about understanding the legal filings of it, understanding where you're exposed. We have, we have serious organizations that hire us just to be able to give back the keys without any exposure. And we work with counsel. We're hired by some of the biggest litigation firms in the world that bring us on board for their clients. So that is something where we are extremely, very different, where we can articulate a strategy before we start. We can explain what we're going to do, we can explain multi, variable, different, various different ways we're going to go at it. But it's not meant to be an advertisement, although I love it. But the point I'm making is that when you're a borrower, you need a plan that will convince not just to say, oh, you're screwed, so therefore let me have the benefit of it. It doesn't work that way in life.
- [15:03]
Lonnie Hendry
I think that's a valid point. And you know, in the white paper you talk a little bit about some of the early, you know, planning steps that are required to not make a mistake. And one of them is just waiting too long. One of them is thinking that, you know, waiting potentially gives you leverage when that doesn't happen. And then I think you, you know, do a good job of defining like pre fault positioning and then understanding the documents at some level as you kind of walk through that process and you explained, you know, the new loan and everyone's excited and popping champagne bottles and everything's going to work out great. But as soon as things don't, you have to know exactly what those covenants are. You have to know exactly what those triggers are. It sounds like you guys, you know, are helping borrowers that sign documents that they probably don't fully understand.
- [15:45]
Shlomo Chop
Yes and no. So we actually have two tracks. Our primary loan workout process is only going to be with more sophisticated borrowers. But we just, we just started helping borrowers that are smaller borrowers that just need to understand what they're dealing with. We don't do the work for them, but we prep them to be able to talk to the lenders because doing the work at itself is a very heavy lift and quite frankly, at the level that we do it, it gets too pricey for them. So I'll give you a bit of a contrast, a comparison between the small borrower and the big borrower, both that screw it up. So the first and biggest problem with every single, not every single, many borrowers Many borrowers is this notion that there's no negotiation. So a small borrower, he's taking a loan. He's like, oh, I got presented to docs. There was no negotiating the ducks, so we signed the docs as is. Oh, my gosh, I gave it all away. What am I going to do now? I'm like, hire an attorney two years ago maybe. Right? Like, it's like, like I was talking to attorney recently. He's like, yeah, thank you for the referral of listeners. Borrow. He was shocked that actually people mock up the loan documents before you sign them. I'm like, what do you mean? He's like, yeah, people don't think it's negotiable. It's correct. People don't think it's negotiable. But you know what is negotiable? Whether you're going to take that loan or not. So until they say no, have a good day. It's nothing to talk about. And oh, by the way, if you think the loan documents are negotiable, I got a news for you. Have you signed the term sheet? Is the term sheet negotiable? Because, you know, the loan documents reflect the term sheet. So something is negotiable. Okay, let's go now to even the more sophisticated borrower on CNBC Loan Workouts. You're like, we don't think the lender would, would do this deal. So therefore we're not going to try to negotiate. We're just going to give back the keys. What? So basically you're saying that the lenders, the lender has something called a special servicer that apparently is supposed to solve problems. He's there to help himself for sure. The special service is not here to help the borrower to solve it. To get the best net present value to the lender. Yeah, let's take all those tools out of his hand. Let's not give him an option to work with us because, yeah, he's just not going to accept it. Right. It's like, what are you thinking? Like, there actually is a discussion. It may, it may not be in the way you're thinking about it because you're saying to yourself, oh, here's the deal. The deal was worth $50 million. I have a $40 million loan. The property is worth 30. Now I can't pay the 40, so let's just give it back. Perhaps the lender will do a deal at 32. Like maybe the lender typically will do a deal at 32. Now if you show up and they Want to say, oh, I want to do a deal at 32. I'll say, okay, great, I want Santa Claus. I mean, you're not just getting it. You got to convince him. That's the thing. So you have the largest of investors and borrowers that look at it and say, I just don't see how it's going to work. I'm not sure. I spoke to him. They said, there's an indication I know his boss. And then he came back to me and then he swear. And they get so caught up in the minutiae of the dynamics of the relationship that they don't deal with the fact that if you get everyone to agree as to what the value is, then there's a negotiation to be had. And that's what we do. And we're working on deals. We're working on billion dollar capital stacks right now. And that's one thing. Like when we started, you and I became friends years ago. Like I was doing, you know, $15 million deals, $20 million deals. Before the GFC, my biggest deal was, you know, I think collectively maybe $120 million. Now my average loan size is about $120 million. So we're doing some significant deals. Like one we're dealing right now is like multiple A pieces, multiple B pieces, Litec, and with convoluted structures. But everything is up for negotiation. Everything is up in negotiation. You know why? Because you could say, I want this. They say, no, you know what just happened? The negotiation doesn't mean you got to win it, but it's yet to be negotiated. And that's the mistake that the big guys make. And the small guys, they don't mind the shop. My manager screwed me. Where were you? Have you. Did you visit the property? Did you review financials? Yeah, he didn't really send me. Okay, and how long did you wait before asking for it? So when you go to your lender and you say, oh, my guy screwed me, what is he supposed to think? Oh, you're a guy to do a workout with because you're someone that managers could screw. So therefore, we're going to do a workout with you. It doesn't make any sense. So that's also. That's the day now between a investor, a large investor, and a small investor. And the key thing is to what you said, Lonnie, start early. You need to start early. When you see there's going to be a problem or likely to be a problem, and you're relying on one or two things to happen, you're relying on a company that's on the brink of bankruptcy to renew, or you're relying on Powell to. To basically give in to Trump. If those are your two business plans, you likely should look at a contingency.
- [19:57]
Lonnie Hendry
Yeah, it's, it's interesting. You know, I'm sure you see, as you've explained here, I mean, the more complexities and the deals, does that actually create more opportunity for workout like you're saying, because there's so many levers you can pull. I mean, it's almost like in the brokerage business, you know, the $2 million deal is sometimes more complex than the $200 million deal, just because the $200 million deal is at scale and people generally know what they're doing. It seems like in this example, though, the complexity might be a tool that you can use to your advantage.
- [20:28]
Shlomo Chop
It's easier to work out a CMBS loan than to work out a bank loan. I mean, imagine that people think with banks, this world to talk to, and with cmbs, there's no one to talk to. The reality is it's the opposite. It's not just. No, it's not just the opposite. It's. It's from the, the success rate or the ability to work it out is the opposite. It's inverse. Why? Because cmbs, it's a specific set of rules and guidelines as to what it takes to work it out. If you could work within those guidelines, you're good to go. There's no wild cards. There's no like, oh, the guy was in a mood today. Well, yeah, maybe. Sometimes a controlling class isn't. Doesn't want to do a deal, but there's a reason for it, typically. Right? It's all based off a spreadsheet. It's all logical. When you deal with a bank, maybe the CEO doesn't want to take a loss, or maybe without naming names of banks, they just don't want to put a distressed property on them on the list that right now is 0% occupancy despite having a CFO two years ago. Right. And they're borderline committing fraud because it's people protecting their proverbial. You know what? In cmbs, it's all open. It's all transparent. You open up the trap data, you see it, you see what's going on. If the math don't math, it doesn't math. I mean, there's no. I mean, that was a genius line. But the truth is, if the math doesn't math, it doesn't math. You can't make it math, right? Well, you could actually, you could, if you create derivatives, you do some, some credit default swaps against it and then you basically horse collar it, you should be able to find a way to make it happen, but not always. So that's, you know, that's the problem. So back on a serious note, CMBS is logical, you can work it out. And the more complexity there is on a loan, the more you could explain to the lender as to a part of the solution, not the problem. Here's why the lender is going to hire a receiver, okay? Now I don't want to bash the receivership community. I think they're great to doing what they do. It's not an easy job. They got to step in on a moment's notice and they got to operate at the very high level and they're dealing between various moving parties. They have, they, they deal with the courts, they deal with the lender, they deal with the borrower. It's not an easy position. It's a job, it's a career. And they do well. I'm sure there's no question. But they're not the guys that are going to solve a problem for you. They're the babysitters and the interim people there. Right? If you have a complicated asset and you have a skill to solve it, that is almost as good as putting new dollars in. You're putting a new skill in, right? And that is something that you can bring to the table. The lender says, if I put a receiver in, I'm going to have a problem. But if I leave this guy at the table, maybe he could solve it for me. So let's see if we get him really motivated to put some dollars in side by side with it and he could show a good plan, then we can figure it out. So leverage complexity is leverage for the, is leverage for the borrower. The problem is so many borrowers don't know how to articulate their problem, they don't know how to articulate the solution and they don't know how to negotiate or are scared of negotiating. So I, I challenge anyone who has a challenge, has a problem with an asset and wants to know whether there's actually a strategy here, what could be done. Heck, you know, I'm on social media, hey, just drop me a note. Or you want to just post, you post the link, say, hey, how would I solve this problem? I'll just, I'll show you how you solve the problem. You'll tell me the. But, but, but it's no problem. We'll deal with edge cases, we'll go through that with you. But there's a path to solving these problems. And I, and I've seen SASB's $600 million plus SASB's that have sat there stagnated as a result of the borrower's boardroom not understanding what they're dealing with, not being able to make a decision and worrying about the what ifs and not sure whether they want to go and hire, you know, and come out of pocket for, for six figures to hire an advisor. That makes sense. And ultimately, ultimately, you know, missing the boat, so to speak, because they have so many problems at every level that they don't know how to solve them altogether. So because they don't have a complete solution today, they're like, we can't start the problem unless we have a complete solution and everything goes to hell and they lose money when in fact they could have gotten that ahead of it, take it one step at a time, solved it together with the lender, put up new capital that made sense at a basis that made sense. And bondholders would have been better, the lenders would have been better.
- [24:31]
Lonnie Hendry
Well, you know, I think if I'm putting my borrower shoes on right, your property is non performing or has challenges which puts you in this position to begin with. I mean they're trying to navigate a bunch of different things all at once. They're trying to remedy the issues at the property, they're trying to remedy the challenges they have with their loan. I can see how that gets overwhelming at some point. And so I think for you guys, I mean I know your team's been growing and like you mentioned using the trap data and other things as part of your business. But you know, how are you getting the answer to some of these questions like what is the value of the asset? I mean like at the end of the day that's what it comes down to, right? I mean like what is the actual value? The lender is trying to come up with what they think the value is. The borrower, you know, they, they don't know which way's up sometimes and you're trying to come in and bring some objective, you know, guidance to, to what the value is. Walk me through that process of how you guys, in times like this where there may not clear cut answer, how are you determining value of assets? What are you doing to quantify that?
- [25:30]
Shlomo Chop
Okay, there's a few things that you mentioned there and one thing that's most important, you said that you know, you got to understand, the borrower is dealing with property issues, dealing with lender issues, dealing with investor issues too. A lot of different issues. That's where we're differentiated. We actually get involved at the property level. We get involved. We become. We become the asset manager almost, or the asset manager oversight. Like, we'll step in, we'll say, okay, we see the entire university issues before we even retain. Like, here are the issues you have. Here's how we view our scope of work to go from here to there, right? Like we're doing this, this huge restructure right now that involves reorganizing the entire management of this huge asset. This over a million square feet asset that we're changing the entire org chart, I'm sorry, the management org chart. We're changing the entire governance structure. We're changing everything. Okay? And that's something that emanated from my office. We're guiding the process with there's. I mean, we're running the show on because this is, this is what we do. So the average borrower that's like, oh, I don't know what I should. Like, they're lost, they shouldn't be. There's someone there to hold their hand. Now, how do we establish value? Value is a very finicky thing, if you will, right? Ask any appraiser, and there'll be another appraiser. That's what they call it. Baseball arbitration, if you will. In these appraisals, right, you have dueling appraisers, almost like dueling violins, right? This guy's got his song, that guy's got that song. And see where you go from there. But the way you do it is you learn the property as the lender will learn the property. You talk to the leasing brokers, you understand the comps in the market, you visit the property, you understand the floor plates, you understand what the leasing demand is being asked on which tenants have come to the table. Why have they left? Why have they not reopped? Why have they not signed a lease? Why did they go to the building down the block? What's the difference, right? You then need to, from the ground up saying, I need to give more ti's for this space because I need to do over different parts of that space. And that all gets punched into little, little numbers in this huge Argus system. And you pop out some numbers and you constantly have to go back and create about 20 different versions of the. Not 20, but like 5, 6 different versions of the Argus that's continually updated to sort of Understand the market, right? And it all comes down to the borrower's belief in the business plan. What does the borrower believe he can execute? Once you have that, then you have your value. Then you need to find out what the lender's value is going to be, right? So that is a little less intense because that's going to be what the market's going to think. But you also need to find a way to highlight the issues where the lender needs to understand that they got exposure and they may think that is better than what it is. But because you can identify some of the problems that you've gotten to know, because you've dug in on it to a certain extent that their appraisal wouldn't, you highlight that to the lender and you make sure they account for it. Okay? So once you have now your borrower's value and you have the lender's value, and if you're good enough and you figured it out, you've gotten your borrower to believe either the lender's value or better, then you can overpay the lender's opinion as to what this thing is worth or structure around it so that the lender thinks it's a higher value. But because you're giving some additional credit enhancement, additional dollars or additional reserve or whatever it is that you're anyways, you know, going to use in your business plan. And even though maybe like give you an example what I mean by this. Let's say you have $100 million loan and it needs $20 million in TIS over the next three years, right? You think it's worth 80, the lender thinks it's worth 70. Right. But both of you agree it's going to be $20 million in TI, right? So you think it's not worth a penny over 70. The lender thinks it's not, it's 80. Right? So you basically come to a deal where you're putting up $20 million in TI's. Ultimately, if you could come up with a way that your $20 million in TIS are protected in some way via some type of subordination, then maybe there's a happy meeting where the lender says, well, I don't want to come out of pocket for $20 million in TIS, and obviously it won't be in the next five years, but the next guy is going to price it in. So it's really a present value thing and I don't want to go down a rabbit hole. But the point is someone's paying for it either way, whether it's the next guy or this current guy. So the lender has it baked into the numbers. So you're not looking present value discount rates because you're a real estate operator. Maybe you are to a certain extent, but mostly not. The lender's purely looking at that. So you start moving things around, how the lender looks at it and how the borrower looks at it. All of a sudden you're getting to this equilibrium. Sometimes you get the Venn diagram that sort of overlaps. You're like, we got this and sometimes a lender just wants to kick the can down the road and you say, you know what? All power to you. Kick the can for me. I'm giving you very little money. Let's see what happens and I'll decide what to do from there. I have a very, very low risk to go there. So when you establish the value that the lender's looking at, establish a value that you're looking at and then you could, then you could compare them and come to a deal. That's, that's where deals happen. Right? Where deals don't happen is when the lender thinks worth 100, you think it's worth 50. There's no bridging that gap. It's my job to educate my borrower and to help the lender get to where they need to get to justify this deal.
- [30:12]
Lonnie Hendry
So where do you think we are in the cycle right now? I mean, I know when we had you on last time, we were kind of just early in the distress cycle. You know, you were seeing things come across your desk and so you had a much more negative perspective than what the broader market might have had at that time. I think now, you know, it's, it's interesting. We've been talking on our podcast and some of our research recently that two narratives can be true at the same time. Like we've seen a resurgence of origination volume, an issuance, and even the CRE CLO market is up 3x from what it was last year, year to date. But at the same time, you're seeing office distress basically at its all time high from a delinquency standpoint. So what are you seeing today? Kind of where are we at in this cycle from your perspective?
- [30:55]
Shlomo Chop
Just broadly, it's impossible to know where it is because there are things that could happen on a day to day basis that will make a difference. Right. For example, if Powell cuts rates, all of a sudden you get momentum in the market and it covers up a lot of issues right now. People talk about how lenders need to reality, right? Well, you know what? They may not have to. Because if they could push it off long enough and the market picks up, then it's all about exit value and they could sell things at a better price. So it's really hard to tell where we are. But I could tell you is where I am right now, okay, where I am right now, I never been busier. Now, that doesn't mean it's getting worse. It just means people are coming to realization they need to deal with things, number one. And the second thing is on the acquisition side, I have found that my skill set is absolutely dynamite in making deals happen. So, you know, just having conversations with investors that, you know, I get calls all the time, like, let's partner, let's partner, let's do this. I'm like, there's no way you can do deals with me because you don't have the level of sophistication to understand these structures. I'm not great. It's just what I do. Like, this is what I focus on, right. It's not that I'm somehow smarter than that guy. No, I'm probably not. I'm not that smart of a guy. I'm just decent at what I do. The point is. But most of these, most of these individuals, they want to invest in cookie cutter deals. You know, they want the multifamily deal that's not too far underwater, or to get a discount from the lender. They want to buy that office building a good price, but the lender's got to take a discount as well. Like, I'm dealing on one of those right now where it's absolutely a great deal. But if the lender doesn't do a discount, nobody wants to do the deal. And I'm prepared to do the deal. Hopefully we'll get this thing done. So the ability to work out the stress and to solve for it is something that provides a tremendous amount of opportunity today because lenders don't want to realize a lot of these, a lot of these problems. But if you could be creative in deferring some issues for them or doing some type of subordination type deals, then it's possible to get deals done today, which means the issues are all there. But we do have our bunch of banks that are hiding, you know, hiding the salami. There's no question there's a lot of hiding of problems. And it's amazing. You look at, you look at a annual report or a quarterly report from A bank that's a publicly traded and like one quarter everything is good, the next quarter it's a problem. Well, you know what the thing about, you know, for example interest reserves are, it's not in default until interest runs out, right? And if it's not leased up the quarter before, you can't expect it to lease itself to break even the next quarter. But for some reason they didn't see the problem happening and the stock was, you know, perfect. All of a sudden they have a huge write down. I'm like, oh, people didn't see it coming, right? And you feel bad for all the guys that took a massive position the quarter before in the bank because it's so healthy, it's doing well, right. So there's a lot of that out there. So to answer your question very simply, I think we're in the space now where deals can happen. If you have the expertise to find a way to push it to the forefront that banks and lenders should do those deals. If you don't have that expertise, then you still need to wait for the brokers to bring it to market to sell it on the open market. And I can tell you what I am doing right now. I'm going to lenders who are going to sell and take losses in the open market and say, listen, let me buy into your debt. I'll take your risk off the table and then I'll go in, foreclose and restructure. I'll then do a restructured debt with you once I foreclose. So now I've saved you from further write downs on your books and don't go to market and sell because that's me a multi month process and you're actually going to take potentially a further hit on it, right? So it's that expertise that we could bring to the table and I'm 100% all in on investments right now. I'm not going to buy three caps and I can buy six caps. But you know the regional, the really great regional mall that we think we could turn around, like we're all over it, right? The office building that's in the best part of town that's doing really well. Like white on rice industrial. No, that's too exciting. Everyone's chasing it. Hospitality. We don't know where things are going yet over there. We're not sure, right. Whether the asset classes are there. I don't know. I missed one. Multifamily, it's tough because the multifamily, like it's, it's Unless there's a real problem with it. You have lenders feel that they could sort of churn it. Right. Because there's a lot of talent out there in multifamily and like we don't bring something that differentiated to the table. So like a lot of the CRB that have it, they've taken it out of the close, put on the balance sheet and tried to work deals with new sponsors. But the more this stays out there, the more there's going to be opportunity. So my prediction right now is as follows. I think over the next year we're going to see a flurry of distressed deals because kicking the can is not going to work anymore. Even when rates come down a bit, it doesn't all of a sudden increase occupancy, increase cash flow. It just decreases the debt. And the debt's already being carried by these lenders are ready to a certain extent and these deals are going to happen. I think more behind the scenes that's going to be than 12 months. As we get to the end of those 12 months, I believe, at least based on what I'm seeing, that we'll start seeing a lot more clean deals out there. You know, lenders that took things that are as REO and going out to market and will start getting a normalization in the market moving forward.
- [35:46]
Lonnie Hendry
Yeah, I think that aligns, you know, with what we're seeing too. It feels like, you know, you mentioned some of the publicly traded banks. It's, you're starting to see some movement on some of those larger institutions where they're strategically divesting some of these non performing assets. Like they've kicked the can but they're ready to kind of deal within reason. Right? I mean like we're not seeing 50% haircuts on in aggregate. I mean on These portfolios they're 10 to 20% type of range. But I think they're at least acknowledging that they got to make some moves here. Whereas 18, 24 months ago they were saying that there was no distress. I also agree there's a lot of shadow distress. It's not probably being fully, you know, baked into the calculations that will continue to pop up over the next couple of quarters because we're seeing it across the country. I mean back to the two narratives being true on the office origination perspective, if you look at the headline numbers, we've seen 20 plus billion in the CMBS market this year, which sounds really great. But if you look at the underlying assets, they're all super high end class A amenitized buildings in great locations. It's nothing beyond that. Outside of, you know, those top 200 buildings or so, there's not been a lot of activity. Those are the loans that need to get worked out, those BNC office loans. But I'm with you. You know, I've done multiple podcasts over the last couple of months for other podcasts and on our show we've had several people come on and it seems like the sentiment's pretty much the same. Like people are willing to look at office now if the basis can get reset to something that's acceptable even in cities like Chicago and San Francisco. So I'm with you. I think we'll see some action here on some of these office buildings, even some of the retail stuff you mentioned. I think we're going to start seeing a lot more action on those deals and then the, a couple of quarters as well. A couple of last things here. We hit on this briefly, but I wanted to kind of get your perspective. You had made another post online the other day about just the appraisal process and how appraisers, you know, maybe don't pay enough attention to some of the inherent risks around lease up risk and other things. You know, I wanted to get your thoughts if you wanted to dive into that a little bit. Like, I think, you know, let me, let me give you my perspective and then you can, you can respond. I think appraisers generally, by definition, they're giving values based on things that have already taken place. Like if you're doing a fee simple market value appraisal, you're looking at sales that have already closed, you're looking at income that's already been earned and you're effectively coming up with evaluation. When they're doing distressed values, it's difficult for them to articulate and capture the risk because that's generally not what they do. You're effectively looking at the likelihood of something leasing up that hasn't leased up yet. I think it's just a flaw in the system as much as anything else because they're by definition supposed to reflect what's taking in place, not predict what will happen unless there's a hypothetical condition or something else included in the appraisal. Inherently, they're going to be conservative in that regard. And I don't disagree with you. I think the lease up thing is very interesting because their natural inclination is always going to be to the good that the property will perform at market or better than market when if that were the case, you wouldn't be in this distressed position in the first place. So happy to hear your thoughts.
- [38:44]
Shlomo Chop
So I'm looking at appraisal right here and I cannot tell you which one it is, but it says over. This appraisal does not employ any hypothetical conditions. That's what it says on the first page.
- [38:50]
Lonnie Hendry
Okay.
- [38:51]
Shlomo Chop
And then this is a shopping center that was valued at a crazy number in my opinion. Okay. And everyone's opinion. And this appraisal is dated in 2024. And I know this property because I put together a business plan to turn around this property and I wanted, I want was working on, you know, we had some exposure on it in some perspective, wasn't a workout that we did. And we're looking at their value and they have over here, their value is at market value as is. Okay, then they have prospective market value upon stabilization and insurable value. Right. With all due respect, if it doesn't have any hypothetical whateverness, I mean, come on, then why are you giving me a prospective value upon stabilization? Okay, and what is that hypothetical value upon stabilization? Oh, we're going to keep all the tenants that are there as is and then we're going to lease up all the tenants over a nine month period. Okay. To lease the thing up, to get it to where it needs to be. And oh, by the way, you know what's happened since then? Exactly what we thought is going to happen, which think this thing's going to vacate. Right? So meanwhile these bonds trade at a crazy number because you got a bunch of guys who don't look at appraisals for a living, but rather just trade bonds going and saying, oh yeah, the appraisal came in at this, it's good to go, I'm in the money, I'm good to go. Right? It's great. But you know what, the whole thing is conflicting, right? This is like, I don't want to go into the specifics here because it is just so difficult. But like weaknesses, a subject includes a higher level of in place vacancy compared to other centers of similar caliber. AFRIT ran this, this. So now you're assuming it's going to lease up in nine months. I mean, come on, like what, what do you like? This kind of dissonance is ridiculous. So the answer is, oh, the lender wanted it done, so we did it this way. Okay, but you're still on appraisal. So what are you, Are you made as instructed or are you doing your job right now? You may say appraisers are woefully underpaid and yes, that's great. But you know what? If you continue going to the game and you're a Mets fan, then you deserve what you get if they don't spend money. Okay? That's what it is coming from a Yankee fan who's just like sitting here, fan, agree, greedy for all these years, although now it's been a bit of an issue. But see, understand them saying, like, the frustration over here is, is that when I'm working on a specific loan and I find out that there is capex, I know for a fact, because we did the thing to pitch the lender that there was capex in the amount of the debt that needs to go into this property. And you try to negotiate an ab mod and the appraiser comes to the table and gets specific instructions to that. The people touring the appraiser gets instructions, do not talk about the cap. How is that not fraud? Right? So the point is, I'm not saying anyone is here intentionally committing fraud. What I'm saying is, is that when you play at the edges and you're supposed to be an authority around this stuff and you don't call balls and strikes, you're indirectly causing someone to either make money or lose money. And that's manipulating markets, especially when you're dealing with securities. So, yes, appraisers get a raw deal. Appraisers don't get paid enough, and appraisers need. It's almost like a rating agencies, you know, you want to. Like what it used to be. I don't want to talk about today. I don't know. I don't know enough. But the point is, like, the way it used to be, the rating agencies got paid by the originator. So they do what they have to do, right? It's that good old game. This is the problem with appraisals. The problem is, is that you cannot give me a pro forma and then call it an appraisal. It's just the way it is. Now, if you want to say the client requested that we use a lease, a period of this, and here's the reasons we did it, and this is a client. You could do that. There's ways around. And, you know, Biznow has done a great job job talking about, you know, the appraisal. Sasha Jones, about the appraisal authorities that, you know, I didn't even know they were appraisal authorities, but now I know there's authorities for appraisals because, heck, these authorities are everything, right? But like, so she's done a great job of highlighting that people, men, sleep at the wheel. But there has to be a more of an objective valuation because you move markets and you create indirectly booms, bubbles and busts. And that's a huge problem. So, yes. Now here's the thing. I could play within the space, like I'll, you know, every mistake by somebody, you could take the other side of the bet and do well at it. And I could do that. That's not a problem. But it doesn't change the fact that it's just not right the way these things are being played. So, yeah, it's another one of my pet peeves, but I tend to have a lot of these.
- [42:59]
Lonnie Hendry
Well, I think we, we may have to do a follow up where we do a deep dive on that off the record or a tripwire podcast after hours or something like that.
- [43:07]
Shlomo Chop
After hours.
- [43:08]
Lonnie Hendry
You know, I think it is interesting and this is where like playing in the data space and the technology space that we do. I agree with you. I think there's, there's got to be a more systematic, objective way to measure some of these risks and quantify them versus just having an independent third party come out and do an appraisal on a property. I don't think you'd get rid of the appraisal. I don't think you get rid of the profession, obviously. But I think that there's ways to statistically validate or prove that some of the assumptions are valid or believable. And we have tools available now that we didn't have in the past to make those, those assertions. Right. So it'll be interesting to see, I think over the next five or so years you're going to see a wildly different appraisal profession than what we've seen for the last 50 years. So something we'll be monitoring. We actually did talk a little bit on our weekly show about a month ago about some of the stuff at the Appraisal Institute and some of the other challenges that they've had as an industry. So we'll be keeping an eye on that for sure. So I think Haley's going to take us out, but I wanted to thank you, Shlomo. It's been, been a great time chatting.
- [44:07]
Shlomo Chop
Don't take me out, please. Come on. I mean, my wife and kids, you know what I'm saying?
- [44:13]
Hayley Keen
Well, Shlomo, thank you again for joining us. I think our audience can always feel your passion through the microphone. I know we can. It's really great to see that you love what you do so much and you're so dedicated to helping your clients. If our listeners want to get in touch with you, how can they do.
- [44:30]
Shlomo Chop
So LinkedIn and X? Just look for Slow Mo Chop and send me a message. And I'm glad to engage with anyone publicly or privately. I love what I do. It's so much fun and I'm always grateful for you guys. Thank you.
- [44:44]
Hayley Keen
Awesome. Well, thank you, Shlomo, so much for joining us today. We will see you at what's next for us? CREI Summit in September. Okay. Shout out to our friend Ken Ashley and the team at CREI Summit. We will see you in Palm Desert and excited to reconnect in person.
- [45:01]
Shlomo Chop
Looking forward. Thank you.
- [45:03]
Hayley Keen
With that, we'll close this special podcast. Thank you, Shlomo, for joining us today. Join us later this week as we look at what's happened during the week and how it may be impacting you. If you have a question or a comment, send an email to podcastrepp.com until then, visit trep.com for more info and subscribe to the TruckWire Podcast with your favorite provider. Thank you for listening and stay well.
- [45:26]
Lonnie Hendry
All right.