Master Bridge Lending and Credit Risk in Real Estate with Big Mike

Mike Zlotnik (00:00)
start well and not everyone finishes well. So people make mistakes. So the key portion or the key component of your work if you are a lender is to monitor what your borrowers do and how they do it and how they change with times.

Scott Bursey (01:48)
Welcome back to the Real Estate Pros podcast. I’m your host Scott Bursey. And on today’s show, we are focusing on structuring efficient private debt and managing credit risk in a competitive bridge lending space. We’re joined by Mike Zlotnik, also known as Big Mike of TF Management Group, who brings deep expertise from years of successfully deploying capital across various real estate asset classes. Mike, thanks for joining us.

Mike Zlotnik (02:16)
Thank you Scott for having me.

Scott Bursey (02:18)
It is wonderful to have you here. And for our listeners who may not be familiar with your journey, please tell us, how did your career begin and what’s your focus now?

Mike Zlotnik (02:30)
So I had 15 year career in tech world. ⁓ spent from about 90…

five till 2009, maybe 14, 15 years in tech. And I discovered real estate passively in 2000. Just bought my first apartment here in Brooklyn, New York, where I live, and I continued to buy real estate passively for years. And it became my passion. I really enjoyed doing real estate. I enjoyed getting great deals. And I realized you can build wealth predictably over time.

And in 2009, I was a little burned out from the tech world and I went to real estate full time. So there was a switch happened naturally. It was when the stock market was sort of had its collapse and I had my concerns about that. But my biggest driver was I wanted freedom and I wanted not only freedom for myself, I wanted the freedom for people who I work with. So ultimately, over the years, we developed our mission is to empower

investors to grow and To achieve and grow their financial time freedom through real estate. So that’s been my journey I really enjoyed it and as said it I’ve been doing this since 2009 it’s kind of been a lot of fun and continue to continue to learn more

Scott Bursey (03:53)
What a wonderful mission to empower and uplift. Love it. Let’s dive right in. Given your background in private lending, what is the most critical vetting item that large institutional lenders often misjudge or perhaps overlook when assessing borrower capacity for value add opportunities, considering factors like sponsor liquidity and exit strategy validation, Mike.

Mike Zlotnik (04:22)
So it’s little different for, for lender versus, versus equity, right? You always start with who before how, right? So you, start with the, with the borrower and we’ve done over a thousand loans over the years. And I can just tell you that, ⁓ you, you, of course, you start by trying to understand who they are, their character, and then their financials, right? You look at their personal financials. Those things matter, but over time, you’re trying to understand, ⁓ how they think, how they do business. And I’ll just tell you that.

start well and not everyone finishes well. So people make mistakes. So the key portion or the key component of your work if you are a lender

to monitor what your borrowers do and how they do it and how they change with times.

When market shifts, do they shift? Do they understand what’s going on? So it’s not all quantifiable. It’s not all LTV. Obviously, you’re trying to be conservative in your underwriting, your LTV, the borrower’s capacity to

pay, debt service coverage, all those. ⁓

⁓ But most importantly is how they act, whether they build margin of safety, whether they are aggressive, whether they adjust to more conservative deals. Are they doing deals for sacred deals or are they a lot more choosy and picky in their deal flow? So what I just mentioned is not all exact science, but you certainly, ⁓ the human element is just as important as the numbers and methods.

When I’m a mathematician by education, I actually have a degree in mathematics. I’m a chess master. I grew up all about precision, mathematics, computation. But over the years, I developed the human element and understanding who you’re working with is just as important in many ways, sometimes even more important than the numbers.

Scott Bursey (07:01)
Isn’t that the truth? Absolutely. And it’s difficult to master. It really is. And that level of detail that you just brought to the conversation is why we bring people such as yourself onto the show. Let me ask you this, Big Mike. What are some of the core strengths right now with your group, the TF Management Group?

Mike Zlotnik (07:25)
So we really raise the focus today and it takes years and I have to say that I’m a student and the first thing you do and I learned this lesson when I was four or five year old.

This is really really important. I learned from my father. This is one of the greatest lessons of all times So we were analyzing a game of chess and usually you learn in chess by analyzing a game you played and mistakes you made and you try to ⁓ get the lessons and I learned the lesson and my father asked me the question. Do you understand the lesson? I said yes. Will you ever make that mistake again? I said no, no dad I will never repeat that mistake because I learned that lesson. He left says yes, that is correct, but you’ll make a new one

It’s a great wisdom from the point of view that life is journey. It’s a learning journey all the time. So you have to continuously take every experience as something that you want to learn from. When you succeed, you generally learn less. When you use error or mistake, you do something wrong, you learn more. Same is true for me. So we’ve seen kind of… ⁓

boom and bust of multifamily real estate. And again, if you are on a lending site, you’re feeling the pain. If you’re on an equity sign, you’re feeling more pain. When multifamily has gone through its market correction, when the Fed hiked rates, 2022, 2023 market shifted rapidly and significantly. And you learn that that conservative approach to both lending and equity investing is similar.

funny how when I say this, the lower the LTV, the lower the risk for both the lender and the borrower. So as you do deals on both lending site and ⁓ investing sites, sticking with more conservative philosophy is one of the most important things that we do today. Downside protection matters more than all the great upside. So that’s the lessons learned and that’s what we do for today. It’s the cash flow.

and downside protection. These two elements, if you do that well, you will have an easier journey, more predictable journey. Maybe you won’t hit those massive home runs, but at least you’ll avoid big strikeouts.

Scott Bursey (09:38)
broken down in terms that everybody can understand. Thank you for that, Mike. Let’s discuss capital structure for a moment or two. With the current interest rate and debt market environment, what specific funding methods or co-investor platforms are you currently proving most effective for TF Management Group when originating the service multimillion dollar bridge loans in a competitive environment?

Mike Zlotnik (10:42)
So today we play mostly equity ⁓ on the commercial deals, but from time to time we will do ⁓ debt instruments. So we’ve done mass debt, we’ve done ⁓ some primary debt on deals, right?

⁓ It’s not about the platform. So we have relationships ⁓ with programmatic lenders. We have relationships with brokers who know ⁓ how the environment changes. So the market is very fluid and dynamic. I we’ve seen…

Concerns about private credit recently. It’s been a lot of Market noise again private credit not necessarily in real estate, but it’s been in private company software companies So there are some ripples in the water even private credit, which is one of the most you know conservative weights to invest has seen some some correction

So what the way I think of this is we have a new deal. Is this a great deal? If you are a lender or a buyer or an owner, and if the deal looks great from every perspective, then you start thinking about what’s the optimal way to finance the deal. If we play the lender’s hat, how much risk are we willing to take and what?

return we need to get. If we playing the equity side, we are obviously trying to optimize for lower cost of capital, but at the same time manage the risk for the lender. So when you both wear two hats and you understand both parts of the equation, you try to find an optimal solution. Of course, if you are looking for debt today, ⁓ the preference is longer term fixed debt with at least amount of prepayment penalty. So the best way to describe it is if you can get

fixed rate debt for five to ten years on a commercial deal and a minimum repayment penalties or some kind of you know gradual scaling is what you’re looking at for the optionality as the equity owner. As a landowner on the other side right ⁓ what are you trying to do the most important thing is safety right so if the LTV is lower LTV you could manage to somewhat lower interest rates as long as you feel that the borrower is well positioned.

to pay and you’re to have a very, you know, very smooth experience. And the fact that the interest rates are higher, right, what it does, it lowers ⁓ ability to borrow. So the biggest delta between now and when the interest rates were low is it’s hard to hit the SCR, the higher level of interest rates. So the only solution is lower leverage. At the end of the day, it works for both the borrower and the lender.

Scott Bursey (13:17)
When traditional lending tightens up, the true transaction expert steps up. Mike, what do you feel is some of the opportunities right now on the horizon?

Mike Zlotnik (13:31)
Well, so I’m going to speak about specific opportunities we see, you know, when we operate in our, you know, box in a manner of speaking. It’s kind of funny how I say, I talk about the buy box and the don’t buy box. The buy box is usually your small thing, which you do, and you got to be crystal clear on your buy box and everything else falls in a don’t buy box. And a lot of things that clearly outside of your, your buy box. And you have to be razor ⁓ clear on

what’s your don’t buy box. For example, we don’t do any ground up development, no heavy development, every deal we look at, we want to see ⁓

acquisition, if it’s acquisition, a deep discount on the other spaces. When you do a ground up, you can’t control what’s going to happen a couple of years. You can’t control what are the risks of construction delays, cost overruns, etc. So we don’t do those deals. So having clarity on what you like and what you don’t like, whether you’re a lender or an equity holder, is very important. So we love today, industrial.

Why industrial? Because there’s been reindustrialization of America. There’s obviously Ray Dalio’s changing world order and us versus China type of, it’s not a war, it’s not a hot war yet, but it’s an economic war in a matter of speaking. So more industrialization of America, more properties, real estate properties here that are mission critical for the US investment and long-term success is what we love.

So we love typically,

the

industrial manufacturing, we did a deal that is a, ⁓ it’s an industrial asset where the private equity bought the business, but they sold real estate and concurrently leased back. It’s called sale lease back. We did this in January. We loved it.

It’s very predictable and they sign 25 year lease with predictable rent escalation clauses. This is a single tenant called sale lease back We’re doing another deal right now where it’s a flex industrial the difference is You have instead of one tenant you have 11 tenants. You have 11 open bay industrial properties. It’s near DC In Maryland, it’s in a great location very protected location from supply and they have a lot more residential

Another development that is not impacting this type of an asset, right? So we love the asset itself and the fact that it’s got 10 of 11 spots least and we have one opportunity to lease up creates an upside But it’s already very well down side it so example of this deal talking about buy bucks our buy box is at least 2 % positive spread between the capitalization rate and the interest rate You could do the math very very easily. So that deal is being acquired at eight and a half percent cap rate on purchase

roughly.

and being financed probably around 6%. So it’s more than 2%. It’s 2.5%. I just gave you an example. But when you have 2 % or more magic happens, your cash flow gets very strong. Your debt service coverage ratio is very strong. Especially if you use conservative leverage, you have all kinds of margin of safety, downside protection. You cash flow really well. And then you look at your tenant mix. And I compare industrial to multifamily. Multifamily, you have short-term leases, one-year lease, and you have to deal with tenants and toilets.

I don’t know how else to put it. There’s nothing wrong with it, but it’s a hard to operate asset. If you’re landing on multifamily or you’re operating multifamily, it’s got that operating risk. With Flex Open Bay Industrial, ⁓ it’s very different because you have long-term tenants with 10-year leases, five-year leases, 15-year leases, and rent escalation clauses, and these are sophisticated industrial tenants, and you can underwrite them, and you can get a very predictable experience versus a volatile experience, what happened with

multifamily. Now I’m not saying multifamily is bad today, maybe great opportunities to buy because the market already corrected, but if you want steady predictable experience, but we love flex industrial or flex medical or single tenant sale lease back type of industrial deals. So you asked me about

What do we like? That’s what we like. The world is broad. People are investing in data warehouses for AI build-out. But we don’t do that because they require, you know, multi-billion dollar investments that are way, way bigger than, you know, we are. So we are focused. We know the size of what we can buy. That’s very important. So our buy box is very clear and simple. It’s a very lower end. It’s a lower end of the ⁓ mid-market commercial real estate, the best way to describe it.

Scott Bursey (18:53)
broken down with surgical precision. That was outstanding. And from a forward looking perspective, what’s your asset management strategy in the next 12 to 18 months, beg Mike.

Mike Zlotnik (19:07)
Well.

So the world is a little bit volatile right now. I we’re recording this and we know there’s a war ⁓ in Middle East. We’re recording this during the truth but I don’t know if it’s going to hold, right? So the world uncertainty and the changing world order are de facto standard. So the expectation is that the interest rates are probably going to stay where they are. If they come down that’d be wonderful but if they don’t we just kind of expect the world to be where it is. ⁓ And I would say that

Scott Bursey (19:22)
8.

Mike Zlotnik (19:38)
Operating in a condition of uncertainty and geopolitical volatility is the forward norm. It’s almost like if you want the world to be ⁓ perfect, that’d be a great outcome, but you gotta be prepared for uncertainty and volatility. And so in this world, we’re looking for is the type of investments that will generate, as I said.

predictable cash flow, steady cash flow, they are conservative, you’re protecting your downside, and then you’re trying to basically find deals that have a symmetric return profile. In other words, you’re not sacrificing upside, but the goal number one is always to protect your downside. And the uncertainty and volatility, what is it creating? It’s making it more difficult for owners to sell.

So you gotta look for motivated situations, best for circumstances, and as a buyer, you’re trying to come in and you’re not, know, vulture, you’re not trying to…

steal a deal from somebody, but you’re being opportunistic and you’re trying to negotiate somewhat better terms. So on a buy side, this is a good time to buy because there’s volatility and uncertainty about the interest rates, the world order, what’s going to happen makes people nervous. So that’s the key on a buy side. On an exit side, right, now if you’re wearing a seller’s hat,

probably it’s better to wait it out and give the market a little more time to stabilize. And if you are focused on cash flow, you’re not speculating. In other words, you are not speculating that you build something and then you can sell it for a certain price. Then you have your margin of safety and you’ll see when the market recovers. Ultimately, I actually do believe, this is my view, in the long run, AI, and this is my 15 years of technology experience, right?

Technology revolution, technology improvement is generally deflationary in nature. Why? Because the automation, the acceleration, the productivity gains, people can create more with less, faster. So the cost of goods and services comes down. So I believe that in the long run,

there will be anti-inflationary pressures in the economy. As much as the government prints money creating inflation, AI is deflationary in nature. So I think the interest rates in long term will come down somewhat. It’s highly speculative. not, you I’m just giving you my crystal ball type of view. So give it enough time, the AI and other productivity gains will help society to be less inflationary. And as a result, we might see better outcomes for real estate.

because real estate loves lower interest rates but it’s not going to happen anytime soon. you got to buy expecting the interest rates to do nothing but if they actually come down you get the tailwind. But in the underwriting you got to be prepared for interest rates even to come up and if you can do well with interest rates rising even in that scenario then you stress-tested your investor.

Scott Bursey (22:39)
Excellent foresight and that was so valuable for our listeners. Could you touch on market risk a little bit, Mike?

Mike Zlotnik (22:49)
So again, back to the crystal ball conversation, right? So the in general real estate is sensitive to the level of interest rates, right? So there’s a risk of, I was actually asked this question by one of my investors. And he asked me, what if the interest rates rise from here? And I said, that’s a great question. That is absolutely a great question. Something that we should learn from the last few years. But the big difference today versus what transpired from.

from the lowest level of interest rates, from the ZERP. The ZERP is a drug. It’s like it sounds like you got a fancy drug with a wonderful name ZERP, zero interest rate policy. And the Fed accustomed us to that cocaine. And for years they kept it. And then they pushed suddenly from 20, in 22, we went from a quarter, zero to quarter percent Fed funds rate to five and a quarter, five and a half. That happened when the interest rates were incredibly low. And that’s why it was incredibly painful.

Right? Today, the interest rates are where we are, sort of at the normal level. And that’s the best way to describe it is even if the interest rates go higher, they don’t go up 40-fold. You don’t go up from a quarter to five, you know, in a quarter. That’s a 50-fold increase. You go from, let’s say we are, you know, 4.3 % on you know, on 10-year treasury yield or the Fed funds rate is, let’s just call it 375.

You can go to even 475, even 575, even if you increase by a couple percentage points. But on relative basis, that change is not that drastic. What the market doesn’t like is the rapid change in the interest rates and when they go from zero up, that’s incredibly painful. So there’s a market risk related to the interest rate. Supply demand, of course, forces are such that with high interest rates, supply side is missing a lot of construction.

So depending on the sector, we’ve talked about residential housing, it’s missing a lot of supply. ⁓ Even multifamily they talked about, there was massive overbuilt and then absorption is slowly catching up, but the new supply is very limited. But the same token, ⁓

There’s limited new supply for industrial, there’s limited new supply for other strategies. So where I want to be today from a market risk perspective is in the strategy where the supply is low, right? Because of higher cost of build, because of other factors. And at the same time, not speculating on what’s going to happen. I’m not building a building and sitting on a building and try to figure it out where the opportunities are. The deepest discount probably exists ⁓ in those very

distressed assets but you have to be prepared for a heavy lift and we are not doing this today and it tastes different. not just a lot of thing for us but it could be a wonderful thing for somebody else. So I don’t know if I answered the question on the entire market risk because market is a broad thing right there’s so many things that could be called market.

Scott Bursey (25:43)
Yes.

In terms of fund management and portfolio risk mitigation, what specific core metrics beyond just property level LTV are you personally relying on right now to confidently approve the deployment of substantial private debt capital on new deals in the highly competitive market, Big Mike?

Mike Zlotnik (26:09)
So the key point is you got to go through sensitivity analysis. So you look at data. And most of the underwriting is driven by numbers, data. Of course, you go into the area and you go feel the building. You got to feel what’s in the neighborhood. But at the end of the day, you’re doing data analysis.

You can analyze there’s plenty of data sources with AI. Now you could use some of the advanced AI tools to help you with data. What’s happening in a given area? What are the trends? But what you don’t know is what you don’t know.

So what you can do is you can play around with numbers and sensitivity analysis. So if you’re doing a commercial deal, what variables can you play with? What drives sensitivity of performance? Obviously, rents, right? So how much rent can you collect? And if you are dealing with multifamilies, very different versus industrial or retail center, where you have predictable leases and you need to look at the credit quality of tenants. In a multifamily, you’re looking at, you know,

essentially people are going to live there in the class of the properties of the class A area, class B, what’s their credit, et cetera. And we know it’s very bifurcated, for example, multifamily. It’s a K-shaped kind of economy where the top echelon is doing really well and a lot of people struggle. So your class C, maybe B minus assets are struggling, and I’d be very careful with those because you don’t know where the things will go if recession hits. So the class A is generally little bit more attractive.

When you go to commercial assets, it’s a quality of tenants who are these tenants their longevity their credit rating and The reason I’m saying this so you’re playing with few variables you’re playing with rents again multifamily rents They depend a lot on what’s gonna happen with supply demand and where where there’s gonna be rent growth One commercial it’s predictable You literally could look at leases and say they’re paying this much this year and next year It’s gonna be this next year is gonna be this because it’s triple net rent escalation clauses and is an example

Scott Bursey (27:47)
It is.

Mike Zlotnik (28:13)
So.

Those are important variables. Obviously, level of interest rates is a key variable. If you’re lending money for short term, it’s one thing, but if you’re lending money for long term and the interest rates rise, it’s not good for you. If you’re an owner, ⁓ same issue is true. If the interest rates rise, your ability to sell for the price you want may not happen. So sensitivity analysis to the ⁓ rents, leases, to the level of interest rates, vacancy, right? It’s another important variable you can control. So you could stress that’s the condition.

and say what if you lose some of the important tenants, what would happen? Can you release it and what is your kind of a stress point? So these type of mathematical analysis can help you make a decision whether to do a given loan if you’re a lender or invest in an equity overdeal if you are doing that. And the underwriting, the funny thing is pretty similar, lender or equity player. So the lender’s stress conditions are the same as the owner’s stress condition because at which point, at what vacancy can they

pay the mortgage. That’s the bottom line. So understanding that is an important part of the underweight.

Scott Bursey (29:20)
Absolutely. Big Mike, this has been an absolute masterclass. What single one piece of advice would you like to, ⁓ can you give to our listeners?

Mike Zlotnik (29:36)
As I said, look at the investment journey as a learning journey. And this is the lesson I mentioned from the childhood just lesson. It just continued to learn.

And don’t be afraid to make mistakes and people are very concerned that they, you definitely want to measure seven times, cut once, right? You have to be very, very careful. You have to take your time and sometimes sit in your hands and do nothing. And when you take action, you have to have high confidence. So I would say, ⁓ don’t be motivated to act, be motivated to learn, learn a lot. And when you act,

make sure that you learn from your investment, even if it doesn’t go ideally. In fact, you’re going to learn a lot more. So the point is, I’m re-listening again, I’ve re-listened to this book so many times by Howard Marks, the most important thing. And the key thing is that he says,

is that focus on your downside protection. If you’re starting early, think of the conditions under which you could actually lose money. And if you minimize those possibilities, you will do well in general.

But remember, it’s a range of outcomes. The world ⁓ is like roll over dice. Sometimes it hits your number, sometimes it doesn’t hit your number. And you have to be prepared for various outcomes. And if you’re prepared for a lot of, let’s just call them not ideal outcomes, then you can still do fine.

then your investment journey will be smoother. Just continue to learn and continue to choose your investments that have more of a downside protection. And I’ll just add one element. Some people love to get these great upsides. And me too, like I worked in tech world. You want these AI stocks to go to the moon, you want these things to be worth great fortunes, but those things are not cashflow investments. And the market…

as much as it is bullish, can turn bearish. And some other things could drive ⁓ losses in that. And investors just need a mode. They need a safety margin. And that’s the story that we generally tell. Build your foundation first, and then you can go and shoot for starts. If you love to take more risk, take on risk. But start with lower risk, more cash flow, and then see where it takes you from there.

Scott Bursey (31:55)
There it is, outstanding, outstanding advice. Mike, we love fostering connections here at Real Estate Pros. For the listeners who want to follow your journey or collaborate with you, what’s the best way for them to reach you?

Mike Zlotnik (32:10)
So the easiest way it’s going to be cheesy. People call me Big Mike and I do run a podcast with a cheesy name, Big Mike Fund Podcast. I couldn’t come up with a better name. I’m sorry. It just, it is what it is. So people can go to the website called bigmikefund.com and you could sign up for a newsletter. I actually have a book coming up.

Scott Bursey (32:22)
Yeah

Thank

Mike Zlotnik (32:34)
And ⁓ the book is going to share a lot of these great lessons so people can go on the website and punch in your information. I think there’s a sign up link. The book will be out soon. We’ll send you an autographed copy. Just sign up, go to the website and I’ll get you a copy of the book. And if you misspell it, I just love to crack this joke. It’s a little cheesy, but ⁓ I started this way. I was saying bigmikefund.com and people said, did they hear you correctly? Did you say bigmikefund.com?

Is this the right site? And I tell him, I promise it’s not a kinky site. The moment I heard it, I grabbed the domain and yes, you’re to go to bigmikefund.com. But the bigmikefund.com is not a kinky site.

Scott Bursey (33:14)
Mike, what is the name of the book going to be entitled?

Mike Zlotnik (33:19)
So it will be called the investors end game, like in chess, the end game is the finale of the game.

And it’s going to be the lessons learned or the journey ⁓ of a chess master in real estate investing. You’re basically going to learn real estate investing in the eyes of a chess master. have many chess lessons throughout the book. Even if you don’t play chess, chess is one of those things you can’t go wrong with. It’s just a wonderful, wonderful game. I grew up playing chess. spent ⁓ many years playing chess. I’m a chess master. And a lot of lessons in life that I’ve learned is through chess. And it’s a real estate.

investment book but it’s in the eye from the eyes of the chess master.

Scott Bursey (34:01)
Big Mike, thank you so much for being on the show today. This was outstanding.

Mike Zlotnik (34:07)
Thank you Scott for having me.

Scott Bursey (34:09)
And for our listeners, we appreciate each and every one of you. If you got value out of today’s episode, please subscribe. We have more conversations coming up with exceptional operators just like Big Mike. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.