155 Mike Zlotnik on Passive Accredited Investor Show | Hard Money Lenders
This Thursday at 1:00 PM Eastern, join the Carolina Capital team LIVE for the Passive Accredited Investor Show with Big Mike, CEO of TF Management Group, LLC!
Along with Big Mike, Bill & Wendy will be discussing different types of Funds available to Accredited Investors!
Mike Zlotnik, CEO of TF Management Group, LLC, has been a debt and equity investor in real estate since 2000. He started his career and had spent nearly 15 years in the information technology field managing Risk, Business Intelligence, and Quality of complex systems, software, and processes.
While building a successful carrier in IT, Mike’s passion has always been real estate investing because of its predictability of outcome and well-understood risks.
In 2009, Mike joined Tempo Funding, LLC (Mortgage Pool Fund) as a managing partner, and Vice President of funding operations.
Starting from January 2014, Mike has assumed the responsibility of a CEO and has since founded TF Management Group, LLC, launching 4 new real estate investment funds, TF Investment Fund II LLC (Income Fund), Tempo Opportunity Fund LLC (Growth & Income Fund), Tempo Growth Fund LLC (Growth Fund) and Tempo Income Fund LLC (Income Fund).
Mike holds a Bachelor’s degree in Mathematics from Binghamton University. Mike is a member of multiple real estate and investor mastermind groups such as Collective Genius, Freedom Founders, Venture Alliance, CA Investors (Private).
0:01 – Introduction
2:04 – Wednesday with Wendy: https://calendly.com/wendysweet/wednesdays-with-wendy?month=2021-09
3:37 – Today’s guest: Mike Zlotnik – CEO of TF Management Group, LLC
5:07 – Tempo Opportunity Fund & Tempo Group Fund
7:21 – Disclaimer
9:36 – Cost to Build vs. Cost to Develop
12:37 – Affordable multi-family apartments
13:45 – Exterior Improvements
14:30 – Where do you find these investments?
16:02 – What happened to these properties during covid?
19:56 – Values of the properties during and after the pandemic.
24:44 – Trust your fund manager.
28:36 – Investing in a fund is not a short-term thing.
Carolina Capital is a hard money lender serving the needs of the “Real Estate Investor” and the “Small Builder” borrower who is striving to build wealth and generate income for themselves and their families. We offer “hard money rehab loans” and “Ground-up Construction Loans” for investors only in NC, SC, GA, VA, and TN (some areas of FL, as well).
As part of our business practices, we also serve as consultants for investors guiding them to network with other investors and educating them in locating and structuring transactions. Rarely, if ever, will you find a hard money lender willing to invest in your success like Carolina Capital Management.
Listen to our Podcast: https://thealternativeinvestor.libsyn.com/
Visit our website: https://carolinahardmoney.com
YouTube Channel: https://www.youtube.com/channel/UCYzCFOvEt2n9TchgECLwpww
We discussed several shows ago some of the repositioning that had to happen during COVID for different commercial assets. And we want to give you the other side of this now that we’ve kind of worked our way through it.
So we are very happy and honored to have our friend, Mike Zlotnick, joining us today with the Tempo Growth and Tempo Opportunity Fund. We wanted to have him because we had talked previously about the different asset classes that are affected the most through COVID. That would be hospitality, some retail stuff. And what funds that had those types of assets in them did to keep up with that class, if they had to do write-downs or if they wrote them back up. I’m just so happy to have him on here. He’s one of the smartest people that I know other than Wendy Sweet, of course.
He’s also one of our favorite people. Mike is just a good, good friend. He’s been in so many of our mastermind groups together, but we just have a great relationship. We have a lot of respect for each other and he’s just that guy that you’re going to be buds with for the rest of your life.
Excellent. So first of all, kind of give us an idea again, with your opportunity fund and your growth fund, what are the asset classes that you’re mostly involved in or you’re looking to put into those funds?
Sure. So, Tempo Opportunity Fund has been around since 2017. It’s a broadly diversified fund and we’re capital allocators so we’ve been changing strategy as we go along with the best opportunities. And just a quick overview, it’s got over 80 assets while diversifying among many strategies, including multi-family, storage, some shopping plazas, office, industrial, portfolio as a single family, a number of hard money loans. So this fund touches many aspects of real estate. And let me switch briefly to the Tempo Growth Fund. That fund we launched essentially just pre-COVID. We launched that fund in January 2020 and COVID hit. And it was actually a phenomenal opportunity for us for that fund to start picking up assets, to make investments when the market was dislocated and substantially discounted. So that fund had a different mandate. That fund is a growth mandate, so it loves a repositioning of assets. And we started writing a good number of checks into the hotel to multi-family conversions and some offices to multi-family as that trend started to pick up quite a bit.
And what’s really interesting is that you can’t blame everything on COVID. It’s an easy excuse. “Hey, oh, it’s the pandemic.” The reality is that many of these assets struggled before pandemic and kind of the pandemic knocked them out and the highest and best use is no longer the original purpose. So it just accelerated certain trends or certain opportunities. So that’s the brief history of all our funds. At this point, once we launched the Tempo Growth Fund, we started focusing Tempo Opportunity on more income deals and less of the growth deals.
Before you go any further, I want to make sure that we keep you and ourselves in compliance and mention that this is for educational purposes only. There are no sales of securities. So read your prospectus, your PPMs. And again, there’s risk with any investment.
Yeah, thank you. It’s a wonderful disclaimer. I’d like to do the same thing. Informational, educational only and consult with your attorney and CPA and yeah, read the PPM, please. So again, being capital-allocated is one of the strengths. We can shift our investment focus to the best opportunities that present themselves. So as we launched Tempo Growth Fund, we obviously invested in some classic, value-add multi-family projects. What has happened during COVID, a number of these projects were trading or selling at a discount. So the opportunity was to basically come in and invest in those projects at a good price. And then the hotel to multi-family, the whole trend picked up rapidly. And even though we are diversifying quite a bit, we also took advantage of some of these opportunities. So we like the strategy. We’ve allocated probably 40 to 50% of the fund so far into these projects.
And that’s been a great blessing. The fund is still open. We continue to raise capital and continue to write more checks into the strategy. Although, it’s getting harder to find these great deals. So during the peak of COVID, these things were completely stalled, no business. You could pick them up at a much better deal. Today, there are still good opportunities from the point of view that these were not good hotels pre-COVID and now they’re sort of recovering, but at the same time, they’re not recovering well. So there is an opportunity to convert, and many cities and towns don’t want as many hotels as they have. And they would prefer to have more affordable housing. That’s why this thesis comes in, it’s a do-good strategy as well as it has economic benefits to investors because the cost to build versus the cost to redevelop is quite different.
So is that what you’re seeing? A lot of these conversions happen like a hotel? Are you seeing them go into more of a long-term housing situation, multi-family apartments, and things like that? Is that what you’re seeing?
That’s exactly what I meant.
And what about strip centers? Are strip centers in there, too? And are you doing that as well?
We’re not doing strip centers to multi-family. I haven’t seen those projects yet. They’re hard to do. Maybe zoning issues, maybe logistics, how do you do that? But the hotels, especially extended stay hotels. Just think of it. It’s an extended stay hotel. They look like mini apartments anyway. So they’re ideal candidates. The conversion process is generally easy. They may already have built-in kitchenettes. So that whole strategy seems to be easy to execute. There’s two flavors of ice cream, I call it. You have the extended stay hotels in the good candidates area. We’re not looking at the high-rise hotels. We’re looking at the typically low-rise, two, three stories, extended stays or your hotels that look like motels like Ramada Inn. So instead of internal access from the building, you are entering externally from those. If you can imagine these motels, what they look like, their conversions to studios. So it depends where it’s located. If affordable housing is critical, instead of building one bedroom, 600-square feet, you are better off with two studios at 300- square feet each. And that seems to work quite well. For many people will prefer privacy instead of having a roommate.
Right. So are you also seeing any of this turn into assisted-living type scenarios?
I’ve had a conversation with, interestingly enough, one gentleman who was talking about thesis – old hotels to assisted-living. The complexity is, in today’s day and age, you have to build all kinds of filters and the cost to convert is very different. So, assisted-living might make sense in some circumstances, but it is a lot harder lifting. It’s a lot more work, more complicated, maybe for some people it would make good opportunities. For us, we’re looking kind of a low-hanging fruit.
Well, that was the question I was going to ask. And the reason I was asking it was because they already have the wide hallways and the elevators in place, and you would need that for people that might need to be in wheelchairs and that type of thing.
Not these hotels, at least in that, not the Ramadas and maybe extended stay might have some handicap access rooms, but in general, it’s not something that doesn’t appeal to us, at least not as an investment strategy today.
So when you’re turning them into multi-family, I’m assuming that it’s more of an apartment-type complex? Nobody’s turning around and selling them like condos or anything, right?
Correct. Just simple multi-family, typically affordable range. As I mentioned, they’re smaller units. They present probably one of the most affordable products in that zip code because there’s, literally, nothing small. I mean, either studios or small one-bedrooms, so it’s an affordable product. And then they could be located in a great area. Just the demand for hotels might be subdued or wasn’t there pre-COVID. So with the opportunities to convert and the primary thesis on this is to compare building apartments ground up versus conversion. The cost to build now has skyrocketed. Labor, materials. So conversion is incremental. If you pick up the right property, you may still have to put on a new roof. You may have to do some more work, but it’s incrementally a whole lot cheaper than building ground up. So you can get into that apartment complex with an affordable range at a well-below reconstruction cost.
Now, are you doing any exterior improvements on something like that as well? Making them more family-friendly?
Yeah, I mean, depending on the property. A lot of them have pools, right? So you basically have a pool for the residents at that point. Roofs, siding, some other known normal renovations for an aged property takes place. And then can you build a small playground? Yeah, if there’s space, if you could implement what you can implement. Some other hotels might have some meeting rooms with some other stuff that could be turned into rooms available for a family room or something like that. It really depends asset by asset, investment by investment.
Right. So where are you finding the majority of these? What area of the country or certain states that are doing more?
I’m just going to go down the list of investments we’ve made. So there’s no particular focus. It’s not being done by a specific area. It’s really where the opportunities show up. So we have investments in Mesa, Arizona, suburban Phoenix, kind of the workforce housing. They call it, “the armpit of Phoenix” because of workforce housing. Then we have an investment in Longmont, Colorado. We have an investment in New Braunfels, Texas. Winston-Salem, North Carolina, sort of your neck of the woods, relatively speaking. South Bend, Indiana. So they’re all over the map. They’re not coastal cities, they’re not San Francisco’s, New York’s. Very different projects. These will not be high-rise hotels with very different dynamics. That’s not happening here. At least I haven’t seen too much of it. But, funny, I have a property I’m going to go look at right before the CG Mastermind in Orlando. So we’re flying in. As I mentioned, we’re going to go to Universal Studios and also gonna look at a property in Orlando. One of these hotels that look not far from Disney. So there’s no right or wrong. It’s just where the opportunity shows up.
If you don’t mind, Mike, kind of walk us through what happened with some of these properties during COVID. And then now, after COVID is over with, because your fund is in a syndication, it’s an open-ended fund. At least the income fund is, right?
Yeah. So we have the Tempo Growth Fund just to contrast, it’s a closed-end fund. So that fund, essentially, started raising capital in January 2020, right before COVID hit. And then most of the investments happen kind of after COVID took place. And the open-ended fund is the Tempo Opportunity Fund. And that fund continues to raise capital every quarter in deployments and deals and pay distributions. So the big difference is Tempo Growth has a simple mandate to acquire the assets for two years, put the money to work, and then let the portfolio generate the returns. Tempo Opportunity is very different because it’s ongoing distributions are focused substantially when the income, just like your fund, is distributed on a quarterly basis. So they are very different mandates. And these redevelopment projects fit very, very well into the Tempo Growth Fund. But they’re a little bit outside of the primary focus today in the Tempo Opportunity.
So in the Tempo Opportunity Fund, what’s really interesting is we’ve learned some money on some of these projects. We have a deal. We have two deals where Tempo Growth took the equity position while Tempo Opportunity took a debt position on the deal. Why? Because the debt generates income and it’s great for income distributions and income-focused investments. And then on the growth side, the Tempo Growth fund is perfect in that it doesn’t need any income. It has a ton of tax efficiency that passes through passive losses to investors, but it generates the returns on the backend, in the form of capital gains when these projects are converted, stabilized, and sold. So sort of those are the kinds of the two differences
I was going to say, if the sponsor decides not to sell and do a refinance and then cash everybody out, then that transaction may have some additional tax benefits with it to the investors as well, right?
Yeah, for sure. So part of the strategy on a lot of these deals, there’s two primary strategies. Think about this on pretty much any value project. You have the value at phase and which is a conversion of a hotel to multi-family or whatever it is on existing multi-family renovations. Once that completes, the sponsor, typically, either sells it outright, which is the closest call to a two-to-three year flip. Strategy number two, refinance, return a substantial amount of capital, and hold it for say, a five-year hold. So we’ll welcome both in either scenario, it works for us. If it’s a refi, if it’s a return of capital tax-free completely, which is always welcome, right? On the other side, if it’s a sale event that happens fast, it typically increases the annualized return. The IRR, internal rate of return, goes through the roof. So we welcome them. Either strategy works.
Most of these deals aren’t written for a five-year hold, but some of them will immediately say, “Hey, we’re gonna value-add, and then sell immediately.” So it works for us. We actually like both of these strategies in the fund. Why? Because we want semesters to flip in two years, some in three, some in four, some in five. We don’t want everything to come out on the backend because investors ask us, “When am I going to see some money back?” Well, you’re going to see some money back earlier because some stuff will flip so that you could do that in a fund, it’s harder to do one-off deals because you get all or not, whatever happens in the deal, that’s what you get.
Right. That’s awesome.
So, let’s talk about the values of some of these deals during COVID and then after COVID, and I’m not sure which fund exactly, but this happens even in syndications where you’re doing a value-add project, and as your income is much less because you don’t have as much occupancy because you’re fixing them up. The values of the properties actually go down during the investment. And then in later years, as you start increasing the occupancy level and the income on them, then those values go back up again. So the writing down and the writing back up again of an asset is pretty normal, is it?
Yeah, that’s right. So that’s a great point. I’m going to make a couple of quick comments. So, the beauty of a closed-ended fund, we don’t really care about write-ups and write-downs. We don’t have to do quarterly mark to market. In an open-ended fund, we do that. So for Tempo Opportunity Fund, this matters. For Tempo Growth, it doesn’t. But from the valuation perspective, you have the right. If you have a functional hotel and then you stop operating it, the value has dropped and then you convert it, re-stabilized, then the value has gone up.
So what we just observed is that the returns in these value-add projects follow what is known as the “J curve.” Imagine the letter J. So in the beginning, the value of your investment drops like a letter J literally just, just draw letter J. And then as you execute the value-add strategy, the returns start picking up, the value for investors picks up quite a bit on the backend. This J curve is an incredibly powerful strategy because you can, without giving any investment advice – not a CPA, don’t play one on TV, informational purposes only, usual disclaimer – you could invest a traditional IRA money into a growth fund, like Tempo Growth Fund, or a growth value at a single deal. And then converted at the bottom of the J curve, when the hotel stopped operating and now is a dysfunctional hotel being converted to multi-family and converted at a valuation substantially lower than what you put in the cash.
It’s a pretty powerful idea. I’m a little bit tangenting from this, but you started on this point. I wanted to share this idea. So if it makes sense for people, you can write a 100,000 check in the middle of the value-add for 70,000 bucks. You pay less taxes on the conversion value, but that’s the kind of concept here for an open-ended fund. Now I’m going to use another example for Tempo Opportunity Fund. We invested in May 2019 in a hotel conversion in Ogden, Utah. Now this was not one of these residencies nor Ramadas. This was a boutique hotel, kind of a high-riser. This was a pre-COVID outboard, and it was being converted to apartments as well. What’s really fascinating about that project was that it gave us a lot of passive losses and we had to basically mark down the value of the investment on the books of the fund while it was being converted.
Now, the project sold in February of 2021 this year. And it’s sold at a phenomenal price. Essentially, we generated 2.2 times return on the money in 21 months. Yeah, it sold. You asked me the question, “What has happened with all these values?” Well, the values shoot up. The pro forma projection on that sale was 18.8 million. It sold for over 20, 20 and a half. So when you have leveraged that deal and these properties come out of COVID and they come out strong and they sell above the target price, it magnifies the rate of return quite a bit. So we saw that. So that project we just finished Q1 again, full disclaimer. We were about to finish the results and the Q1 has monstrous results, much, much stronger than our typical quarter, because that sold at a rate of return far above the projected number. So we’re having massive distributions in Q1 as a result of this. So when they happen, these projects, they pop. When they pop, the returns shoot through the roof. And that’s what happens on these projects. You have to be patient and deal with the markdown until it’s going through the project, but when it exits and it exits well, it becomes a home run.
Mike, I think it’s really important that we mentioned here that this is the perfect scenario of why it is important to know, like, and trust your fund manager. You have to trust in Mike’s knowledge, ability, skill-level, ability to see into the future, ability to make sure that all of your exit strategies are a win-win. It’s just amazing how you have taken what some people would have looked at as a complete and total lemon and turned it into not only lemonade, but lemon everything, because it’s just sweet. It’s absolutely sweet the way all of this turned out, but you have to trust your fund manager and pick a fund manager that understands what they’re doing. You’ve done a phenomenal job.
Thank you, Wendy. You’re so sweet.
Yeah, and I greatly appreciate the kind of words. If you don’t know, like, and trust. We use the same philosophy now with investing. We can write a check until we know, like, and trust whoever we invest with. And the same is true. So that is given. The other quick question. I don’t have insight into the future. I’d like to call it, “I had a great crystal ball. It broke, I can’t find another one for sale.”
You can absolutely see the trends and understand, identify the opportunities. And investing is not an easy game. It’s definitely something I love to do. This is kind of my genius zone. And I mean, we saw that to be one of the strong COVID-created opportunities. It’s not necessarily all COVID, but it is one of the substantial ones. The other thing you talked about, the shopping plazas, and I could tell you this on the shopping plazas. So during COVID, we have to write them down in our Tempo Opportunity Fund. When this thing started, we had no idea, especially Q1 and Q2, 2020 things look very scary. I mean, people are going to be in this funk for a long time, right? And then the thing started to come out, we started writing it up. That’s one of the things that fund managers do like myself, in an open-ended fund, you write things up and down as market conditions change, or as a score to their progress.
It’s something that is both a beauty and a curse. Right now, things are looking great. But during COVID, I had to explain to investors why the returns are not looking great because one thing that most investors misunderstand, they look at investments as bright, shiny objects. They don’t understand that investments can have a downside. Things can go down. So if you’re just investing for upside and you want safety guaranteed, you’ve got two options, right? Buy government bonds and get your whatever little return paid off. You’ll guarantee to be paid like clockwork and you’ll be paid until the whole thing will stop. And most other investments have some degree of risk and investors should understand. You don’t always have perfect smooth sailing. You will have ups and downs, especially when black swan events like COVID hit. But you have to understand things may be a little rocky for a bit. When the storm passes, you may have a great smooth sailing from there.
The bottom line is that there is no straight line in nature. And when you invest in a fund, you’re not doing it for the next six months. You’re doing it for the next 5, 6, 7 years. Investing in a fund is not a short-term thing. And you’re going to have some ups. You’re going to have some downs, but you have to trust that your fund manager and the investment strategy that they’re employing is a long-term “when” situation. And you’re always going to have black swans that are gonna affect this. But if your strategy is sound over time, you’re still going to be on the upside.
Yeah, that’s the words of the wise. I agree with you a hundred percent. Most people don’t quite understand this concept. They think, “Hey, I’m just going to invest in any open-ended fund. And when I want out, I just click a button, like your self-stock.” It doesn’t quite work like this. You’re really investing for the long-term. That’s the whole idea. These alternative investments, and that’s what we call them. They call alternative investments to the stock market. One thing you’re sacrificing is some of that liquidity. And you’re parking the money for somewhat of a longer term. So if you take that to heart and you understand that, then you wind up not being disappointed because sometimes you will have COVID. Unfortunately, this is how the world operates. And the shortest distance between two lines on a planet over earth is not a straight line. It’s a curve. And sometimes you have to walk the curve.
Yeah, absolutely. Mike, how can people get a hold of you?
Thank you, Billy. You can hit me on BigMikeFund.com.