Building a Multi-Million Dollar Real Estate Empire - Stephen Bittel

[00:00:08] Welcome to the CRE Project Podcast, the show where we take a deep dive into the world of commercial real estate. I'm Clayton King, your guide through the complex environment of commercial real estate. So, whether you're looking to invest, develop, or simply understand how commercial real estate shapes our cities and economies, the CRE Project Podcast is your ultimate resource.

[00:00:48] Stephen, thanks so much for joining me on the CRE Project Podcast today. It's great to have you here. Thanks, Clayton. It's a privilege to be with you. Yeah, man. This is great. Terra Nova is obviously known as a powerhouse at real estate company out of the Florida market and you're obviously a very well-known individual in the commercial real estate space. So, excited to have you on and talk about what's happening with commercial real estate in your world.

[00:01:15] So, to start out, I've given the viewers a little bit of background on who you are and your company, but I'd really like to hear from you how you started out and how you got all the way to where you are today. Well, the company was incorporated in 1980 out of my house while I was in law school. By the time I graduated, we had already purchased with friends and family two strip shopping centers. I graduated law school in 82 with seven employees and a few third-party deals that we were leasing.

[00:01:45] We did another syndication, participated in a few more. Of course, I thought I was rich. And then in 1986, the Tax Reform Act of 86 hit an almost simultaneously for real of the Financial Institution Reform and Recovery Emergency Act. Real estate lost about a third of its value. It was a devastating time. I got very skinny because I couldn't eat because the pressure was so intense.

[00:02:10] Our first three syndications, two went back to land lessors and one went to a dead S&L that had been taken over by the government. Not a lot of fighting. It was all very friendly and cordial. And we roared into building what became the largest third-party management leasing business in the Southeast. Our biggest customer was FATA, the Federal Asset Disposition Association, which was the predecessor to the RTC.

[00:02:36] We also did all of the work statewide for New York Life, a lot of work for travelers, insurance. We ended up working for six of the top 10 insurance companies, six of the top 10 banks, and seven of the top 10 pension fund advisors. So we built this huge third-party business. We had in-house CPAs, general contractors, leasing agents, property management. We did it all in an era when the larger national firms weren't in that business.

[00:03:05] And typically the company would come in with me as a receiver on a foreclosure. We would take over management leasing. We would do the development, the construction management, and then take it to market to sell it. It was very good. We tended to have a several-year relationship with every property. Most of our clients we had a lot of properties for. And we took the profit and slowly and quietly started buying again.

[00:03:31] We have historically been a very long-term holder of assets. I guess our longest hold today we've been in since 1981. Wow. There you go. That's probably before you were born. Yes. But we have lots of deals that we're in for over 20 years, which has enabled us to work the property hard, grow the rent, refinance, and do it again and again. Yep. Do you come from a family of commercial real estate?

[00:04:02] No. My mom was a school teacher. She remains very much alive at 91. I had dinner with her last night. Wow. That's amazing. And my dad was an attorney. But growing up, when my parents would have their friends over for dinner and I would sneak in and listen, their friends were other professionals, doctors and lawyers and teachers and mortgage brokers. And they would all talk glowingly about their real estate investments. And I always used to say, why? If that's the place to play, why do you only do it part time?

[00:04:31] And they said, we needed the cash flow from our other businesses to have money to invest. And I said, wouldn't you be better if you did it full time? And they didn't answer because the challenge in building a family is your overhead has this wonderful tendency to expand to meet all available income. Yes. And they had done that. So that kind of always was in the back of my mind. I went to public school my whole life. My graduating class in high school was 1240.

[00:05:01] We were on split shifts. So I went 1155 to 455 every day. Yeah. It was a very large public school with no air conditioning. You shouldn't. We didn't seem to know. Jeff Bezos graduated from the same public high school. Really? Wow. As did Vivek Murthy, the recently exited Surgeon General and Ketanji Brown Jackson, the most recent Supreme Court justice. I was clearly the underperformer.

[00:05:28] And after I applied to a bunch of very selective New England liberal arts colleges, and I ended up going to Bowdoin College in Maine, a place that I remain close to. And my sister went two years after me and my son was in the class of 2010. Wow. And people always say, how did I end up in Maine? And I said, caught a wrong flight. Good answer. But again, I'm really, I really am from Miami. I was also born in the public hospital here. Oh, there you go, man.

[00:05:57] It's a miracle. My life has been a miracle. Right. I love it. So I'm curious, your path is interesting just hearing you talk. So you were in law school and then talk about your first deal that you put together. Because again, typically people will go through the brokerage path or some path similar to get into commercial real estate. You just dove in and bought your first investment. Talk to us a little bit about that. How'd your journey start? I had this real estate focus in mind from listening to my parents' friends.

[00:06:27] And I had left college twice to work at the Congressional Budget Office and wrote some papers on the US tax treatment of foreign investors in the United States, which at the time was effectively tax free. While in college, I was nominated for a number of postgraduate fellowships.

[00:06:45] I accepted one from the Thomas J. Watson Foundation and spent a year in Europe after college meeting with private banks and law firms and accounting firms and companies about what they were looking at in terms of their international investing. And I, while away, wrote a column that was printed in Miami's daily business publication every other week with my picture. And I got paid $25 a column and got a press card, which got me into some cool events in Europe.

[00:07:13] But I did it more importantly because I wanted to get a job when I got back. While I was away, I was persuaded to apply to law school, which I did. I got into a few, but the University of Miami offered me a scholarship. But I had written this column. And when I got back, I'd spoken at a number of conferences in Europe while away as older than a child, but younger than an adult. Sure. And I was asked to speak in Miami and immediately afterwards I had inquiries about jobs.

[00:07:42] I got calls from Drexel Burnham Lambert and Goldman Sachs. I ended up taking a job with a local real estate company. And I did that full time my first year of law school. I participated in brokerage fees, but I was salaried and happily salaried. And after about 14 months, the owner invited me in and had this big spreadsheet, which of course was on accounting paper with a pencil because we had computers back then.

[00:08:08] And he explained to me how much more money I would have made as a commission only broker. And when I began, you could have persuaded me a square foot was a birth defect. I knew nothing. Nothing. And they were finding the opportunities and I was finding the investor. After 14 months, I was doing both parts of it. And I asked if I could take the spreadsheet home and they said, okay.

[00:08:32] And I went to my then fiancee, now wife, and told her that I thought I was going to quit the next day. And of course she was terrified at that thought. Naturally. And then I called my dad and told him the same. He was more unhappy. And so I did the responsible thing and went in the next morning and quit. Yeah. So shortly after, within a month, I came upon a deal that had some interesting features. And I put it under contract.

[00:09:01] I went to a local neighborhood bank and borrowed the deposit, assuring them that I would not go hard and risk their money, which of course I would have no way of paying back without having the capital raised to close. And so I, it was a 27,700 foot strip center that was U shaped, which I wouldn't do again. And it was also on leased land, which I have done again, but I always hate. And that was the first. And then a year later, I did another one a block away.

[00:09:29] And a year later, I did a one story office park on five acres. That was really all about the land. And in each of those deals, the world was different today. I got a brokerage fee. The company I owned would be the general partner. They were very tax advantaged. There was no promote because that wasn't a thing back then. Yeah. And I got management leasing fees and left in most of my brokerage commission as my equity contribution to the deal. And those were good.

[00:09:56] So I was pre 30 and had bought a bunch of real estate and was off to the races. Yeah. Until the music stopped. Yep. I'm curious. I'd like to, to hear from you. That was a year and a half. You said you were with the real estate company before you quit, right? 14 months. Okay. So 14 months, right? Talk to us about how, and this is more of even a global conversation, but even at the time, like, how did you have the confidence in yourself?

[00:10:26] And how did you deal with fear? You've been in it for 14 months. How did you have the confidence in yourself to pull off these deals and raise money and get with the lender and all the things? Because again, in our business, right? Everyone has the want to go out and take these risks, but a lot of people talk themselves out of it. So I'd love to hear from a guy like you, how do you deal with fear and how do you push yourself to take risks? Whether it's then or now. Listen, I was not short of confidence as a kid at my wedding.

[00:10:55] When the rabbi got to the place, he talked, said really nice things about my wife, which were true. And then he got to me and he said, I know Steven Patel since he was wet behind the ears. Although most would suggest Steven was never wet behind the ears. I was a very serious kid and I was a very hard worker in college. And I had done very well. I got all kinds of awards. I still make the college a little crazy. And I haven't heard from the board chair since this afternoon, who was my classmate. And I was a serious guy.

[00:11:25] I'm still a serious person. My friends in my forties used to say, why don't you smile? And I said, because I'm busy and I'm thinking. And so I think it's a lot easier to go out and take risk when you have less family overhead. When you already have a big family and a mortgage and cars and schools. And it's hard because there are a lot of people depending on you. I did it. I wasn't even married yet.

[00:11:52] So if I completely blew it, I probably could go get a job or practice law. Or there were many options that I could have done in failure. Look, I've been through a lot of cycles now. And the good news is at the age of 68, I have lots of stuff in other people's names, like my kids and wife. And I'm comfortable today. But also our balance sheet is much better today. We're significantly under levered.

[00:12:19] And so you had a bad moment, like the COVID hit and I was worried I might be poor again. We didn't know if anyone was ever going to pay rent. Yeah. They did by December of 20. We were almost 100% collected, including any deferrals we had done. But that's not to say there aren't terrifying moments. Look, when 2008 or 9 hit, most of our portfolio had no debt. In this current cycle, we probably have LTV portfolio wide of less than a third.

[00:12:48] So that's a forgiving balance sheet. But in the beginning, there was no forgiveness in the balance sheet because there was only debt. There was no equity. Yeah. I imagine there was equity until there wasn't. Look, I think that people deal with failure and the fear of it all the time. It's a great motivator. I tell people when I talk to young people is become a principal at the earliest moment you can.

[00:13:11] Again, even if it's a little piece, hook yourself up to an honest, hardworking entrepreneur and beg them for a piece of the deal. And look, it's I've done it for lots of our employees. Early ones, I it's urban lore that I once took someone to the bank and signed on a loan for them because I said, you got to be an owner. We have lots of owners now here, and we have a number of people are alums that are still getting quarterly distribution checks. And we're good with that. Yeah.

[00:13:41] I think I always used to say that I explained today the leadership of retail and most Miami companies had come from Terranova, but I think when they left, I was always upset. But I have rationalized it to make myself better by persuading myself that we hired great entrepreneurial people with the right spirit and values. We gave them some structure and discipline, and they did great things for us and then went out and did more great things. Yeah.

[00:14:07] Now, maybe that's an after the fact rationalization, but I have persuaded myself of that and it makes me very happy. Yeah, I think that's a good way to look at it. For sure. You're still benefiting the community from your office. When COVID hit and I was banned from the office for the first two and a half months because of my age, our alums who are leaders at lots of other companies, they were all calling me every night. I remember one guy called like April 4th or 5th. He says, so what do you think I should be focused on?

[00:14:37] I said, collecting rent. He goes, Oh, I don't do that. Everybody pays rent. I said, no, everyone did pay rent. Yeah. You ought to go look at your delinquency right now. Call me back the next night. He goes, I had no idea. He said, what do you do? I said, we call through those tenants every day. Yeah. Some were amazing. McDonald's sent a letter to us and everyone else saying, everyone's calling you a partner. We're paying. And lots of the others asked for relief. Yep.

[00:15:02] Some with giant market capitalizations asked for relief, but look, we soldiered through that as we have on many other cycles. And I was blessed with a super smart dad, a very social mom who like stayed late last night talking at 91. I kept saying, mom, gotta go home. And yeah, I, everyone says, what's the secret? I said, I outworked everyone. I started earlier. I stayed later. I was not a very participatory parent.

[00:15:28] I much, I did go to grandparents day at my kid's school last week, but I never went to that as a kid. I was at the office at seven and rarely home before 10 Monday through Thursday. And Saturday was a normal day. Yeah. So what would you, what would you tell younger people that are doing deals related to fear and self-doubt when it comes to approaching a deal? It's like at the end of that movie, risky business, when they asked Tom Cruise, what do you learn?

[00:15:58] And he said, once in a while, you just have to say what the fuck and go for it. The answer is when we've closed large transactions and we've done lots of very large transaction, the larger was 342 million, but several over a hundred. And people always call and congratulate me. And I say, I am now at the highest risk part of the trade. Yeah. Congratulate me when I sell a refinance right now. I'm terrified. Yeah.

[00:16:24] The answer is if you're not scared, you're not alive. Yeah. That's what I was looking for right there. Yeah. But we're all scared. I'm still scared. I, we all carry with us the baggage of that fear. I don't lease cars. Everyone says to me, you're so stupid. You get a new car every four years. You don't have to worry. They said, why don't you lease cars? I said, I'm worried I might run out of money and I want to own my car. Yeah. And I don't have a home mortgage. Yeah.

[00:16:53] And my kids don't have home mortgages. Same reason. We want this base of assets that if it hits the fan, we're going to, we're going to make it through. Yep. Yeah. Well, you just have to, you have to believe. And look, I believe you should never make an investment unless you think you have some edge that, that rents are under market and you can raise them, that the land is worth more at a different value that you can add square footage, that there's some piece of it.

[00:17:21] That housing development is coming and you're going to have more customers. There's a piece of it that you rationally can persuade yourself. That is an irrefutable fact. That's going to get, make things better in the future. And if you can't do that, it's the wrong deal. Yep. And just have confidence in yourself that you're, your stuff. So you should, every time you buy a deal, you should know the market better than anyone else.

[00:17:45] You should know every tenant coming, every tenant leaving, every developer building a house, every high rise underway. You should be able by memory to recite every part that's going to make tomorrow better than yesterday. Yep. Yep. And if you know all those things, you resolve your fear because you believe in the truth. Have we ever done a bad deal? Yes. I plead guilty. You show me someone in the business for 40 years who said they never did a bad deal.

[00:18:13] And I will tell you, show you someone who's either never done a lot of deals or is a good liar. Yep. Yep. 100%. Failure is part of it. So the greatest retailers in the country do lots of deals and not every store is great. Yep. And the key is when you have something that's bad, you don't put good money after bad. You learn to cut bait and move on to the next one. Yep. Absolutely. I have one question and then we'll move on to more topics of today.

[00:18:40] When starting out in commercial real estate and you're growing your portfolio individually, because you mentioned obviously you hold a lot of your property now. I'm curious, when you were starting out, did you just strictly do cash out refis to acquire more assets or did you sell property in order to take that profit and roll it into other properties or did you just hold on to them and then have that cash flow accumulate and buy other assets? What was your main strategy to grow your portfolio?

[00:19:10] So we never were a believer in the pump and dump. We always bought everything and ran it as though we were going to own it forever. And we leased it as though we were going to own it forever. And when we made capital decisions, they were, we didn't do a quick and dirty roof repair. If it needed a new roof, we put on a new roof. But the Holy grail of in commercial real estate is a cash out refi. There's nothing better. But we have had some wonderful sales, but the goal was to grow income and have quarterly distributions.

[00:19:39] We had the real estate business that was providing consistent and regular and growing cash flow with every couple of years, there was a capital event through a sale or a refinance. And then we had this fee business that was generating significant cash flow. So the combination of all of them, you know, regularly provided money to reinvest. And the other thing is I kept my overhead low. I lived in the same house for 37 years.

[00:20:07] I'm always astounded when young friends in their early forties are buying these giant expensive houses. We didn't do that in our house. And we didn't, we had a lot of cars cause I had a lot of kids driving, but no one, there were no fancy cars. Yeah. Live within your means, right? No, you got to live below your means. Yeah. So that there's excess cash flow that you can redeploy in a way that makes more money makes so much more money than labor. Yep. Yep. For sure. Yeah. Thanks for answering that.

[00:20:34] Cause I, I've batted that around internally and talk to other people and it's just interesting, the best path to take. So I was just curious how you typically did that. So talk really quick about the, to the viewers that aren't familiar with Terra Nova, talk about the type of assets that you really focused on. And even historically all the way through today, what are you working on today? So first of all, commercial real estate's half of our balance sheet today.

[00:21:01] And the other half is a series of other businesses that we do run all of, or most of. And then there are scattered investments really all over the world today. The, we started in the strip center business and we built this really big third party management leasing portfolio. Quietly with a lot of fanfare, no, there was no online media at the time. So you could buy something out of Dade Broward, Palm Beach County, and no one would know. Yep. And we bought stuff all over the place.

[00:21:31] Today we had, we own multifamily in Texas. We're part of an office development in Bellevue, Washington. We own a lot of gas station, real estate and the whole gas station and the fuel distributor in Georgia. We have a biotech company in Israel. We have a lot of other investments, some of which are really good and some have not been so good. So when we started in the strip center business, it was great. We grew. We ended up with all those institutions that we managed the least for were our partners. First principal over a dozen deals.

[00:22:01] Our key guy left and what became BlackRock. They were our next big institutional partner today. Morgan Stanley is in one deal with us. I've had some amazing institutional partners that enabled me to, with confidence, go buy things with a certainty of execution and a lower cost of capital than even the REITs. And that was great. And we, it was very effective. We, part of our success in that is we bought in growing communities.

[00:22:27] And as homes were added, more customers came, sales went up, rents went up and it was a great story. As those neighborhoods got built out, rent sales growth started to stagnate, especially as the families old aged and the kids moved out. So we sold off most of our strip center portfolio and refocused our efforts on urban high street retail. So over time we became the largest retail owner on Lincoln Road and Miami Beach.

[00:22:56] And the largest owner on Miracle Mile and Coral Gables. Both of those holdings are worth well over a hundred million dollars each. And both are way under levered. I think total debt on the two of them is today 73 million. And they're probably combined worth easily over a quarter of a billion. So after our first gigantic liquidity event about a dozen years ago, we clearly focused on creating more diversity in our holdings, both for our family and the people working here.

[00:23:24] So today we own another company since 98 that owns gas stations, car washes and convenience stores. And then we also own an insurance company. We only own 86% of that. And I'm not on the board or an officer, but I do observe board meetings. And those are our most core holdings. We've, but we've been very focused on diversification. It drives performance closer to average, but also it makes it more consistent.

[00:23:51] So that when no one paid rent the first two months of COVID, it was great in the insurance business because everyone paid their premiums and no one went to the doctor. Yeah. So that was a good thing. And the gas station business was great. Palm Beach County did shut down our car launches. This is not essential, but they opened back up pretty quick. And those, and we redeployed the convenience store shelf space to more like many grocery stores, because there were so little available in the grocery stores.

[00:24:20] We tried to pivot to a better place to keep our revenues working. Yeah. And that's a great luxury of me. Someone runs each part of the business. And when the world changes a little bit, I can freelance in and say, have you considered this? Yeah. How do you manage multiple different companies? You know, Clayton, everybody asked that first, when you build the business, the margins and the balance sheet and the debt, and you're comfortable. So the insurance company has no debt.

[00:24:49] I could not run that business. The others, I could all run if I had to. I don't want to, but I could. Yeah. And I did at one time. Yeah. It's a blessing. It's a genetic gift that was given to me at birth. I don't know. I'm super comfortable with numbers. I just, I can read a financial statement and it's a story that comes to life. Yeah. It doesn't scare me. And I think, and I can tell you, I have never taken an accounting or a finance course. It just, numbers are comfortable. Yeah.

[00:25:17] And they tell stories and good ones and bad ones. And the key is to be able to look through it and have some key places to look, changes in cash, adding back depreciation, some simplistic stuff that gets you to a quick read of, is this something to pursue or not? Yeah. The deals we chase hard, we typically buy. Yeah. Not everyone. I missed one a couple of years ago that I'm still aggravated about. It happens to all of us, man. Yeah. But no, I didn't get it.

[00:25:47] So I tried to buy the company instead. Yeah. Yeah. I did. I was unsuccessful, but I made money on the stock. I love it, man. Let's talk a little bit high level. Let's talk about retail in general. Obviously you have decades of experience in retail real estate. You've seen multiple different cycles. For a long time, retail was considered in trouble. Where do you see retail now? And where do you see it going in the next decade?

[00:26:13] So I think we talk about retail as this big, broad category. The reality is there are differences. There are regional malls. We're probably way over mauled in this country. And the mall traffic was driven by department stores. The department stores are suffering almost all of them at different levels. Regional malls are problems. Not all of them. There's some still some great ones. Aventura, Tyson's Corner, Bal Harbor. There are some exceptional malls, but there are a lot of them that need to go away.

[00:26:42] And these are big pieces of land, structured with a lot of different covenants, but are great development opportunities going forward. Then we can talk about suburban retail had suffered pre-COVID, but from COVID forward is the best producing part of the whole retail environment. I mean, there's been very little new delivery. Stores want to grow. They've been expanding and rents are really climbing nationally. The part, but it's changed.

[00:27:09] We once had a shopping center that we still own part of that had two Payless shoes, one Fava and one Shoe World, all doing over a million dollars a year in the mid eighties. Unheard of today. Yeah. The apparel and we had apparel in all of our supermarket anchored centers. There is no apparel, maybe occasionally a one off local. When you look at our leasing over the last three years, it's been overwhelmingly restaurants. Yep. There've been a lot of new restaurants and it's just changed.

[00:27:39] You know, I used to joke when my two of my three kids lived in New York for a while and they would have my credit card and I would always see these charges to seamless. And I would call all aggravated. What were they spending money on? Seamless. So seamless was later bought by door jet dash. And it's the same as Uber eats. And in New York, 20 years ago, you could order food from everywhere and have it delivered to your apartment. But this had not gotten out of New York, maybe in some other cities.

[00:28:08] But when I was growing up, if you ordered food in on Sunday night, there were basically two options, pizza and Chinese food. Yeah. Two of my absolute favorites. So I was happy. Yeah. Today, first, number one, there are very few Chinese restaurants left. There used to be in every strip center, there was a sit down or take out Chinese. They're gone. And in every strip center, there was a dry cleaner. Most of those are gone because people don't.

[00:28:36] Look, if this conversation had happened 20 years ago, I'd be wearing a suit and tie, which I'm obviously not. It would have been hard to wear an orange suit and tie, although I do have one orange suit. So the mix of tenants has dramatically changed. Today, it's heavily medical. We didn't used to want medical because they took too much parking up. Yeah. A lot of restaurants. We didn't like them because of parking either. And a lot of the local codes required more parking for restaurants. It's changed. And still, most of these centers are over parked.

[00:29:06] But suburban has been great. We transitioned to urban because as I listened to my young employees, instead of as they got married and had families or had families and not get married, they tended to be in my generation, people move further and further out in the suburbs to get bigger homes. Yeah. To accommodate more people. I didn't. I stayed. I always lived urban.

[00:29:29] And as I listened to this younger generation who was buying homes close in, I thought that parts of our community in Miami were becoming more like New York and 24 hours and people wanted to live carless. So our first we bought a package of eight buildings on Miracle Mile and Coral Gables, then two and then a third office building on Miami Beach.

[00:29:52] Then we started, we bought three buildings on Lincoln Road and then three more on Lincoln Road and eight America Mile is now 15. We like these concentrated bets where we can influence the future of a street. That's the good news. The bad news is when you own suburban centers all over the place, we had no relationship with the local government. We didn't care.

[00:30:15] And when you own the main street in an urban place where everyone has a better opinion on how to do it than you, government relations have become an acute part of our job. An unpleasant part, but an acute part. Important, yeah. So we've changed. Look, we always were available. We always had capital available for whatever was the most opportunistic play of the time. And we've done lots of industrial deals. We've done plenty of office buildings.

[00:30:43] Look, we bought about a year and a half ago, a 250,000 foot office building in Coral Gables. People thought I was crazy. And then we bought the mortgage on the one next door, which we now own. We try to be an opportunistic investor and try to be agnostic as the asset class. We've done a lot of retail and we're super comfortable there. Our president, Mindy McElroy is an exceptional leasing professional.

[00:31:09] And I just signed a Pandora lease for her right before we turned on the camera today. I love it. That's awesome. By the way, I loved it even more. I'm curious to get your opinion. What do you think caused the shift of suburban retail to go from struggling back to successful again? I think it's an easy explanation. People work from home. Terra Nova, we came back to work early. After Memorial Day, we were here. Yeah. Three people got COVID afterwards.

[00:31:37] But in those early six months of COVID, we were terrified it was going to kill us. Putting people on ventilators was probably a terrible mistake. Forced oxygen was a better approach. And we got through it. I didn't get it for the first two years, two and a half years. That was good luck. But I was careful. So people stayed. They worked remotely and they stayed. They were at home more. So they frequented in the local businesses more. And if they were working remotely and decided they needed to go to the supermarket in the middle of the day, they could. You couldn't leave your office in the middle of the day.

[00:32:06] Now, the urban retail around office buildings suffered terribly. And Washington, our government still isn't back to work full time. Maybe with the new administration, they might be. Maybe. New York Midtown, which had a lot of office space, is a lot better than it was in 20, but it's still suffering. I don't know when Chicago comes back. San Francisco is showing shines of life. Portland and Seattle still struggle. LA still struggle.

[00:32:33] The southern third of the country where people could be outside more have fared better in the office market. Miami and Coral Gables, they've been on fire. Rents have grown significantly. A lot of corporate relocations. It's a unique story down here. I say I'm blessed to live in a place with nice weather, especially in the winter, with no state income tax.

[00:32:56] And when people woke up in New York and California, miserable that they couldn't go to any of the places they wanted to, and were paying almost 15% in city and state income taxes combined for that privilege, they said, we can move. Yeah. And then people, you know, people learn to work remotely and this kind of interview today wasn't done 20 years ago. So technology made some things better, but what turned suburban on is stores were succeeding.

[00:33:26] Restaurants were succeeding. They wanted to expand. No one was delivering new product. So the base that was there became instantly in higher demand and with higher demand and fixed supply prices only have one way to go and that's up. Yeah. What is your, what's your viewpoint on e-commerce and its impact on retail? My family jokes. I was the original Amazon customer. I used to buy it on AO. We had dial up AOL.

[00:33:54] Nothing like no internet connection that we have today. Look, e-commerce has made all the existing retailers get better. They have to provide better service, better experience, or they're not going to survive. There are certain commodity type things that it's easy to search the internet. You take a picture of it, you hit Google search and you can find it. So there's some wonderful things.

[00:34:17] Most of my household items I purchase online because it's easy and it's fast and I don't have to go anywhere, but I can't do that. Look, we don't use Uber Eats at our house. I have an old fashioned wife that wants it cooked and prepared. That's what goes on at my house. We do go out to restaurants a lot and love them. Suburban has gotten a lot better, broader experience and the commodity type stores failed and will continue to fail. Yeah.

[00:34:45] So our suburban centers today are heavily medical, heavily exercise related and heavily restaurants. Yep. Yep. Do you think that we're past the peak of e-commerce impact on retail or do you think it's going to continue to increase? Look, retail will always evolve. And every time someone comes up with this great way to do retail, they will try to deliver it better and faster and cheaper online.

[00:35:10] And when someone great creates a great online experience, they always try to figure out how to deploy more volume in physical stores. And each of those trades sometimes work and sometimes doesn't. Yep.

[00:35:25] Let's talk a little bit about like, how are you navigating or how would you advocate someone navigate deals right now in just today's climate with construction pricing being high, with supplies being high, with debt relative, obviously, to the last 10 years being high. What where do you see the most opportunity right now? I think it's the most challenging environment that we have faced ever. That's a big step.

[00:35:53] Ever for me is since 1980, so 45 years. My generation and those older than me, there are a few of those left, but even those 10 years younger than me, we could always buy real estate at a yield that was about 250 basis points higher than our cost of debt. So if we finance 70% of it, we had cash flow from day one on the debt part and also on the equity part.

[00:36:20] And then if we knew something that could grow rents, it got better and better. Yeah. That's not the story today. If you buy it at a six and a half, and we've got a loan quote on something that we won't take today at 805. You just can't. That doesn't work. Yeah. And you don't have to be a buyer in every part of the cycle. Kind of our mantra today is that every deal we consider has to have some element of distress. Why?

[00:36:46] While we can buy it at a basis significantly lower than replacement costs or what we could have bought it for five or 10 years ago. Now, we're in an enviable position that if we do no deals in a year, it's perfectly okay. Most people can't do that. Also, 100% of our real estate debt is non-recourse. That's also a luxury that most people can't do. I say that's my dividend for good behavior. For performing, yeah.

[00:37:15] Yeah, we pay our bills. Yeah. And even when, look, we've had four bad deals and we did not have a fight with the bank in any of those bad deals. When we bought that big office building, I remember sitting down with the bank president for lunch in New York saying, the only place in the country that I would buy an office building today is in Coral Gables or in Palm Beach. And he said, Stephen, the only person that we would do an office deal with in the country is you. Yeah.

[00:37:44] But we have two of their bigger loans and we perform. Yep. Is the relationship perfect every day? No, no relationships are. But we treat one another respectfully and have robust conversations and we try to get to a good place. So I think opportunity is you gotta see value and you have to see the path toward value that doesn't include refinancing it in three years at a lower rate. Yeah. Because that's just financial engineering.

[00:38:11] Part of the old model that you financed it at a lower rate than your yield. No part of that included cap rate compression and interest rate reduction. We owned one center for 22 years. And when we bought it, we financed it at a nine happily. I refinanced it a few years later with Nomura at 704. I thought I robbed the bank. Yeah. Over the time I was done, I had refinanced it at three and a half. Wow. We have one loan today that's at 4%.

[00:38:38] We have had the benefit of financing and this of course made us all smarter and richer because the more money you make, the smarter everyone thinks you are. Yeah. So even if it's untrue. Yeah. So what gives in your opinion? It just seems like the market has been in this spot, right? For three years now, as far as the real estate being high debt being high. What, what gives to really start the process?

[00:39:08] Do you think that we're going to have to go into some massive correction or do you think rents are going to have to increase and therefore consumer goods are going to get eventually increase? What's your opinion as far as how we get out of this gridlock in commercial real estate? Yeah.

[00:39:25] So first I've said that the biggest problem corporate America and real estate face in this country is that the small and mid-sized banks, the regionals and smaller, have been the primary debt capital providers of, to small and mid-sized businesses around the country. And that's 75% of our employment. They're pretty much, they say they're all in business, but they're not really in business.

[00:39:51] They are very focused on getting their portfolios paid down because they're nervous about the liquidity crunch. They blame the regulators, but it's really about their own obsession with liquidity, which I understand. Again, people that were over levered and have loans coming due are either facing big pay downs, which some can afford and some can't, new loans at higher rates, or new lenders at higher rates. There's no shortage of debt capital in this country.

[00:40:20] The private debt funds have completely replaced the banks. They're just expensive. The loan that you might've done at 4% or 5% is now 9%. Yeah. Well, on new development deals, it may still pencil because hopefully of a low cost, but construction costs are way up. They're going to go up higher. The current immigration policies being rolled out have got to impact construction, labor for construction projects.

[00:40:48] It's clearly impacting restaurants already. One restaurateur, that's my tenant today, when we discussed it, said that the government knows that people can phony up social security cards, which is why they don't have pictures on them. And one estimate was that undocumented workers with fake social security cards were paying $20 billion a year into the social security system, which is a problem if they go away. Yeah.

[00:41:13] The cost of raw materials for construction, especially wood from Canada. Oh, yeah. Starting Tuesday, that's a big increase. Now, the disputes could be resolved. There's probably 60 to 90 days of inventory in the country already. And maybe by the time the disputes get resolved, the products will start flowing again. But increased labor costs, because this country was built on the backs of immigrant labor.

[00:41:42] Whether the immigrant of the moment were Irish or Italian or Mexican or Cuban or Jewish or whatever they were, at every generation of our country, there was some wave from somewhere seeking some combination of economic opportunity and religious freedom. And they came here and they did all the worst jobs while their kids went to American schools and got smarter and then got better jobs.

[00:42:09] So you shut off entry-level labor from out of the country, we have a problem. And similarly, raw materials coming in, GM is estimated to hurt the most on tariffs from Mexico, which are now delayed for a month because they make a lot of cars in Mexico. And all the companies, even those that make cars here, are parts that come from China. Look, we're in new territory on some of our public policy on these issues. And of course, everyone hopes that it works out fine.

[00:42:37] And everyone is terrified that it won't. So you keep your fingers crossed and you hope leadership does the right thing and gets us to a good place. What do you personally, just internally, what are y'all's thoughts on, like, when are you going to start buying again? You know what I mean? Like, when is the environment going to be attractive again to do new development and new acquisitions? Are you just strictly waiting for bloody water?

[00:43:06] Look, we've been a big net buyer of expiring debt from banks. We like that trade. Either one has resulted in us owning the property, all the others, we restructure, we defer some default interest, we give them some more time, they find a new lender and pay us off. That's been a good trade for us. That's the, and we bought the last two purchases have been two office buildings. Yeah, that's fascinating. Yeah.

[00:43:33] I mean, of course, that's a very contrarian play that outside of Miami seems like a crazy play. We bought it at a seven and a quarter yield. We've done a bunch of leasing since we're probably up to an eight and a half yield. We got fixed rate financing at 6.82%. Of course, I thought that was a terrible rate at the time. But my friends assured me that no one else could have pulled it off. I'm sure there's always someone else. And that's open to prepayment now.

[00:44:02] We don't think we're close enough to do it today. We think the rate, if we went out to retrade it, would be six and a quarter. But it's a low leverage deal. It's in a great location. We've come up with some interesting improvement ideas on the building. And we're not sitting still. Look, the portfolio is big enough that there's so much work to do. Yeah. And what we have that if it's, I won't tell you there's no buy we'll make today, but it'll have to have some element of distress. Yeah.

[00:44:31] Meanwhile, we're trying to sell some of our, in the office they're called Stevens Crumbs or Scraps deals that I thought were too good to pass by, but they're not core to our business. And we're trying to move some of those out. So what is your crystal ball for the next three years in commercial real estate? What do you think is going to happen? That's a lot longer perspective. I think this year is going to be pretty much like last year. Okay.

[00:44:58] The banks are going to be hyper-focused on managing their loan portfolios with a lot of intensity. I always say they're coming up with covenants we didn't know existed. Yeah. They wield appraisals like a weapon. And it's certainly been a challenging time for bank relationships. Going both ways. That's the bad news. The good news is our cash in the banks are earning between 475 and 5.25%. And that's pretty good for a risk-free return.

[00:45:28] I don't know what next year looks like. Clearly, some of the policy that's been rolled out in the last few weeks feels like it has an inflationary tendency. We'll see if it's true. Obviously, there was the threat of a tariff war with Colombia, which, of course, would have been devastating for Valentine's Day because we import so many of our roses from Colombia. The good news is that was resolved. That had caused a lot of consternation in a lot of homes.

[00:45:53] I just said you should send an orchid instead of roses because it lasts much longer and you get the benefits of that gift longer. Good thinking. But I've always advocated for orchids in lieu of cut flowers. It's a better trade. Mexico was announced and then just pushed back for a month. I mean, we will see in time how much of this is negotiation and how much of it is real. So are you feeling bullish or bearish? I think the economies are performing pretty well. Yeah. I always say I'm cautiously optimistic.

[00:46:24] But again, I'm in a different place than when I was 30 and 40 when I probably would have been terrified. Yeah. It's just a hard one to figure out, man. That's what I've been telling people. I feel like for the past two years, we're trying to figure out whether we're on a plateau or a peak. What are we? When is it going to drop? Are we just going to continue? Are we going to have a correction? I don't know. The stock market was down tremendously pre-market. By the end of the day, it was mostly recovered.

[00:46:51] I think every time there's an announcement, it triggers some volatility and sometimes we absorb it and sometimes we don't. But if you look overall on a macro level, most companies of size are doing very well. It's hard. What do you do with a restaurant? My wife bought eggs last week for organic eggs at Whole Foods. We're $11.75 for a dollar. That's staggering. I complained to a friend. He says, oh, I have chickens. And I went over his house. I got 12 eggs for free today. He's going to become your best friend.

[00:47:21] Yeah. I know. He says, I got a dozen every week. I said, good. That's enough. My household can absorb that cost. Food prices are up probably just over 25% in the last two years. And for the 75% of Americans living paycheck to paycheck, that's a huge delta and really hurts them at home. I don't know what the solution to that is. Look, there are lots of opportunities in our economy to decrease prices, whether it's pharmaceuticals.

[00:47:49] Gas prices have been way down in the last couple of weeks. It was under $3 in some places in Miami over the weekend. So there's a lot of volatility. I have been preaching the same thing for a long time. Live under your means. Save your money. Be ready for great investment opportunities. And make sure your bills get paid timely. Have good credit. Your banks will behave. And some of them show up when you need them. And that's a great thing. And by the way, and a lot of them don't show up. It has nothing to do with you.

[00:48:19] Yep. But yeah, it's a relationship business at the end of the day, man. That is absolutely the truth. We had our annual bank dinner in January. And I always remind them, we're just over 30 years in the relationship. No defaults. Yeah. No restructures. Just reminding you guys. I said, you may hate me some days, but just know my loans are good. Yep. Yep. No, that's all they want at the end of the day. So. I love when they bring the chief credit officer to dinner. You're right.

[00:48:46] When the chief credit officer is behind you, you're in a good place. Absolutely. So to finish it off, I know you've been gracious with your time. And I always ask, is there a piece of advice that someone told you, a mentor or a family member at some point in time that you feel like has really stuck with you throughout your career and has helped you throughout your life? Yeah. That friend's dad who said, identify your game changers and overpay them.

[00:49:16] Good tip. Look, I have the leaders of this industry in South Florida have come through Taranova five years, six years, 13 years, 18 years. First, they're a great resource for me when we're doing a deal with someone and we haven't done a deal with that tenant in years. And I call up and say, have you done a deal with them? Anyone else has. So I think they're all a little terrified sometimes when I call them, I view them as my network of capable professionals that really give me lots of good advice.

[00:49:46] So you cannot overestimate the value of the people in your business. Having people with you a long time, you just what the other one's going to think before they say it and it makes everything quicker. Someone comes in with a question and a document and you ask three questions and they know the questions they're going to be asked, they get to the answers, everything happens faster. That's been good. Another friend who was a big public company once told me, it was in the early nineties. I had just come through a terrible cycle that was very painful.

[00:50:15] And he said, the problem with real estate guys is they focus on managing cashflow and they forget to manage their balance sheets. So that was very instructive to me as we were successful. Every time there was liquidity event, the first thing I did was I would go in to our controller and say, what's our most expensive loan? We pay it off. But our goal was to always run lean free. So people need to manage their balance sheet more effectively.

[00:50:41] And you got to, there are lots of smart people out there, many smarter than me. And the secret of course, is to outwork them, to know everything about everything, about all your projects and show up like this tenant with an Italian restaurant on Lincoln road called today. And I picked up the phone because God, it was really easy to get ahold of you. I said, it's always been easy to get ahold of you. I pretty much take everyone's phone call. I always have. And people said, what made you do that?

[00:51:06] I said, when I was young in the business and the ICSC had its very first open air center committee, I was on it. Milton Cooper chaired it. I sat on his left. So whenever he had to leave the room to take a call, I chaired the meeting. Milton always took my phone calls. I was so excited about that because here was this giant in the industry that took my phone calls. And I was like, tiny. I was so impressed. And I always thanked him all the time.

[00:51:34] A few years later, I learned the mill called everyone back right away. But I said, if he can do it, I can do it. And I've told our team that our tenants are our customers. We have to make them happy, or at least we have to tell them honest communication about like we, we had a little fire in an electrical room and I have four tenants that have been power for two weeks. And we told them, we try to update them every day on the process. We tell them you have business interruption insurance for exactly this reason.

[00:52:01] And we've done all the work and it's the county that we've got to get to approve it. But I believe long before it was an adage in a different era, hard work beats everything else all the time. There are some super smart guys and women that never have made it. This modern day concept of balance was never part of my life growing up. Balance was something that happened in a bank account. It wasn't a lifestyle.

[00:52:26] And if you had no balance in your lifestyle, but you outworked everyone and made a lot more money, then you would wake up with balance in your bank account. And that was a good balanced life. My kids' generation completely thinks I'm wrong. They are equal co-parents. I didn't diaper the kids. I didn't feed them. I didn't bathe them. I worked all the time and there were rewards to it, which I guess I now get to enjoy.

[00:52:55] I am a super engaged grandparent. That's another dividend of a life well spent. Yep. That's awesome, man. This has been great. You're obviously a huge resource and really appreciate you just sharing some personal stories and history about some of the struggles that you've had over the years. And I think a lot of people can get a lot of value out of that. So being that you are accessible, what is the best way? If someone has a question or wants to run something by you, what's the best way to get in contact with you? So I'm super.

[00:53:24] The only social media I'm on is LinkedIn and it's Steven Patel. My email address is really easy to find. It's spatel at terranova corp.com. And I read all my own emails. You know, I had five years where I was fully engaged in politics and other people read my emails because there were 2,400 a day. Yeah. But I'm really happy that part of my life has ended. And I'm an entrepreneur again, full time. And it's wonderful. And it's funny.

[00:53:53] One thing that the current president said that, and I was on, I'm on the other team that I fully agree with. He said, I used to think that real estate guys were tough. He said, real estate guys are wonderful compared to political people are vicious. They will put their arm around your back, a knife in it, twist it, smiling the whole time. Look, we're in a good industry. People tend to be very willing to share.

[00:54:17] Look, I love, look, we were in Vegas and we were flying to look at a restaurant in Phoenix. So our president had a friend who was from Phoenix. I said, come on, I'll give you a ride over there. And six months later, I got a call asking me what I thought about a deal. I'm so happy to get those calls. And by the way, when I was a baby in business, I had people to call too. We're absolutely in this all together. And this is a wonderful industry and business. And on the other hand, it's hard. We're in a hard time.

[00:54:48] Retail people tend to be doing better today if you're not on the development side. But the leasing business has been pretty good. Every deal takes a lot longer today. Agreed. I mean, I always find it's amazing. We can buy a $100 million deal with 21 days diligence and a 30 days close and everything. That's fine. The tenant's signing a 3,000 square foot lease and it's a nine month negotiation. I laugh so hard because I have those same conversations, man. It's like the small tenant size. The longer the deal process takes.

[00:55:16] For years, we had at the peak about 14 retail leasing agents, more in office, more in capital markets. And I used to tell everyone, you know, I would give an annual State of the Union address where I would dress funny and we would play music. And there were always some themes. But I would tell them every year that the secret to a good year is opening the year with strong receivables. Yep. And that remains the case. Work harder, spend less.

[00:55:45] My generation, we weren't living our life on social media. So we didn't have to impress anyone with where we were going or where we were eating or what we were wearing because no one was going to see it anyway. Yep. Yep. I am on Instagram. I only allow very few followers. And all I post are pictures of my 2000 orchid collection in the backyard. That's it. And by the way, and that's a beautiful, wonderful thing. And it's enough. I love it, man. We'll put your email in the show notes.

[00:56:14] And yeah, this has been great, man. Thanks again for being here today. I appreciate it. Clayton, thank you for having me. Thank you for joining me on this episode of the Commercial Real Estate Podcast. I hope you found today's conversation with our guests both insightful and inspiring. If you have any questions or comments or would like to connect with me or our guest, you can find all the relevant information and links in the show notes.

[00:56:44] I encourage you to reach out, share your thoughts, and continue the dialogue. Don't forget to subscribe to the podcast to stay updated with our latest episodes and to explore more fascinating stories from the world of commercial real estate. If you've been enjoying the CRE Project Podcast, I'd greatly appreciate it if you can take a moment and leave a review on your preferred podcast platform. Your feedback helps us grow and improve. Before we part ways, remember this.

[00:57:10] In the dynamic world of commercial real estate, every experience is an opportunity to learn and grow. So, keep pursuing your passions, stay curious, and continue your journey. Thanks for being a part of our podcast community. I'll be back soon with captivating stories, expert insights, and valuable knowledge to empower your path in the realm of commercial real estate. Until next time, always keep in mind that the world of commercial real estate is filled with endless possibilities.

[00:57:38] Keep building, keep investing, and keep dreaming big. Thank you. Thank you. Thank you. Thank you. Thank you.