CRE workouts, maturity walls, and the art of restructuring

CRE Exchange host, Omar Eltorai, sits down with returning guest Shlomo Chopp, Managing Partner of Case Equity Partners, for a candid look at where the commercial real estate financing and workout market stands today. Shlomo draws on more than two decades of restructuring and advisory experience to explain why fatigued capital is pulling back from existing deals, what the maturity wall actually means for borrowers and lenders in 2026 and 2027, and why good intentions can walk a borrower straight into a recourse situation. The conversation also covers Shlomo’s LinkedIn series The Road to Default, the real job of a workout advisor, and what he thinks the industry consistently gets wrong about distress.

TRANSCRIPT:

Omar Eltorai: Welcome everyone to the CRE Exchange. I'm Omar Altura, your host and senior director of research at Altus Group, a leading provider of commercial real estate intelligence here to provide you with the latest news and trends in the commercial real estate market. I'm excited to have a special returning guest on with me today, Shlomo Chopp.

Case equity partners to talk about the CRE financing markets and his observations as a restructuring and workout advisor. Shlomo is a seasoned real estate professional with more than two decades of deep and varied industry experience. As managing partner of case equity partners and founder of Case Property Services, Shlomo brings a unique perspective to his clients and today's conversation.

A perspective really shaped by his years spent in advisory, restructuring, investing, asset and property management. Shlomo, thank you so much for being back with us today,

Shlomo Chopp: Omar. I'm glad you had me back. Thank you. Appreciate it.

Omar Eltorai: So welcome back to the show. For listeners who are new, can you give us a kind of a quick version of who you are and what Case Equity Partners does?

Shlomo Chopp: Yeah, so we'll go backwards. So today we are a debt restructuring advisor and we also invest in opportunistic commercial real estate, which today's market is distressed. I mean, invest in all aspects of commercial real estate. Meaning not just asset classes, but also at the levels with its equity debt bonds.

We'll call it derivatives, if you will. Not that it's necessarily all the time behind the Bloomberg terminal. And my background is I started in oh three in PropTech, then saw the opportunity to do some deals, if you will, and in 2010 when there was nothing going on, used what I've learned. Trying to make it in the business to start advising borrowers.

Probably the strength being is a translation of property to debt, not only from borrower to lender, but also from lender to borrower to try to equalize how a lender and a borrower looks at a deal to try to resolve a loan, frankly, in the best possible way, whether it's for the borrower or the lender. So did that.

Probably 2017 is when that there really wasn't much to do anymore because everything was just great and everything worked its way through the system. Let's remember the recovery was basically 2012, 2013. It started recovery, so we're talking about three to three, four years, four or five years maybe even of just lagging things, working through the system.

Then went and acquired some deals. I've worked on some the various. Projects, including we have now four patents around combining retail e-commerce. And that's been a bit of a passion project for me about like, how do you figure out the next gen of some underlying drivers that are not pure real estate but drivers real estate and are too long ignored, I'm left to outside industry to do, which basically has an effect.

So how do you go and solve that in a way that helps real estate? In that case it was e-commerce and retail. Then in 2020, the calls started coming in again. We got a problem, and ever since then we built up, built back up the business. And at this point we're working on over 20 deals, over a couple of billion dollars in total deal volume workouts primarily.

In all types of lenders, banks, syndicates, CMBS, which is our core expertise. That's where I broke my teeth, if you will. And just, excuse me, Vizient, that brings us back to where we are today and focusing on just opportunities, but also guiding borrowers in just another iteration, another cycle. So I guess that ages me at this point.

Uh, this is the second real big one that we're in. And this one is more of a simmer than a. Boom, Lehman Brothers went under, or Bear Stearns was acquired, or Washington Mutual went under or all that. So I'm excited to talk about that.

Omar Eltorai: So if you've been rebuilding since 2020 and just characterized it as simmer, the last time we spoke was end of 2024.

What's changed since we last spoke? Have you seen a shift or is it that same level of simmering happening?

Shlomo Chopp: I think the capital has left the building and people will be going like what? There's so much capital on the side. Yes. On the sidelines. Exactly right. So commercial real estate, when you buy a property, there's all the capital you possibly can need, so long as a pencil's out, but unlike a regular business, if I own General Electric, well, if somebody own General Electric, then they create products through r and d.

They sell products through. Whatever channels they have, they innovate, they bring new products to market. There's goods, there's suppliers, there's vendors, there's customers, et cetera. It cycles through. But commercial real estate, it's single purpose entities, right? You enter into an investment in specific investment that has four walls around it, quite literally, and there's a capital stack around it, and you can't say, oh, this building, we're just gonna.

Dump it out the window 'cause we need a new one. And it's perfect. And it's great because you are limited by what you own, which is physical, not just the ideas and the concepts you that your real estate is a component of the real estate is the business. And frankly, even depreciate that building over a very long time and your investment was gonna be investment arising at a minimum was gonna be 10 years.

And you were then expecting to sell at if you were gonna sell. Approved version of what you acquired within that time. So you can't just say, oh, let's just throw it out. Which means if you are calling capital, for example, to extend your loan, as many have been doing, you better believe that you're gonna get that capital back.

'cause that's the second bite of the apple. And frankly, it goes back to after World War I and the movement of gold between countries. Right? It's like. This country gold will gimme a better payoff or the reserves are strong, let's move gold. And if you had gold in your possession, which it wasn't necessarily your possession, if you read great book by um, uh, 1929, I forget who wrote it, but um, the guy from cbc Andrew Ross.

S

Omar Eltorai: Tokin. Yeah.

Shlomo Chopp:  Andrew Ross Tokin. Right. He talks about like the gold didn't move anywhere. It stayed in some guy's vault. I believe he talks about, or maybe it's the middle, broke the world. One of those books that I've been reading. The goal didn't move anywhere, but reality is you're able to acquire for the benefit of you are able to move it for the benefit of another country or invest in another country, right?

Because you got a better return. My money, it's the same way, right? It's economics as a alternative use. Why would I reinvest in this deal? Just because I made a mistake five years ago, I'd have an emotional attachment anymore. It's about yield. And even if I have an emotional attachment, I do have a greater emotional attachment to my money.

So it's gotta make sense. So people don't wanna restructure their existing partnerships. They're ready to restructure the debt if it makes sense to go back in a second time. So what's happened is, to answer your question, for several years, people have had the muscle memory of what, where things were worth.

And over time, especially as some of these extensions are now rolling, and the business plans that were discussed are. I'd say not working out exactly as people anticipated and perhaps even getting worse. Now people are saying, hold on. We need to really mark this to market, not just kick the can because the last kick hurt us sub toe, if you will.

I'm seeing less capital coming to chase existing deals, which is allowing lenders to say, okay, we've hit a point where. We're not going to get somebody to hope on today on yesterday's value. Maybe it makes sense to go to market, just dispose of it. And that's why I think you're seeing note sales more than even regular sales and res because in, in a way, these guys have piled up so long a history of default and of accruing.

Losses against their original yield that they're like, let's just get this off our books. Let's someone else worry about it. And it's somewhat deceiving to a borrower. They don't interpret it the right way to think, oh, the lender just doesn't want it. You're right. The Linda never wanted it. They want their money.

But that's a long-winded way of saying that opportunities are now finally here. I don't know the pricing is, but the opportunities on here.

Omar Eltorai: So there's a lot I wanna dig into there in terms of extensions, note sales and how, I would say almost like the tiring of capital. Even though there have heard and seen that there is a lot of capital and kind of liquidity, it's not necessarily everywhere and not available for all.

Let's first go with the extensions because I know there there've been a massive amount of extensions coming out of the. Pandemic period and the post pandemic period. Are you seeing the opportunity within the extensions that are not able to be extended again? Is that concentrated in any sector, market, or structure, or is it across the board?

Shlomo Chopp: If I took an extension in 2023 and it was a three year extension, and it comes due in 2026. As a rule, you'd like to know whether those extensions panned out to where now you can potentially refinance as question number one. At question number two, if they did or did not. Which sectors saw the most success or least successes?

Essentially, I find, understand what you're asking, and I don't think. You go sector wise, although there are certain sectors that the decline has gotten worse. Multi-family, for example, first it was interest rates. Now it's just, it's gotten worse with regards to rents, recoveries, the economy, et cetera. But getting better I think is really wholly dependent on the operator, right?

And if you're a really good operator, it's gotten better. The one sector where I think it may have gotten better is office. And that's not to say that on a holistic basis that at real estate is not starting to recover because you we're seeing some indications of it. It's gotta continue. But in office, if you were originally not over leveraged pre.

Interest rates going up and over-Leverage is, is a really something in retrospect you could look at, right? It wasn't over-leverage because obviously rates change, the use of office change, all that stuff, and you extended based on that and you were basically in the throes of the challenges, like at 110% LTV at that point, right?

So you would temp, you are 10% on the water, if you will, or one low. The numbers approximately. Then now with the recovery. You likely are back in the money. The right asset, right operator, right. But if you are a, not a great operator, not well capitalized, you took an extension and you will over-leverage. You probably haven't found the money to reinvest in TILC.

You probably have and leasing expenses, you probably have over the course of the extension. Hope that the market will come back to you as opposed to going and doing something. On your own, you were the spoke instead of the wheel. If instead of the hub, if you will, then you got a problem. So as a whole, I would say kicking the can down the road has not worked.

There are instances of it working, but I will tell you in office right now, and I've spoken to many people who are day-to-day in the trenches, this is what they do. If you have money to put into leasing costs and you're in a decent market. There's a lot of opportunity to lease office's pent up demand.

Now, if you are a building that had leases that went long, let's say you had a lease that was signed 2016 to 2026, those tenants are vacating now, right? They were basically zombies for a while. You're seeing that, but if you're a building that is in a higher demand market is what to be done. So as a whole extended pretend works for one very simple reason.

Finance is time driven, right? It's very simple. It's a time value of money. Every dollar it's at. I could earn interest on every dollar, every day. It's not at, I don't know, right? So extending out, pretending is, I'll give up the meantime. Recovery of my principle. Maybe I'll make a list of a yield because I'm pushing out what I get back if I bought it at a discount or something like that.

It's like in some bond situations, like to pull to park the. I think as a whole, it depends on the operator. It's really not sector driven.

Omar Eltorai: And uh, I guess, um, would you say that it comes down to individual operators and so sponsors kind of business plans so it becomes asset specific? We did see quite a few extensions over the last couple of years.

Would it be fair to characterize that first wave of extensions as being almost rate speculative on this hope that rates would be coming down, or am I wrong with that characterization?

Shlomo Chopp: I, I think a lot of it was just hope. Yes.

Omar Eltorai: Yeah.

Shlomo Chopp: When rates come down, listen, who's to judge? Who's to judge? There's the man in the arena.

There's so many instances, like if you play the game, you never know. All right, buy a lotto ticket. We have a client now who's making some really bold assumptions around what he could get done, and, and I would've made those assumptions, but you know what? Your money, you know what the deal is. You understand it.

If you feel that this is something that you could achieve, or if you want to invest your money based on that, go for it. I'll alert you to the fact that you're making a pretty bold assumption around X, Y, and z. Other than that, I support you. Whatever you think needs to be done, I work for you, not the other way around.

Omar Eltorai: As I noted that, you know, we have a massive amount of debt coming due in the kind of next 12 to 18 months, some of it being driven by the previous extensions. What would be your take on the maturity wall that we're facing through 26 and 27? Is there any kind of different read on that in terms of it really deserving.

A, a concerned read.

Shlomo Chopp: The thing about maturity walls that are interesting is that it forces people to make a decision, right? And if I can push off a decision, then I'm going to push it off. So a maturity wall brings things to the forefront. I think the best way to look at a maturity wall and also assess its impact is to really undertake a.

Serious analysis of it, and the only people that are, I guess, just can justify the time and energy are either rating agencies, which I don't put much faith in anything that rating agencies do, or somebody who's marketing. I wants to show the analysis they've done. You have to have access to a lot of data.

What do I mean by that? The first thing is if I got maturities coming up in 2026, 2027, we went 26. Right now we're halfway through the year for Carla, but 2027, 2028, whatever it is, the way to know whether I'm gonna have an issue is to see where values are now. And we are allocators are making decisions, right?

And this is something that I'm actually working on a bit of a study of this based on data that's available, but. It's not gonna be as comprehensive as like it to be because you don't have bank data. It's very hard. You have CMBS data, but not bank data. Even the CMBS data isn't necessarily tracked as much, but what are the limbo loans is the question, right?

What are the loans that. They're extended, but no way they pay off without a cash infusion. They're extended, but no way. They pay off without some type of impairment. A principal reduction, they're not extended. They're not getting modified. The borrower's gonna walk from it. It's gonna become distressed again and.

It's very hard to even to identify those loans. Like even for me to be able to find that data and to come up with ideas, to find the data, I have to live in this every day. Like I have to understand that comment by a servicer over there means X, Y, and z. Extrapolate out what it likely means, and even then you're likely wrong because they correct whatever they want and they could change their mind to go have a meeting and say, we're we we're shifting gears.

But if you could identify that subgroup of assets that are in limbo. Then you could say to yourself, okay, that's going to swing the, I don't know, let's call it delinquency rate or losses, even by a significant amount. That will make a huge difference. And then you could assess it and say, okay, now that these loans mature, mature, and now that a decision must be made, the question then becomes, what will that decision be?

And. You could extrapolate it on say, well, all this stuff coming to market based on office in New York, which is 10% of this pool I just mentioned and office in South Florida, which is 2%, and office in California, which is 15%. I could start extrapolating stuff out, but that level of data and quantitative analysis needs to go into that is insane.

And unless I'm. Creating some type of a vehicle for it. I'm not going that deep. Yeah. So no one really knows. So therefore what happens is we tend to look in retrospect, and we look at the what happened in the past, and then we make assumptions. But as Mark Twain says, history rhymes, right? It's never the same if your numbers are off, if it rhymes, I think a 10% difference is sort of, you know, the chart looks the same.

You say it's the same, but a 10% difference can mean the difference between losing your pants that's leveraged. Or making a crap load of money. So it's very hard to tell. So that's why I dismiss so much of this prognostication, so much of this hand wringing, it's, listen, here's the deal. The whole purpose of me doing analysis of what happens is to go to my investors and say, guys, here's where our opportunity is.

Here's why we can identify this opportunity and here's why. Once we identify, we actually know what to do with it. That's how that pitch makes sense to me. For the average person, it's like, I mean, buy interest rate hedges, I mean like, just like make it simple, you know?

Omar Eltorai: I love that. Um, shifting gears slightly.

If you look at lending banks are really starting to come back into commercial real estate in a real way, and then also through their back leverage and funding to the non-bank financial institutions IE funds. Um. As well as CMBS market, head of kind of a banner year in 25. It seems as though there is a lot of liquidity.

However, one of the comments that you've made is that no one has cash borrowers, LPs, rescue capital, and lenders are either constrained or hesitant with investing in existing loans. Can you explain how that's making DPOs or discounted payoffs or other routes other than extensions a little bit more attractive or popular?

Shlomo Chopp: Yeah, I think the term known as Cash works well on a cap or a t-shirt and a bumper sticker. I think if I were to make that statement to you as opposed to way I've said it elsewhere, I would say significant investors. Most significant investors right now are suffering from a lack of liquidity. Or operators, maybe not the word investors, but maybe investors too.

And yes, I understand CMB has had a banner year, but that's because they took a significant amount of market share away from other people because they were able to do higher leverage. Small borrowers went in, it's going to be a disaster. Not that the market's gonna have a 20%. Delinquency rate, but these small borrowers, the docs are bad.

And yes, I understand CMB has had a banner year, but that's because they took a significant amount of market share away from other people because they were able to do higher leverage. Small borrowers went in, it's going to be a disaster. Not that the market's gonna have a 20%. Delinquency rate, but these small borrowers, the docs are bad.

I've seen them, I've seen them before. I've seen one, I've seen 'em, all the docs are bad. They don't know how to operate it Within the, you know how CMVS requires you to operate? They don't even understand it. You know how many times I get a call from a guy going, hi, I, hey, have a good relationship with, insert the name of the special servicer here.

And he goes, I'm in cash management. Do you know a guy who knows a guy that could talk to a guy to get rid of a guy or get rid of a cash management? Not a guy, but yes, I'll be like, no one called me to take someone out, but when it comes to cash management, and I'm like, no. Yes, I know a guy who could speak to a guy who could talk to a guy, and he is gonna tell me no.

Like, that's what's gonna happen. Let's skip the whole thing. Let me not waste my time and your time. I'll pay you for your time. I'm sure you will. You'll pay with your property too. So that's not great at all. Now with borrowers not having cash, um, DPOs in the CMES space are very hard to come by. Because typically it's only when a special servicer has a disaster on its hands.

That is a binary disaster, right? An office building that just doesn't have the occupancy to lease up in a slow market, it's a $15 million loan. They're like, what am I doing? It's let me get rid of it and put on the market. Let me sell. Or if you gimme my number, great. So DPOs are a problem with regards to cash. If you wanna restructure A-C-M-B-S loan, you're bringing cash to the table. It doesn't make a difference.

That's what's happening. If you don't bring enough cash to the table, the lender's gonna say, why am I gonna put this back into another situation in distress? I won't be able to resolve it. Let me cut to the chase and just take it back. Right? So not say, let me cut to the chase and take the loss. No, that doesn't happen.

Lemme cut to the chase and take it back. No, that's the approach. Because if you want something from us, we're not gonna do it because at the end of the day, we don't wanna look bad in the process. With regards to banks and liquidity. I'm very afraid about what's being done with this discussion around allowing banks to inject way more money into the market.

The market is overvaluing assets left and right. There's a lot of aggressive underwriting and even lending to people that are aggressively buying. We've had a period of 40 years or so of just hockey stick up into the right. And frankly that's due to various different factors. And I'm not saying there cannot be another factor that comes in and continues that growth, but here's a few things that we need to understand.

People cannot afford the rents that landlords are charging, and those rents come directly from interest rates. From speculative lending and speculative investing. And yes, taxes have gone up, but taxes have gone up. Why? Because everyone's expenses have gone up, including the cities, and then people can't afford it.

So the city then goes and Right, so it's all circle like people argue, oh, it's not because we spend so much on our buildings. Yes, you're right. It's because everyone's got a go type mentality of investing. So what you end up having is when you put too much money into anything, it becomes a problem, right?

So the argument that property values have gone up is an inflationary argument, right? So for example, long Island rental rates have stayed in the mid thirties for the longest time while expenses have gone up, right? So you say, well, rental rates have to go up because expenses have gone up, right? But that's the tail wagging the dog.

It's not because GDP has gone up, I'm sure it has in various aspects that it's not because income is driving the rent, it's because expenses are driving the rent. So when you throw a lot of money into any system, as we did in in the United States, things become pricey and people get left behind and the divide between the rich and the poor gets wider and wider.

So with. With the government starting to consider to allow banks to inject more money into real estate, and even people, I think people could put into retirement accounts, real estate are being opened up, different concepts that are being floated or passed. That's extremely dangerous because it's not like we're in a environment where real estate values are deflated.

We're an environment where. Everything has gone up and it's left people behind. And despite our need to modernize, everyone's got Amazon coming to the door every day and everything is hunky dory. The reality is we need the surface. People have credit card debt piling up. People are keeping up at the Joneses, and their break even is ridiculous, and that's continued being concern.

So all in all, I believe we're missing. The fundamentals we're hurting ourselves because we're not focusing on the fundamentals of real estate. The fundamentals of real estate is the fundamentals of any business. Who are my customers? What do they need? How much could they afford to pay, and how can I be sure that reliably they could continue to afford to pay?

Let's look at that, right? If I'm GE and I'm selling aircraft engines to Boeing, and Boeing gets the income from selling it to an airline, and the airline gets the revenue from. Flyers that go on it, that go on those planes and those flyers go on planes either for business or go for pleasure. It's all trickles down to what GE ISS gonna get in the aircraft engine business.

And I think the same thing is if I'm in real estate and I wanna lease space to a retail store, it's based on my sales, right? If I'm in office, I want a lease based on. The people that need space in my office, which now you need less per square foot per employee because they're not there as much. It's the same thing in multifamily, right?

So the problem over here is that we're injecting money to throw money at a system to juice values more, to save something. This is borrowing from our kids. This is not just barring from our kids. This is putting a disaster on the next generation, which again, I'm pretty much okay worrying about mine and letting the next one take care of themselves.

That's fine. We've set 'em up for it, but it's just, it's not a good thing. And. I'm just seeing the cycle of distress is something that I think we'll get closer, are more stark and more abrupt, and I don't think we've seen the worst of it yet, because the problems, while they've happened on an individual basis, they haven't been acknowledged by a lot of lenders.

The modification rules have been relaxed and hope that time will cure it. I think a lot of lenders haven't sold. Haven't sold their assets yet. And we're starting to see of some of these note sales, and we're starting to see a lot of stressed out, banked executives. And it'll be interesting to see from the, from the sidelines of how this plays out.

But I still have a lot of concern.

Omar Eltorai: You just spoke about some of the fundamentals within real estate. Let's stick on the fundamentals and your business. In your view, what is a deep debt restructuring or workout advisor actually supposed to do, and where do you think the industry gets that definition wrong?

Shlomo Chopp: Okay, so let's talk about the history. And this is such an important question and I'm gonna go on like I did for the last one. Right. Literally. I don't even know why you're here. I could just fall back forever apparently. I don't know. But I'm gonna, I'm gonna go on a little history of debt restructuring, if you will, and I'm sure there's a lot of people that had better knowledge than me, but I'll frame it because it's extremely important.

Debt restructuring. Historically, what that was is somebody that could take advantage of the bankruptcy court system to restructure a business, right? Restructuring is it's taking a business that you have real estate's a business, and finding a way to take this broken business and reallocate ownership to various parties who have a secured or unsecured to some level of senior interest in the asset in a manner that lets the business continue.

And if you don't think the business that con could continue, then you liquidate the business and you distribute the proceeds to everybody else, right? But in real estate, bankruptcy's not allowed apparently, because it's a nonrecourse carve out, right? Not only because it's a non-recourse carve out, but because the carve outs are there to prevent the freewheeling, and as some lenders may view it of the bankruptcy course, the chances for cram downs and so on and so forth.

And even if it was allowed, there are bankruptcy laws around single. Single purpose entity, single asset entities that make it very difficult to restructure them. There's issues around classes, unsecured classes, secure classes, and commercial real estate. If you look at any nonrecourse CMBS loan, the specific SPE provisions that basically say you must stay in SPE, you can take on additional liens on the property.

You can take additional debt unless it's allowed and if you don't pay your bills. Then you potentially trigger recourse, right? There's different levels of that, and many a lawyer knows what they're doing, but many a lawyer have no clue what they're doing and put their borrowers right into harm's way, and that's a whole nother conversation for another time.

We wrote a great white paper on that, but to the point, it's intended to prevent bankruptcy, right? Then all of a sudden we get this new concept that comes out of the savings loan crisis called CMBS that brings structured finance to commercial real estate. It's no longer I go to John the banker, and I borrow money from him and just like you did in rule him thousands of years ago, he lent me the money.

I pay it back in time. I give him collateral. Now all of a sudden I have structured finance. Structured finance says, oh, I'm gonna sell the derivative of the cash flow that you give me as a lender to some third party guy, and I gotta make sure that I gotta pay him because I gotta make sure I gotta pay him.

I therefore need you to adhere to a strict set of rules that gives me the downside protection that I could ultimately pay him and recover. And then all of a sudden you go from having a note and a mortgage to a note and a mortgage and a loan agreement, and you have an assignment of leases and rent you have, and this.

Assignment of of contracts. You have manager agreements, asset manager agreements, assignment to manager agreements, side of asset manager agreements. You got joiners, you got the guarantees, you got carve outs, you got all types of beautiful documents, and I didn't even go through all of them. And then you got funding agreements call lender into creditor.

You got all these agreements and it's, wow, this used to be two documents, a mortgage and a note. You'll pay me on this day and if you don't pay me on this day, I have a mortgage to go to court and collect. So all of a sudden you have all these various moving parts. So the restructuring guys in court are like, oh yeah, the guys did the bankruptcies.

We could handle this. We know how to do this. No, dude, you can't do anything. You got a senior security mortgage here. Unless you get him to voluntarily give you a deal, it's not happening.

Omar Eltorai: Okay.

Shlomo Chopp: So it used to be John the banker. Hey John, how's it going? Let's have golf. Okay. Gimme a mulligan here on the golf course.

Gimme a mulligan for my client. Yeah, no problem. Here. Let's go have dinner. Have a good day. Hey Joe, the client. Hey, I spoke to John. He's gonna work with you. He's gonna work with you and maybe even be able to get you a discount because he tells me he doesn't really want this. Like he's on his second, he's on his second Heineken, and he is like, dude, I don't like this property.

I don't think I could do anything. What does he want to gimme? Let get it off my books. That doesn't happen anymore. This is not a guy at a golf course. This is a guy in front of a spreadsheet running a fricking Monte Carlo simulation to decide. Not that I don't think they do that, but still to decide what's going to happen moving forward.

So when you hire a workout advisor to do a better job of negotiating for you, you're missing what negotiation actually is. Okay. Now can you do a good job? Sure. But is he taking ownership of the process? Is he crafting the process? Is he preparing for the process, or does he just know how to talk better?

He just know how to put it in the hands of the lender and say the right things and hope that everything works out. Or is he actually relying on the lender to be able to come to the right conclusions to be able to align with yours? Yes. Is he rer? He's a restructuring guy. He's a deal maker like you.

Here's the dirty little secret. Restructuring loans is not deals. Time kills deals. Time makes restructurings. You need to let the thing bake. You need to let the thing rise. You need to go harvest ingredients first, and then you need to. Align interests, and you need the lender to be able to arrive at your conclusions and do a deal with you.

In order to get that done, you need to know what, what will this lender take into account from today through the day of me signing an agreement, and how can I help the lender? Arrive at the same conclusions that I've derive at in order to come up with a value to at least we both believe the thing is worth 50 million bucks.

I pay him 51 because I'm taking a bit of a risk and he doesn't want to take that risk. I'm done. That's the question. So what do I do to get that done and just, I'm just gonna tell you what I do because I do what I believe in, right? First off, we take 60 to 90 days before we even call the lender. To sort of understand not only what happened, what isn't, what needs to happen, but rather what someone else thinks will ha happen, what someone else thinks is going on, and what someone else thinks needs to happen.

And then I then run various scenarios. It's not model scenarios, it's literally visiting the property. So how about unit 22 F? What happened there? That kitchen looks like it needs to be done over. Yeah. We don't have it in our budget. We need to, we should have it in our budget, but because we don't have the money.

Okay. Any new buyer will have it in the budget. Let's make sure it's in there. But if you don't put it in the budget, you submit it to the lender, you just basically told the lender, you need less money to go in. Oh, but hold on, we got a problem because if I write in the budget, I gotta spend this extra.

Again, in this case, let's say it's 20 grand. Okay? But let's say extra. Extra million dollars, right? While I may show the lenders appeared by a million dollars, but if he wants to restructure under some type of subordination of process, I'm gonna have to fund that money. Oh, so do I want that to happen? But if I don't make that happen, he's gonna think it's worth more.

So I'm gonna have an issue. Okay? So let's say I put it in, but if I put that number into the model and I show it to the lender, will he accept it? Or will it just work against me? If he doesn't accept it, then why am I putting it in? But if I gotta somehow convince him, okay, what if I, instead of doing all that, okay, we are in this situation.

My pro forma gets me to a $5 million. NOI. What if instead of that, I actually do a overhaul of all the kitchens in the building and I'm able to drive rents by another 40 bucks a month as a result. So I have to pump in that money. It gets me to higher value at the end of the day. So therefore, the lender may recover more under some type of a subordination with the earnout modification, AB split.

But if I do it that way, then the lender will make more, Ugh, I want a discount, but hold on. I can actually convince capital to come in with me. 'cause now I have a sustainable business plan, not just, I'm chasing my tail so the lender recover more, that's fine, but I'll recover more. Okay. What's that cost of capital gonna be?

Only this before I even called the guy with the problem. Because the problem that I'm gonna come up with has to have a solution before I get there. If your guy isn't coming to you with a strategy as to how he's gonna do this, that is literally what we do every day. We spend about, I don't know, anywhere from two to 450 to 500 hours on a workout over the course of 12 to 18 months.

Okay? I know this because we track our time. Okay, this is an trips conversations meeting. How should we respond? What the point is, your restructuring guy is not here to have a better conversation. Your restructuring guy isn't here because of a connection. You have a better connection than him. You owe the guy money.

The guy wants to talk to you. He wants to deal like you don't need the connection. You need to be able to convey what you're thinking. But what if you're conveying what you're thinking doesn't help? What's the point? So at the end of the day, at the end of the day, I can continue going down this rabbit hole, but the restructuring industry in commercial real estate consists of either guys who are focused on debt.

And what it takes to make a loan. Don't understand property focused on people who are restructuring experts, that their skills don't necessarily translate other than their ability to improvise. Ability to understand concepts don't translate to a senior secured loan because there's no bankruptcy going on over here or focused on people that I don't know, basically have.

Don't understand it. And then you have others that have a blend of all that. And then there's us. And if that was the longest advertisement I've ever done, that's great. But at the end of the day, I'd like to see other people do what we do. Because lemme tell you something, we're doing about 20 workouts right now.

I said there's more than 20 loans in trouble and borrowers every day. It's heartbreaking. I guy calls me up, I hired that guy, and this is where I am right now. What do I do? I need a favor. And I'm like. I have a limited amount of resources I cannot take on a project that's doomed. You hear these guys, they're, they're broken and you wanna work with them.

And listen, I don't do this for charity. I would, if I was independently a billionaire, perhaps, that I might do it for charity's sake or right, just take a vacation, but I gotta pay my bills I'm building and I have a business, right? But you feel terrible for these people. You really need to be very careful as a borrower.

You need to have a good plan. Here's the worst part, the worst offenders. The guys that use a buzz line, hi, I golf with this guy. Even if you're good at what, you don't oversimplify it. The reason I don't oversimplify it is 'cause I don't have to. And if someone doesn't understand the complexity of what I'm proposing to them, that's fine.

You're not a fit for us. And ultimately, if you oversimplify and you don't succeed, you better be like Kevlar because frankly. You sold that you could deliver based on a buzz line, and then when you're stuck getting the nuance later, yeah, you made a couple of bucks for your time, but you're not gonna make that fee and you'd have a client that didn't, didn't have proper expectations, you won't be able to close the deal.

So that's my story. I'm sticking to it.

Omar Eltorai: You've been working on a series called The Road to Default, and I've been following that on LinkedIn. What. What is the kind of general thesis here? What made you wanna write it and what do you want Bars and lenders to walk away understanding.

Shlomo Chopp: I want lenders to not say, oh my gosh, I'm screwed. I don't know what to do. Let me hire a guy. And if he sounds like he knows what he's talking about, let me give it to him because he is experienced. I want you to hold you people accountable. I want you to ask me the questions. I want you to ask the other guy the questions.

I want you to go with someone that you believe could deliver for you, and I want you to understand the implications of not going with someone that could deliver for you. It's, it reminds so many syndicators. It reminds me so many syndicators call and they go, oh, I have a terrible situation. My, my manager screwed me.

Like, how did he screw you? Oh, he didn't do a good job. He renewed leases below market. I'm like, well, where were you? It's the same situation. You're accountable for your advisor's work. It's like someone basically saying, I'm a developer. I signed an loan with my architect. Oh man, he did a terrible job. It's a problem.

It's like, are you competent? Then maybe you shouldn't be a developer. You need to be able to assess your people. I. And I already posted like 13 sections. I posted it on LinkedIn, I posted it on X, and now I'm gonna combine it into a bit of a white paper, if you will. The concept is that the road to default is and potentially recourse.

They often pave with good intentions. And the biggest thing that I stress over there, and this is a message for every single borrower, structured finance documents and regular bank loans. Now also. Have incorporated this protection against, like we discussed bankruptcy, which includes exposure to liens and so many borrowers that have challenges with their assets and commercial real estate.

So many borrowers that have challenges with the assets and bills and expenses. They do whatever they can to keep things afloat, and they inc keep piling up accounts payable until they can no longer deal with it. And in order for that to work, you need income to recover. But just pushing off the inevitable is a problem.

But the problem is you're walking yourself right into a recourse situation. You are walking yourself right into a. A problem of having expenses, potentially having liens and incurring expenses that sometimes are limited to the costs of those expenses and that the lender needs to pay and sometimes are to trigger regardless on the entire loan.

And that becomes a huge problem, so don't push it off. Deal with it sooner rather than later. The things that you have, which is good intentions to try to keep the property afloat so you could pay your mortgage is actually backfiring against you. The lender put this clause into the documents because the lenders inherently don't have access to your property.

It has negative consequences as unintended consequences, and perhaps you'll lender in a moment of this, of honesty after there was already distress, would say, I wish I wouldn't be in those documents, but they're there and you're going to cause yourself a problem by trying to do the right thing. That's the premise, and then it goes through the entire series goes to what happens next and how things evolve.

I could attach names to each of these things. Like it's like these are things I've done for the past, almost 20 years working on this. So yeah, that's really something that I think borrowers need to understand. You need to have knowledge of the subject matter, right? If, let's say someone had a problem with their organ in the body that they needed surgery, they'd go and try to understand every single aspect of it and ask so many questions before I did anything.

In this situation. So I can't make money on it, so why am I wasting time and let me move on? But in the meantime, I need to save it for my investors or I don't want to walk away from it. Lemme see what I could do. And you just delegate. Be delegate in a way where you can't keep people accountable.

Omar Eltorai: Fantastic. And the final question, if you could snap your fingers and have any change to the industry come true, what would that be?

Shlomo Chopp: I think they're coming true. There's two things. The first thing I would say is that institutional investors need to realize what they know, what they don't know. Just because you understand that a finance a property doesn't mean you understand how to work out a property, and I'm seeing that more and more we're getting calls from serious institutions that just are lost because they try to reason what the guy on the other side of the table.

It's not working. So the next deal that comes up, they actually talk to somebody. That's the first thing. The thing that I would love to change, but can change is people actually focus on their customer. Just like GE Wonders about what they could charge based on extrapolating what people could pay for travel.

On what ticket charge for jet engines. I wish the industry would look at it and say, what's my risk on my fundamentals? Not fundamentals. We have expert 10 occupancy, but fundamentals like the industry coming in. Yes, there's lagging indicators, but there's actually, with so much data that we've had, because we've been capturing data for so long, we could see how these things extrapolate and I think what that would do would make things more feasible to someone such as myself who wants to invest in certain deals, but actually.

Numbers tie into it, right? So you really wanna say, okay, if I have a furniture store in Market X, I gotta look at obviously the capability of people to be able to buy furniture in that market. Well, that's a gap report. People have been doing that for the longest time. Okay, great. Now can, you could then extrapolate out how many competitors there are in the market and how much everyone needs to be able in order to get that right in order to justify the store.

And yes, the retailers do it, landlords do that own, so to some extent, but many landlords are like, no, I don't. Just gimme me. At least have a good day. Who said he's not gonna put the other guys outta business type of thing. I might as well take it. The point is, it's the same thing with shop rate across the industry, including data centers and so on and so forth.

And that's really what I wrote about, where I borrowed heavily from the Zel on the Grave dancer. We, I wrote an article, the Graves to Dance on where I think we need to go have a. Pushback to fundamentals. As previously, most of the downturns were capital markets driven, just over abundance of cash. I think what we're having now is that most recent overabundance of cash caused.

Other industries to modernize and leave a lot of real estate dead in its wake. And I think now there's continuing to change an ongoing basis to the question of obsolescence and so on and so forth needs to be addressed. So it's not gonna happen because a lot of people lose money in the process, right?

Everyone would have to mark the in their portfolio. But over time, I think ultimately it's a simmering issue the same way that e-commerce was. So that would be the second thing that I would think should be dealt with. But you know what? The gravy train is still here and let's continue riding it.

Omar Eltorai: Well, Shlomo, thank you so much for being with us again.

I think that's all the time we have, but thank you for joining and thank you to our listeners for tuning in. Take care until the next episode of CRE Exchange.