What are the top lessons learned over a four-decade real estate investing career? What are his thoughts on the current real estate investing market compared to other difficult markets that he has been through in the past? Is there such a thing as work-life balance? We are chatting with Stephen Bittel, Chairman and founder of Terranova Corporation, he manages their sizeable portfolio of properties in several asset classes.

Tell us a little bit about yourself.
I was born in a public hospital in downtown Miami in 1956, which makes me 67. I attended public school in Miami my entire life. I am the grandson and great-grandson of immigrants. I went to college at Bowdoin College in Brunswick, Maine, and had a Thomas J. Watson fellowship to spend a year in Europe. After college, I applied to law school and attended the University of Miami School of Law on a scholarship. Terra Nova was started in October of my second year in law school. During my first year, I worked for another real estate company full-time, which no one should ever try to do again. Perhaps I should have paid more attention in law school, but I didn't. I lost the scholarship due to poor grades, but it marked the beginning of a wonderful real estate career. It's amazing what results you can achieve when you work 100 hours a week.

What kinds of investments have you made?
Initially, Terra Nova syndicated among friends and family, investing in some strip centers and small office buildings. The Tax Reform Act in 1986 significantly impacted about a third of all real estate values. We built a very large third-party management leasing business, one of the largest in the southeast United States. We took our profits from that and slowly started acquiring real estate again. Initially, we partnered with high-net-worth individuals for some of our investments, and later, institutions we were doing workouts for invited us to be their partners. Since I had no money, they gave us a 10% profits interest once they had earned a 10% yield. After a few successful deals, they asked me to start investing. Our initial investments were always a million dollars. Years later, someone at Blackrock asked, "Why do you always invest a million dollars?" And I replied, "So I can remember how much I have in every deal." They laughed, but that was indeed the reason. However, that approach doesn't work anymore.

Today, we have one large institutional partner, and one project with Morgan Stanley. We primarily source our capital from banks. We used to have a significant portfolio of supermarket anchor centers around the state, most of which we've traded out of or bought out. Our largest holdings now consist of two concentrations of high-street retail: 15 buildings on Miracle Mile in Coral Gables and a block stretch, which is the High Street in Coral Gables. We also own a couple of office buildings in Coral Gables, one of which we acquired seven months ago with non-recourse financing. Additionally, we are the largest retail owner on Lincoln Road in Miami Beach. We have several other investments, including some family properties in Austin, Texas, and office developments in Bellevue, Washington. Real estate comprises half of our balance sheet. We also own an insurance company, as well as car washes, convenience stores, gas stations, and various other private equity investments.

What is investing like today compared to the past?
This is the hardest investment market we have ever participated in. There's staggering uncertainty about the future, with half of the pundits predicting a recession and others foreseeing a soft landing. People simply don't know what's coming, and this uncertainty freezes both debt and equity capital.

Part of the challenge today is that most of the people making investment decisions have only experienced an era of continually declining interest rates and cap rates, where you didn't have to be particularly skilled to make money. However, the current situation is different. While there was a brief interruption in the last quarter of 2008 and 2009, the past 15 years, and even longer for those under 50, have been relatively stable. Positive leverage, which used to be a hallmark of real estate investing, is now extremely difficult to achieve. In the past, we could finance properties at lower rates than their initial yield, resulting in immediate profitability. However, achieving such positive leverage today is nearly impossible. Despite this, we continue to invest in properties with tighter yields if we see opportunities to increase income.

Typically, when we acquire a property, we obtain multiple quotes from banks for financing. However, it's become increasingly difficult to secure financing. Small and midsize banks, which are the primary lenders to businesses of our size, are holding onto their cash, fearing another banking crisis. Even rollover loans are harder to obtain, with lenders demanding paydowns or additional guarantees as properties are reappraised. Fortunately, all our loans are non-recourse, which protects us from personal liability. However, access to both debt and equity capital remains challenging, contributing to a big ask gap between buyers and sellers.

Do you think the current situation is worse than the savings and loan debacle in the 1980s?
That was a painful period for us. We had several projects, two of which were on leased land and had to be relinquished back to the land lessors when we couldn't secure financing. However, unlike today, there was still money available during the savings and loan crisis, albeit at higher costs. The CMBS business quickly filled the lending gap left by the savings and loans. Today, private debt funds are stepping in to fill the void left by traditional banks, much like CMBS lenders did in the late 1980s.

What are some of the toughest lessons learned, and what advice would you give without someone having to experience it themselves?
Managing cash flow is crucial both corporately and at the property level. We've always prioritized managing our balance sheet, promptly paying down debt after liquidity events. The key lessons are:

  1. Invest in projects with potential for revenue growth, especially in areas experiencing positive population growth.
  2. Establish strong capital partnerships, as demonstrating the ability to close deals is vital. Seller financing can be advantageous for both parties.
  3. Consider being a nonrecourse borrower to protect against personal liability in challenging times.
  4. Honor loan covenants, and prioritize maintaining a clean balance sheet.

Regarding nonrecourse loans, although they may incur slightly higher costs, the benefits of a clean balance sheet outweigh the expense. While our model may not be replicable for everyone, I would advise paying the premium for nonrecourse loans if given the choice.

Is there anything else you think is important for our audience to know that we haven't covered?
Commercial real estate is a fantastic industry with long-term wealth-building potential. While it's not without challenges, such as the current uncertainty in the market, it offers numerous advantages, including tax benefits and opportunities for cash-out financing. It's essential to treat real estate investment as a full-time commitment and to prioritize understanding the details of every transaction. Ultimately, success in this industry requires dedication, hard work, and a deep understanding of market dynamics.

Stephen Bittel