February 2020

In the February Issue

  • Introducing the Tempo Growth Fund LLC
  • Fund Risk
  • Planned Areas of Investment

Introducing the Tempo Growth Fund LLC

In this month’s newsletter, we’re excited to introduce a new fund we’re launching called the Tempo Growth Fund, LLC. Read on to learn more about our team, business philosophy, fund structure, and investment types.

Who We Are

Our team, which brings a combined experience of over 100 years in the field of wealth value investing, consists of myself, Mike Zlotnik, and Ryan Parson as co-Fund Managers; Linda Baker, Fund Operations Manager; Yuriy Novodvorskiy, Underwriter; and Yuriy Gordiyenko, Assets Manager. You can go here to read our individual bios.

As many of you already know, Ryan Parson and Linda Baker operate both the Mile Marker Club and Heritage Fund, while my colleagues and I have operated the Tempo Opportunity Fund LLC.

Business Philosophy

What type of fund are we offering? This is strictly a real estate-only growth fund. Our business philosophy is guided by the standards set by Warren Buffett, master and godfather of wealth value investing.

Neither Ryan nor I claim to be “big-time” investors; however, I am an avid student and scholar of Buffett’s principles and attribute much of my success in this realm to the lessons I have learned from studying and emulating him.

Buffett’s Three Keys

There are three things which Warren Buffett is particularly good at in my opinion which we propose to mirror in regards to our “decision tree,” i.e how we decide to pick our deals :

  • It all starts with people. Where Warren focuses on selecting the right people to run businesses, we strive to select the best people with whom to invest (e.g. Sponsors/Borrowers/Fund managers). We scrutinize these individuals to make sure they have the right core values, track record, and ability to communicate, etc.
  • Select the best projects available. Just as Warren works to select the best companies to buy or invest in, we strive to select the best projects in the growth realm to invest in with like-minded sponsors, borrowers, and fund managers.
  • Capital to Invest in. We also focus on how much capital to invest in to maintain good diversification and the right amount of exposure to each asset.

Network and Relationship Driven Deal Flow

Everything in our world is relationship driven. Your Network is your Net Worth. Therefore, we only do business with people we know, like, and trust within our network or through strong referrals. The key function of a fund is to be a diversified vehicle, and we do look at diversification among many entities: equity, debt, location, deal type, etc.

Investors First

Our investors come first. We are investor friendly and investor focused. All of our deals are designed to give investors strong preference and a professional level split (e.g. 80-20 for Class A units).

Of course, we do need to get paid for managing these funds but our fees are reasonable compared to other funds out there.

Tempo Growth Fund LLC: Quick Overview

Numbers and Structure

Our initial target is to raise $25,000,000. The fund is growth-focused, and we’ll be investing in projects, other funds, and initiatives but, again, only real estate which is growth focused. We’re allowed to generate income, but that’s not our primary focus.

The fund will be close-ended which means that it will basically raise funds for a period of time. The initial framework is 12 months with room built in for two 6-month extensions. We have to close either at the point of raising $25,000,000 or if we run out of time, at the amount we’ve reached when the time closes with the two extensions.

The target annualized rate of return is 12-18%. This is a broad range because at this stage we don’t know what the market will bear. We try to be conservative and underwrite with Risk Adjusted Return in mind–we’re comfortable with this range, but it’s a target range and not guaranteed.

Taxes and Depreciation

The fund will be tax efficient in that it will not generate a lot of current income; rather it will generate long-term growth in the form of capital gains.

It will also have depreciation benefits and show paper losses in a number of initial years as projects go through their life cycle. We expect limited cashflow and passing through depreciation which will create tax efficiency, especially for those with passive investment gains. In the first few years, the fund will be passing passive allocation losses.

Some of the growth projects will have risk, so investors will need to have a certain degree of risk tolerance. There will also be depreciation that will pass through to investors.

While the fund is also a “long-term” investment, the life cycle is 5-7 years. That’s not to say that some investments might not cycle through faster and the capital may not be returned earlier, but some certainly may take longer than the projected range. In other words, this is an approximate timeline.

Performance Split

It’s also IRA Friendly. We don’t plan to use any leverage at the fund level, although technically speaking, we’re allowed in the case of an emergency to use a line of credit as leverage. Note that we are not raising debt capital. Every subscription comes into the fund in the form of equity. That should help to avoid UBIT tax.

Likewise, the fund has a professional waterfall; all investments will earn 8% preferred return with two classes of units: Class A & Class B. Class A earns 80/20% split above 8% PREF; 80% goes to the investors and 20% goes to the managers. For performance Class B, a 70/30% split.

Please note that we do reserve the right and will grant some of the affiliated memberships (including Mile Marker Club members), Class A units even if they don’t put in Class A dollar amounts.

Let’s Talk About Risk

Many of our readers are familiar with the investment quadrants, an educational concept we’ve used in the past to describe the various types of investment and speculative grade projects available to invest in.

Quadrants one and two are investment grade projects that are more conservative in nature with a lower degree of risk and good downside protection. On the other hand, quadrants three and four are a bit more aggressive, speculative grade that present higher levels of risk. Quadrants one and three are the income quadrants which generate cash flow while two and four are growth focused.

For this particular fund, we’ll be concentrating on the quadrants which are growth focused in nature, with limited to zero cash flow. Where it benefits the fund, we’ll strive to be in quadrant two as often as possible, but there will be some quadrant four deals as well.

As you can see from looking at the chart, we’re always thinking about Risk Adjusted Return.

The risk level in quadrants one and two is lower, and so the risk adjusted return is always adjusted by a smaller offset versus the target; if you go into quadrants three and four which have significantly higher levels of risk, the adjustment for the risk is generally higher.

In our fund, the objective is to generate strong risk adjusted return utilizing growth opportunities in quadrant two and quadrant four. Again, the philosophy here is that it’s growth fund investing so there will be a degree of aggressiveness to how we approach our deals.

Planned Areas of Investment

Here’s an overview of some of the areas of investments we plan to use in the fund:

  1. Distressed Commercial Debt
  2. This is a quadrant two deal specifically in New York City where we have a strong footprint; we like these types of projects because they offer good downside protection; they have no initial cash flow; these investments are typically 1st-lien mortgages at a low loan-to-value ratio creating strong downside protection with significant upside through default interest rate and late charges.

    One key for this type of project is that they offer strong upside and provide good downside protection. In some instances, full foreclosure is needed which requires patience through the life cycle. Foreclosure may take up to 2-3 years, but many of them repay faster as the borrowers find the money and repay.

  3. Self-Storage Value-Add Deals
  4. Here, generally speaking, we prefer conversions as they take considerably less time the ground-up construction; there’s a current trend around the country in which dysfunctional malls need better use. Typically they are located well within the cities, but they can no longer function as retail hubs. One of the key repurpose opportunities is to convert them to self-storage facilities.

    As long as the feasibility study is good and the dynamics look promising, along with a strong and experienced sponsor, these projects could present phenomenal opportunities.

    Many of these projects are quadrant four deals while some of them are quadrant two.

    The bottom line here is that we’re focusing on sponsors with good track records with good levels of experience, and these projects generally have good target rate of return in that they improve the value of the asset dramatically through its redevelopment.

  5. Multifamily Value-Add Deals
  6. This is another category that continues to offer great opportunity; we foresee it being a multi-year almost ongoing area of opportunity with the right sponsors and the right projects.

    Value-Add Multifamily deals are normally fully-operating, full occupancy (or close to it) projects located in desirable areas but they are dated and have been in need of renovation for a number of years. These properties present phenomenal opportunities. Not only are they well-located but they have significant rent upside given the average rent in the area and have been somewhat mismanaged. As a result, there are opportunities to come in, acquire the asset, complete a significant renovation cycle (external: roofs or siding: internal: commons areas, appliances, cabinets, repainting and refreshing); all of these projects add significant value-add and they can increase the value and the cashflow.

    Many of these projects fall into quadrant two because they’re cash flowing today and these value-add renovations are incremental. They may not generate significant cash flow during year one and two in the midst of renovations, but once they compete and are fully-leased up to the point where the cash flow is reaching the future value objective or future cash flow, at that point, these projects reach full occupancy. They could be refinanced with the capital returned to the investors, or they could be sold at a fair market price.

    These are significant projects and we only do them with sponsors that we know, like, and trust.

  7. Industrial, Office, and Other Value-Add Deals
  8. This category presents a huge opportunity to redevelop an asset. We’re allowed to do just about any type of real estate project that has good, opportunistic upside with strong risk adjusted return. Quite often, we’ll invest in a project with an organization like Fairway America, who has strong underwriting and where we can get terms better than the street; they’re an example of one of our strategic relationships, perhaps are top one.

    Overall, in this category, we’re looking for a high rate of return, 20% + on a fund level for these types of projects.

    Concluding Thoughts

    As you can see, we’re very excited about our launch of the Tempo Growth Fund LLC, and we hope you enjoyed learning about our plans. There are additional aspects of the fund that we’ll be rolling out in our February newsletter, so please stay tuned. Those topics will include how the fund will be funded, the specific roles and responsibilities of our fund managers, elements of diversification, and a great deal more.

    In the meantime, if you’re interested in learning more, please reach out to me, Mike@tempofunding.com, or visit tempogrowthfund.com. You can also schedule a time to chat via bigmikecall.com.

    Thanks for Reading!

    Mike Zlotnik

    Please don’t miss the latest Episodes on Big Mike Fund Podcast:

    052: Circle of Wealth: Multiple Income Streams with Lee Arnold
    051: Marko: A Technology Platform for Investors

    Thanks for reading,


    Mike Zlotnik
    CEO, TF Management Group LLC

    This newsletter and its contents are not an attempt to sell securities, nor to sell anything at all, nor provide legal, nor tax accounting, nor any other advice. The presenter is a private lending and real estate fund management business, and the information represented herein are purely for educational purposes and represents the opinions of the presented. Prior to making any investment or legal decision you should seek professional opinions from a licensed attorney, and a financial advisor.

    TF Management Group LLC (TFMG) is an investment fund management company that specializes in both short-term debt financing for real estate “fix and flip” projects, and long-term “value-add” equity deals.