#278 - Moses Kagan & Rhett Bennett - Co-Founders of ReSeed Partners - Building the Y-Combinator for Real Estate Operators

Chris Powers: Moses Rhett, welcome to Fort Worth. Thanks for having us. Yeah. We've done 185, 186, and 54 in episode 46 with Moses. Rhett, the first time. It's great to be here. Yeah. Please give us a little background of where you're coming from. 

Rhett Bennett: Yeah.

So. I've spent the last 20 years in various investing roles. I grew up in Birmingham, Alabama. I went to school at Brown University and ended up back in Birmingham, where I was the CIO of an outsourced, multi-family office. I went from there to I ran a, or I was the president of a long-short equity hedge fund based in Palo Alto.

Okay. From there, I moved to Boulder, and I took another investing role where I was the co-managing partner of an outsource cio, and as part of that, we had a real estate mandate that I was responsible for. Cool. 

Chris Powers: Before we get into kind of the big topic of the show, there's one question I wanted to ask you,

So, he has been on four times. If you don't know Moses, I suggest you listen to those episodes, and you can get the factual background. We won't go through it today, but I did want to start with it. How have you evolved over the last four or five years? What was like pre-Twitter Moses like? As I've watched, we've been close for a long time, and I think we're all evolving, but what are you? How have you evolved over the last five years?

Moses Kagan: That's a fascinating question. I'll say that my core beliefs about business are the same. Yeah. They're very similar in how I want to shape my business and life. What has changed is an appreciation for the power of a vast network. Yep. You know, I was never, I mean, I have a decent network from college and high school and stuff, but like I never, it was like this.

Yeah. And just the level of opportunities, we're going to talk about it, but this is how I met Rhett and got to know people who've written extensive checks into our deals and everything. And then also getting to meet people like you and others doing this. And this is where things have changed a lot for me.

Getting to meet people who think on a vast scale, on a much larger scale, is my instinct. Yeah. And I, really, honestly, I give you a lot of credit for this, and again, not to keep bringing this background to this conversation today. One of the things that drew me to this opportunity that we're going to be talking about today is that pretty quickly after Red explained how he was thinking about it.

It was like, oh, this can be large. Yep. And so that's something that, that opportunity would never have come to me five years ago, and I wouldn't, even if it had, I don't know that I would've been able to process it.

Chris Powers: Yeah, I have to ask you that because I think we've grown up in this generation, and the same thing, many people will be like, you know, why do you spend so much time on Twitter?

Every minute I spend on Twitter has an exponential impact on my career from now on. And I, and you could make an argument like, is it too early, too late? I think it's just the beginning of these types of things again. And so I had to ask what brought together today's conversation.

You guys just launched a new business. Let's start there. What is business, and what kind of a bit of background of how did this come to be?

Rhett Bennett: Yeah, so the business is reseeding partners. We are in the business really to do two different things. We aim to build a large asset management business that provides investors access to the sub-in institutional real estate market at scale.

Okay. The second part of the business is we want to help young, ambitious real estate operating partners build significant businesses. And it's essential to know that it will be their business. Yeah. And so we are there to support them, help them get off the ground, and then eventually scale that business.

Moses Kagan: Yeah. And I think, you know, it's a little bit of, maybe a fast salt comparison, but what we're trying to build is why Combinator for real estate gps. Okay. And as we talk about it, you'll see where the scale comes in. But we intend to take cohorts of, you know, five to seven probably that end up being 10 or 15 later on people.

Initially multi-family, but eventually in other asset classes in geographies we like. Okay. Teach them to do the business how we would like it done, capitalize them to do it, and then support them as they chase deals, buy them, and scale their businesses into, as Rhett said, large freestanding operating companies.

Chris Powers:

And you have all been in the business and come from different backgrounds. Like why was this the thing that you were going to chase? Has this been something that you have all been thinking about for a long time? Do you know why this 

Moses Kagan: let's say Rhett can talk about it from the allocator perspective, and maybe I'll talk about it from the operator perspective.

Okay. Yeah, absolutely. 

Rhett Bennett: In my previous role, I was tasked with going and building a real estate portfolio from a blank sheet of paper. And so I went down the traditional paths where I said, okay, we have long-duration capital. How do we maximize returns over a very long period?

And for us, when I did that exercise, it became evident that for long-duration capital, the private equity vehicle was not that attractive because, as you know, you lose a lot of the tax benefits associated with real estate when you go through the private equity structures.

And so from there, it was apparent that it, and the shop that I was in, we really couldn't manage the assets directly. So we had to go to local operating partners, and we started, you know, buying deals, doing transactions. Things were going well, but it became tough to scale. Yeah. So we found a couple of operating partners.

We then started, you know, putting capital out. But, when you think about putting significant amounts of capital out, it naturally pushes you upstream regarding transaction size. And we firmly believe that the return opportunity starts to come down as you get more extensive in transaction size.

Moses Kagan: Yeah. And to unpack what Rhett said a little bit, it's more efficient to write extensive checks, but as you know, when you're doing large deals, you're dealing with sophisticated owners, property managers, and probably most importantly, brokers who know how to run simple sale processes.

And it will wash out many excess returns you're looking for. So, the question becomes, okay, how do you? The attack that sub-in institutional market, but with a large enough volume of capital being deployed to move the dial for large allocators. Yeah, that's right.

Rhett Bennett: And so in my previous seat, you know, we invested across different asset types, and so we thought some models were analogous to this, and DC Moses uses wide Combinator in private equity, but I didn't see a solution that was built to take young operating partners and really kind of, you know, change as Moses would say, change their trajectory.

Right. And so we believe that we can help people grow faster, build more prominent businesses, and avoid many of the pol potholes that, you know, Moses may have stepped in, or I stepped in along the way. 

Chris Powers: The answer to this might be both, but is the goal to we know we want to make money, but is the goal to do that by helping a bunch of?

Like Y com, a bunch of startups become successful or is the goal to also, and I could either write a hundred million dollar check into one deal and make 15%, we're trying to write a hundred million dollar check into 20 deals make 25%. Like, where's the money? What's the motivation? 

Rhett Bennett: Yeah. The answer is both.

Okay. So, I mean, as I mentioned, we believe that the substitutional real estate space is much more attractive. Yep. From a return perspective. But we also, you know, believe that we can take a small number of very talented individuals and help them build significant businesses.

Moses Kagan: I think it's also important to say it's not just any type of businesses we're trying to help them build. Right. So the problem for an allocator who pays taxes right is that the traditional real estate, private equity model, which is heavily irr driven, is going to. Incent certain behaviors that are not welcome from the perspective of tax-paying allocators, for example, levering up, ripping, and running.

You were buying lipstick, selling quickly, and, therefore, generating lots of transaction fees and capital gains, taxes and depreciation, recapture, and all that stuff. And interestingly, that behavior makes a ton of sense if you are a non-tax-paying investor. Yeah. If you are a foundation or an endowment and do not pay taxes, you should maximize IRR.

And so I think that makes sense. And I think many more institutional real estate and private equity firms have understandably designed their businesses with that customer in mind. But as Rhett has just been describing, Other large investors pay taxes. And if you talk to affluent families that own commercial real estate like they don't sell stuff.

You're like, what's the IRR? And they're like, what are you talking about? What's an IRR? Yeah. I mean, our biggest investor has owned stuff since the forties. Like what's the IRR on that? Yeah. Do you know what I mean? Like, it's just a completely different way of thinking about real estate.

And so, the problem is if you are one of these vast tax-paying investors and would like to write extensive checks, the problem is how do you do that? Yeah. And it's not just about getting capital out the door; it's about getting it into properties selected for long-term holds.

And we can talk about what that means, but it's like, it's a, you know, both like a question of the market. Yeah. And then, like the property, the physical building you're buying. So it's, selecting market and property.

It's also the economic arrangements between the investor and the operator. Right. Because if you have an operator primarily focused on crystallizing a promotion ASAP, that will incentivize behavior that is at odds with the goal of these out-tax-paying allocators. And so much of what we're trying to do is socialize, raise, create, and socialize these young operators.

To serve up to us, and therefore the allocators who are backing us to serve up to us the kinds of transactions that we want them to serve up to us.

Chris Powers: Yep. So when I first met you, you used to describe yourself. You'd always say like, I'm weird. We like to buy things and hold them as long-term families would. Has that always been the case? Have you always thought through that lens?

Because I remember when I first met Moses, I didn't come from that world. It was like, no, we are going to buy. It was the Blackstone model. Buy it, fix it, sell it. The irony is, and we, this isn't about me today, where we're headed as a company is way closer to where Moses stands. You realize over time, Yes, a general like leave tax out of it.

It's just a lot of work to buy and sell; over the long term, you aren't making much more. Yeah. The one thing I will say is the night the promotes can be attending; I had a few of those good ones, but what were you guys bonded on the idea that there are a lot of talented people out there that need an opportunity, but also bonded on this idea that we need to start training the next generation of people to think more long term.

Rhett Bennett: Yeah. So I contacted Moses via Twitter, and that's how we initially met. And that, I mean, it's the beauty of the platform, right? I felt like I knew Moses before I met with him. And a lot of that was, you know, even going back to his blog. And so it was, you know, when I was reading the material, it was obvious that this is how I think about the business.

It's in every role I've been in, and it's always been about long-term investing. And, you know, this might be an exciting topic to discuss later. I think that if you can think long-term and think about the situations that allow you to deploy long-term capital at an advantage, it becomes, you know, you start to shrink the pool you're competing against.

Yep. And that's what we're trying to teach the operating partners that will come through receipt. So we were; I think it's essential that you have a solid philosophical grounding and a bond when you enter into a relationship and most design partners in this deal. And we do both kinds of the long-term orientation of the business, the business design, and what we're trying to achieve.

Moses Kagan: Yeah. And I will also add that Rhett tried to gimme a bunch of money, and I was like, thanks, but I don't have anything to put it in. And I think that explains why I'm so excited about this opportunity. By definition, what we have built at Adaptive is a niche business. Yep.

And the pace of capital deployment is because we are ruthlessly quantitative about what we look at. It's pretty clear when we should buy stuff and when we shouldn't buy stuff for better or worse. I have not bought a rehab deal in probably a year and a half or something. Yep. And we slowed down maybe two and a half years ago.

And so that's just the nature of the beast. Like it will be in our market for various reasons, it's not been a good time to put capital out. So the pace of growth for us is going to be constrained, and therefore our ability to take capital and be, for our allocators, a way to deploy capital is constrained.

And so one of the beautiful things about this model that Rhett approached me with was the idea of diversifying instead of having one adaptive Yeah. You know, have 10, 20, 30 in niches that we've picked out both, you know, geographically and in terms of asset classes that can absorb capital at any time.

And so, possibly it's not, and things are not good in multi-family two years from now. Like maybe we're going to do some storage deals. Yeah. Right. Or maybe different geographically and different markets perform differently, and one or the other is more attractive. Like kind of it dramatically expands the scope across which these ideas and the learnings we've developed in adaptive can be applied.

Yep. 

Chris Powers: I will tell nobody I've met that's more disciplined than Moses in these markets. In the last three years, many people have, like, I'm not saying, abandoned, and abandoning previous underwriting standards might not have been a wrong decision. No. People did great, and they did great, and the verdict will be out of how great they'll do.

But if one, and there's one thing I think about, I think of Moses. It's, it's very disciplined. And so bringing that approach into this is the world we live in. You got to know Moses by just reading his stuff, and it's just. Undeniable. You know what you're going to get from Moses. I still can't wait for the day he comes on.

He is, like, selling my whole portfolio. 30 irr, 30 irr, probably not going to happen. How do all of you define sub-in institutional? 

Rhett Bennett: Yeah. I think you can define quantitative and qualitative in a couple of ways, and I think the easy math would be, say, it's somewhere between five and 20 million transactions.

Okay. But that's drawing black-and-white lines that don't exist. Right. For us, it's really about how competitive the market is. Okay. How fragmented is the market, and how likely is it that we come across either a busted deal process or a grossly mismanaged asset? Yep.

So if you think about it, you know, the one extreme. It's probably pretty rare that you find an apartment that has, you know, it's a 50 million transaction size that's not been managed reasonably well. There are always things you can do better, but, commonly, you're going to find an apartment that may sell for five or 10 million that maybe a family's owned for 20 years, and they haven't raised rents in a very long time.

And by the way, that is a giant; those assets have a very long tail. Yeah. 

Moses Kagan: I want to say, To follow with what Rhett Side is. It's not an arbitrary 20 million limit. Right. As we get more comfortable with our operators, if it turns out that one or more of them have a strategy and a pipeline that starts to produce more significant deals, like, you know, like Zima Gaunt and Yiddish is like, go in good health, good go in good health, right?

Like great, we'll do those. Do you know what I mean? But where we think the opportunity is, particularly for younger operators who are coming in with some significant disadvantages, and we can talk about what it means to be a new operator, you know, in a market. It's not a particularly advantaged position to be in.

But one of the places we think that they can be competitive is in this sub-in institutional space. 

Chris Powers: All right, so let's dive into it. So let's start with your mentioned cohort of five to seven people. Let's start there. We're, we haven't, you haven't launched cohort one. What will that look like?

How will you all understand who's going to make that cohort? And then let's talk about what'll happen during that cohort. 

Rhett Bennett: Yeah. So maybe we should start with the response that we got on Tuesday.

Chris Powers: I knew it was going to be big. 

Moses Kagan: I didn't know it would be that big. 

Rhett Bennett: So I think the best way to describe what happened is I was sitting at my desk. I think it was six 30 in the morning.

Chris Powers: You knew it was coming?

Rhett Bennett: We have two colleagues that were working on the launch. I got a call, and Laura Krank, Iris's partner, said we were getting attacked by bots. I said, no, the website's not getting attacked by bots. Moses tweeted, and that's all genuine interest coming into the website.

Oh yeah. So we start with, in the first kind of week, most, in the first 24 hours, we've had 1500 people sign up. Oh my gosh, congrats. Yeah. Thank you. So obviously, that was more than what we originally planned for. What were you planning for? I think the number we use internally. We said if we get three or 400 emails, we'll be excited about that.

That happened in about 60 minutes. The Moses effect is natural. 

Moses Kagan: Exactly, I want to step in and say because I think many of those people will be listening to this. I want to say thank you to the whole community. I have tried to add more value to real estate Twitter than I have extracted.

Yeah. Which is like, you know, obviously that's just good business, and everything that's all of us do, and, you know, so I feel like I've contributed a lot, but this was like, it was pretty meaningful to me personally to get that kind of response. So. Awesome. It was fantastic, and it felt perfect.

Rhett Bennett: Yeah, it was a day. I won't forget.

Chris Powers: That's awesome, so 1500 come in week one. Yeah. 

Rhett Bennett: We have released the application. So we sent them an application that talks about their experience and, you know, what are their goals and what are they focused on, what markets are they interested in, what strategy would they try to execute?

And so we'll take that. So those applications will then start to interview people via Zoom. We've got a whole grading and scoring process. And then we also have to think about markets and some, maybe Moses, some you want to talk about. There's this tension between picking the operator and picking the market.

And ultimately, it'll boil down to us spending time in the market with a small number of operators and then eventually capitalizing them with capital to fund their business.

Moses Kagan: I don't know that there's a playbook here, so you know, we have some hypotheses about what a successful operator might look like, and you know, where they might come from and what their background might be.

But this is very much a learning process for us. So we're approaching it in a rational where we'll talk about maybe we're expecting the operators to come from, maybe it's four buckets, I think, and this has been born out actually by the applications, which has been gratifying.

Analysts and associate types at existing real estate and private equity shops. And this has blown us away; I was expecting people who have been in the business for two years, and we have applications for people who have been there for ten years. Yeah, great. Excellent source of talent there.

Brokers who have got to know, in this case, probably multi-family in geography well, but for whatever reason, would prefer to be on the top side. Yeah. One that I had not considered carefully enough, but I think we see in the applications, is people with more of a construction slash architecture type background, which will be interesting to see.

And then interestingly, and this is another one that I was not expecting a ton of, we are seeing existing operators. Okay. So people who have done some deals. You know this probably as well as anyone; it's tough to go from having done zero deals to doing your first deal. Still, it's also a whole other step from having done deal two, three, whatever, to be like, okay, this is a full-time operation with the flywheel spinning and enough access to capital.

I mean, we can talk about, I call that, my crawling over broken glass period. That's my favorite quote on your all's website. Well, I mean, that's, like, is what it was. And we did, I mean, we could talk about this too, like we did so much dumb stuff that was, well, because you didn't know, we didn't know, and we were broke.

So, you know, you're trying to feed your family and come up with the money to co-invest in deals, right? And you don't have anything coming in, so what do you do? So you're like, oh, okay, I'll broker a deal over here, and I'll do some brokerage. Like, as you and others have pointed out.

It's pretty stupid to broker deals if you're going to try to be a principal in that market. Yeah. Cause all the brokers are like, Hey, how can I show this guy my best deals? I'm still dealing with people being like, wait for a second, aren't you brokers? And we haven't brokered a deal for our party in a long time.

So that, you know, we did, I think, 30 fee development deals where we didn't get any equity. We just got cash fees, which I knew was stupid, but we couldn't; I couldn't raise money, so it was like I needed to eat, and we needed to reinvest in the business. So we did it anyway; I think getting through that period is challenging.

Yep. And so it is perhaps unsurprising that many people are kind of in that. Are like, Hey, you have a way to help me accelerate through this and get to the point where my business is a flywheel, like yes, I am interested in that. Go ahead. 

Rhett Bennett: We hypothesized that those four types would come through in the application, but we've been surprised in several cases.

So we've had a relatively large percentage of the folks coming from different interest industries, but they've done a deal. So they're not sitting in a real estate job or one of the roles. And you know, maybe it's the economic environment in tech, we've had a lot of people that have, you know, primarily their day job is, is their software engineer. Still, they've done some deals, and you know, they bought a fourplex or a couple of apartments, and they're interested in making that career switch.

And so, that's a surprise relative to our initial hypothesis of the type of people that would apply. 

Moses Kagan: And those people are, to be frank like we're excited about many of those applications. Cause you to have these people who. First, software engineers will tend to be pretty high-IQ people in general.

And then these engineers also tend to think very systematically. Yeah. Like, they think like engineers. And that turns out to be a pretty good background for the kind of business that we're in, in terms, you know, it's, as we've said many times, not rocket science, right?

Like, it's not, but it does reward like thinking in systems, optimizing systems, and executing ruthlessly against a relatively limited playbook. And it turns out that that kind of person is pretty interesting to us.

Chris Powers: I think about Rohan when we're having this. Yeah.

Oh, a hundred percent from tech and the way he's thought through the business is so 

Moses Kagan: I was thinking about him as I gave that answer. 

Chris Powers:  It is when you have a pool of candidates and break them into those four. I'm assuming I'm a hustler and have never done this, but I'm just interested.

That's probably not going to, at least in the first cohorts, make its way to the top. You want to see something that's demonstrated. You've been in this business and thought about it for a while, not just I'm, you know, I'm a hustler, and I can prove it.

Rhett Bennett: We'd love the opportunity to put everybody in the business, but that's not the reality.

And so we think about it in terms of, you know, what are tells that people think this is their life mission. And I think that anybody able to, you know, work their day job and then do a transaction outside of it, it's a pretty exciting tell. Yeah. That they're devoted to building a business.

Moses Kagan: I should say, you know, a range of skills is required to succeed in this business. And you think about what you need to do to make acquisitions well, what you need to do to raise capital, and how you execute a deal after you buy.

There's like a set of things, and the truth is, Probably you could teach anyone or any one of those things, or, and you can teach a bunch of them, but you would like people to be coming in, knowing at least something, right? Whether, you know, and it, I don't want to rule out the possibility that we would ever take someone who doesn't have experience.

That is possible at some point, particularly for these first couple of cohorts. I mean, it's so important to us that I mean, candidly, like we can't have these people flaming out, right? So, if it requires, Rhett and I like going down to the market, holding their hand, and walking them through to a reasonable outcome.

That's what will happen, so we'd like to stack the deck in our favor and go ahead.

Rhett Bennett: I think it's important to note that, you know, this is not about one cohort or two cohorts for us. We're trying to build a large business, and we'd like to wake up, you know, five, ten years down the road, and we have 50, 60, 70 people in this vertical across markets.

And then you could think about industrial self-storage and some others. 

Chris Powers: To be clear, anybody in the cohort must demonstrate that this will be their full-time job. It's not a part-time deal for anybody. No. And we're going to pay them.

Moses Kagan: That's, you know, we're part of. What excites me about the opportunity is This ability to fix.

There's this, which is not so bad in some ways because of a business entry barrier. Yeah. Which is like, okay, there's a whole bunch of other stuff that has to do with knowledge and contacts and mentoring and all that stuff. We will address those, but there's also physically like a money problem many people have gotten into the business.

Yeah. And some of us got countrywide, no doc loans. Some of us have a close friend from high school who made a lot of money. Oh yeah. And he was willing to tolerate a lot of dumb mistakes, but not everybody has that. And, the ability to say to someone who has been sitting in an acquisitions role at a successful private equity shop, but he maybe has a young family or doesn't have a wealthy family or whatever to say, look like you're going to bet on, you're going to bet your career on this.

Like, you'll do this full-time, but we won't make you starve while you do it. Yeah. Do you know? 

Chris Powers: Can you guys speak when you said there's a grading scoring process? There are four categories of people. What if somebody's listening to this, thinking about applying, or maybe thinking about how I will fill out my resume?

Like what scores high or other things? Or is that a black box right now? It's not a black box.

Rhett Bennett: I'm sure that you could guess it. As you said, a lot of this is not rocket science, but we're trying to say, okay, what are indications that somebody wants to do this for the long term?

We start everything with that part of the conversation. Yeah. And as we said, there's, you know, doing a transaction's a big part of that. We also think a lot about, you know, how much have they thought about what they want to do? Yeah. Right? Yeah. So when describing the market opportunity, is it I like apartments, or is it I like class B value add in this market?

At this point, I would pay this price X, y, Z. Right? So, the clarity of thought around why they chose the market. Why they chose multi-family, where in the multi-family spectrum, they said, I think all of the that for us shows a passion and a certain amount of intensity that they brought to this, to the process.

Moses Kagan: 

 We should probably talk about personal characteristics, although how you start creating personality is another conversation. But I think for me, and I don't want to speak for Rhett here, ambition is near the top of the list.

In other words, we want people who wanna build extensive operations. If we want someone sitting there and going, I want to be Chris Paterson. Yeah. Like, not someone who's like, oh, I'm trying to build, you know, a lifestyle business where I own, you know, five or six buildings, and I'm done. Like, that's cool.

Like that's great, that's a great life. And, you know, my hat's off to people who do that, and that's, you know, in some ways, their lives are probably a lot less complicated than ours are. For our business to work, we need to grow substantial operating companies that will be large consumers of capital.

Yeah. So we need people coming in the door and saying, look, I need some help to do this. And I appreciate your help, but I am like, the goal I have in mind is a big company. 

Chris Powers: All right. So we've gone through the application process, and I've been selected. What is going to happen next? 

Rhett Bennett: So we're calling that the reseed partner track.

Okay. So there'll be a launch phase, which will essentially be in person. Okay. But before that, there'll be some work to do around, you know, just getting basic information, some reading, and starting to spend time with the whole receded team, which we should talk about at some point because it goes beyond just Moses and me.

Yep. We then, so you'll have some work before the launch week. You'll show up at launch week. Moses and I are big believers, and it's not about just sitting up there and listening to lectures and speeches. It's doing right. It's getting your business going, so when you come out of launch week and set up your entity, you'll have your broker list that you'll start to call on.

You'll have been through some case studies with, with Moses, so you'll, you know, start to build that rhythm of what do you need to do on, on an everyday basis post-launch week, which is, you know, we're talking, we call it the build phase. That's the next 12 months. A lot of that is weekly calls with a team reviewing deals, starting to underwrite transactions together, and hopefully doing a few transactions along the way.

Moses Kagan: 

And that's the period during which they're getting paid a salary. Okay. So we're, and frankly, the expectation is that they will execute what we want them to execute during that year. Yep. And to the extent that. They don't like, probably out of the cohort at that point.

Chris Powers: And again, we haven't done a cohort. I'm saying we, but I tend to do that on podcasts. Welcome. We're here.

Rhett Bennett: Welcome. I'm a partner for the day. You're boom. I think he just committed to speaking. 

Chris Powers: I just committed to speaking at launch week. And it is a week, a one-week deal, and it's its launch, not launch weeks.

Rhett Bennett: We will bring people back together in person. Yeah. But the first, we're, the first week is in person, and that's what we call us and me.

Moses Kagan: I want to say, like, part of the problem we're trying to solve with that is, like, okay, let's say I put you in business, okay? You quit your job, get a salary, and sit at your desk.

Like, what do you do? Yeah. Right, suddenly you don't have a boss coming to you and being like, can you please do this t p s report? Like, what do you do? Yeah. And the answer is we, and there are some things that you need to be doing. Yeah. Talking to brokers to build deal flow, you need to be visiting apartments in your market so that you can start to underwrite rents with some certainty.

Meeting property management companies to know whom you'll bring on board once you buy deals. Talking to contractors about, Different renovation specs and what those things are likely to cost and trying to get comfortable so that you know whom you'll hire once you buy one of these things.

It's,  trying to kind of like take what it is, what could be like a nebulous blank page problem, and be like, no, these are the steps you need to go through to do this successfully. Yep. And it sort of implants that early on into them so that then when we release them back into their market, they're not just sitting there, staring at the wall.

Rhett Bennett: This is where the white Combinator analogy falls apart slightly. Yeah. So we could spend three months in Boulder where I live and have a lot of fun, but at the end of the day, as we all know, real estate's a local business. And so you can't design it as you would, Right?

A tech accelerator. You have to be in the market.

Chris Powers: And do you foresee, like, are these all individuals? Are there going to be co-founder teams? Do you all look to pair people up, maybe, or do you want to see co-founders, or you're cool with it just being an absolute rock star guy or gal, and they're just going to be on their day one?

Rhett Bennett: Yeah. We won't play Matchmaker, so we'll leave that to the apps. We are open to partnerships, and I think you can make a strong argument that there are many case studies of partners. Moses also has a partner in his business, which is very advantageous.

And so we're, I don't know the exact spot, he's the better half all, and it's undoubtedly the more relaxed half. And we're open to both. And a lot of applications from both solo entrepreneurs as well as partnerships. 

Moses Kagan: I'd like to add to that, and this is something we haven't discussed, right?

So Rat might chime in here and tell me. I've talked about this on Twitter. Me concerning a partnership, I think the idea of having a partnership is excellent. Would I like to see someone in the decision-making role? Because we've talked about this before.

But I'm the decision maker. And In my previous business, before I started Adaptive, I was partnered with my brother, whom I love dearly, but we were co-managers. We spent so much time fighting with each other about issues that, in retrospect, were so meaningless.

 And just so much energy was expended because no one could finally say, this is the decision. So, I haven't talked about this, so we'll see if he chimes in to tell me I'm crazy, but I would like to see a decision-maker. 

Rhett Bennett: Yeah. For the record. I agree. 

Chris Powers: I want to get this one out real quick.

People applying, are you guys going to be backing any dev, like ground-up developers, out of the gate? Or is it more of a renovation strategy? 

Rhett Bennett: It's more of a renovation strategy and or kind of some of Moses' recent deals where there might not be a heavy value add, but we like the asset and the market.

Moses Kagan: So, somewhere between heavy value add up to the core, including some lighter value adds some core plus, let's say. But it is conceivable that at some point in the future, we'll do ground-up development, but we gotta like limit the complexity here in some dimensions.

Chris Powers: If you had said ground-up development, I would spend the rest of this podcast convincing you don't do that to start. Okay, so the first week goes well, you go; I'll put myself in the shoes. We like each other. And now, the following year will begin, and this is where I will start digging.

What does a partnership with all of you look like? What am I getting? What will that next year look like, and what do you expect me to do? One deal, two deals, a specific dollar volume of deals. All of the above. 

Moses Kagan: Well, procedurally, it will be weekly calls, some market visits, wrapped around live deals.

But, regardless of whether live deals are going on or not, we want to see evidence that you are progressing in all the metrics we can track. So how many broker calls have you made? Like what is the volume of inbound opportunities that you've built up?

Have you gone and netted with the relevant property managers, the rec, and the relevant brokers? Have you done an exercise where you evaluate Opex? That's a huge one, and we didn't even talk about that. When you're modeling a deal, your ability to accurately forecast what it will take to operate the building is critical.

And one of the disadvantages you have as a beginning operator is, How do you start to estimate that? And I'll tell you what the wrong answer is taking a bunch of broker pro forma, and they tend to leave expenses out, right? What does that look like? Well, it turns out that the answer to that is you meet a bunch of property managers and try and gets some anonymized but real PNLs from real deals and start to triangulate and say, okay, what is this going to look like?

So we want to see evidence that even if they're not doing a transaction immediately, they are growing in terms of their presence in the market and, therefore, the inbound deal flow they're getting. They are doing outbound to try to get deals. That's, depending on the market, like in Los Angeles, that doesn't work as well, but in less well-brokered markets, actively going out and approaching owners is essential.

And then, we want to see that they are internally developing the knowledge necessary to underwrite and then eventually execute these deals accurately. 

Rhett Bennett: Yeah, I think to add to that. What happens over the next 12-24 months with the debt markets and some of the stress that we're starting to see?

That will correlate highly to the number of transactions they should do, right? So if we stay to market, where pricing is not nearly as attractive as we would like, then we must focus on the process. And as Moses said, we are confident that over a long enough period, if you get up every day, you meet with brokers, you look at transactions, you underwrite transactions, and you will find apartments or assets to buy.

Moses Kagan: Right, but you have to sit in your ass in the seat and do the work, right? I'll never forget my partner. We've gone through ups and downs, just like all partnerships have. And I think maybe the most meaningful compliments I've ever gotten, a professional context was John being like the thing I like about you is you gut in here every single day and sit down and look at deals year after year, after year.

And, like, it turns out that if you keep doing that, you will find stuff to do. It's just that most people don't have the diligence to sit there and do it. 

Chris Powers: Regarding the market, do you only want to be in tier-one cities, or would you be in DFW? Would you be doing stuff in Alito or around DFW, or would you want it to be like in the core city?

Rhett Bennett: Yeah, the answer is not just tier one. We're open to many different markets, but as Moses indicated, we want to help people build reasonably sized businesses. And so you've got to have a market that has some scale. And then you have to have a reason for wanting to be in that market.

And if you talk to Moses about Los Angeles, he will tell you got street by street, block by block. Where does he want to be in? Like that's, we're looking for somebody who understands the market and is willing to continue to grow and got that understanding of the market.

Chris Powers: And you guys, if deals are attractive pricing, who determines what's attractive? Is that you all? Is that the operator? Because what's attractive to me might not be attractive. Who gets to make that decision, kind of?

Rhett Bennett: Yeah. So we expect to provide the Co-GP capital and the most transactions that our operators find and do.

We also expect to raise LP capital to help them fund the transactions on a one-off basis. But at the end of the day, it's their business, so they get to decide what transactions they're going to pursue, but we get to decide which transactions we will fund.

Moses Kagan: So for that first year, we want them working on. We have a set of investment guidelines.

Here's what we want you to be looking for. While paying for that year, we want to look for that kind of deal. If, after that point, they decide, hey, you know what, there are better opportunities in retail. Hey, we'll talk about it, and we'll keep a small stake in their operating business.

They should do it if they want to buy retail. What we're hoping for, though, is that they will cook us up the stuff we want to eat.

Chris Powers: Right. Is there a specific type of deal that fits? It doesn't even have to be necessarily the return.

Because obviously, they're going to be holding it for the long term, so it doesn't have to be what your IRR is in three years, but what would be like an absolute no. And what would be an absolute yes?

Moses Kagan: Yeah, this will sound familiar because we're looking ideally for some supply constraints.

I can imagine scenarios where we would be open to markets with limited supply constraints but where we are getting in on a sufficiently attractive basis. But what we prefer is supply constraints. We want from a physical perspective, and we want a building that is in excellent shape. So, you're right.

One ideal scenario will depend on what happens with the debt market if high-interest rates persist. You have a bunch of people who built lovely buildings who need to sell them because they can't refinance them, and we can buy them for replacement costs or something lower than replacement costs and get a decent yield.

Not an amazing one, but a decent one. But on a brand new building that's built well in an area we like, we'll take that if it's going to be a rehab deal where the systems are being addressed. Because what we don't want to do is end up with a portfolio of the sixties and seventies apartment buildings that have been lipsticked, but the plumbing's old. I know from operating a wide range of buildings that whatever you estimate on the opex for an unripped 1960s building is too low.

Yeah. It's going to be higher. So, we want supply constraints and the physical building to be suitable. And then we want to see some evidence, I think of a diverse and dynamic economy to use an extreme example, we're not going to wanna buy in like a heavily cyclical oil market.

I'm sure some people have done very well buying there. But this is long-duration capital, and we want long-duration operators. So they need to be in a market where a commodity price moving or a company deciding to relocate at HQ or something like that doesn't nuke the market.

Chris Powers: If I was to say, what is a successful year, what's at the end of the first year, and if I was to say, have they been successful or not, how would you determine that? 

Rhett Bennett: I think it's around this playbook. Moses outlined is, as I said, we can't predict where the market will go.

 And we're just a believer if you get up every day, and Moses has lived it, and I've been investing for a long time, and we're confident that over time you will build a big business if you get up every day those actions. And so it's a lot about can you ingrain those behaviors and get that done.

If you want to go to more of a scoreboard metric, getting a transaction or two done, we certainly would expect that most of the operators will be where they've bought an asset or a couple of assets. 

Moses Kagan: Yeah. And the reason that we're hesitating a little bit to answer the question is, We all know that from the allocator's perspective, the last thing you want to do is capitalize a deal that the GP is doing just because someone's got a gun to his head or her head, either because they need the money from the acquisition fee or they get bored and feel like they have got to do something like that. That's what we do not want. So, the pace of deployment from our perspective is going to be dictated to a large extent by the market. We're organizing these cohorts to diversify so that, hopefully, even if one or more of the markets does not prove fruitful in the g in a given period, other ones are so that we have a constant stream of deployment opportunities.

And frankly, that's something that, with our investors, has been frustrating for them. Many people we work with or would like to work with are like, Hey, you got any deals? And it's like, how many times do you say no? Do you know what I mean? People understandably get a little bored waiting around for me to find something, and I don't believe that it's my fault because I don't want to show them something dumb, and it's not their fault because they have money that they want to deploy.

So we're trying to solve that problem by diversifying the operator base. 

Chris Powers: How would you describe it? I'm calling all the property managers and all the brokers, and I buy a deal. Does everybody have to fit the same job description? They can't come to you and say, I will manage this alone.

I bought it, and I'm going to manage it. Or I'm a handyman by nature, so I'll do all the repairs. Are you guys saying you have to outsource all this stuff? We want you in this kind of general circulation. These are the activities you're doing every day. You're not getting lost in the weeds so that you don't chew glass for four or five years where you think you're doing all this, but you're getting, doing ancillary things just because you think you're good at them.

Moses Kagan: I'd be interested to hear this might be another area we haven't discussed, but go ahead. Go ahead. 

Rhett Bennett: Yeah. So look, I think creativity is an essential part of the business. And so we're not here to say you must do A, B, C, and D the same way every single time. 

It's going to be incredibly important that our ecosystems can learn from each other as they iterate and change. But if somebody, before we bought an asset, we would look at that business plan, and if this guy or girl said, no, I'm going to self-manage this, and I'll fix the boiler, and I'll do the construction project.

The probability that we think that that's a good transaction is pretty low. And we probably wouldn't capitalize.

Moses Kagan: Yeah, those are part of the lesson I learned from our path: don't do low-value stuff. And someone has to fix the boiler.

But if you can pay someone $20 an hour or $40 an hour, or whatever it is these days to fix the boiler, you should not do that as an operator. You should pay someone to do it. I could imagine. Operators, self-managing, probably not be fixing boilers, but there are certain asset classes or specific geographies.

 In Los Angeles, because of the regulatory situation, we're in relatively innocuous or seemingly innocuous mistakes by a property manager can have a tremendous impact on the value of the building. I almost made this mistake this week. Um, you price a unit too low in a rent control environment, and someone goes in there and rents it because your records were wrong on the units, really a two-bedroom. But you thought it was a one-bedroom. And so you put it out at the one-bedroom price, and the first person who comes and sees and says this is a fantastic thing I'm in. Boom, take it. You priced it at $700 below what you could have for a two-bedroom, and now that person is your tenant for life.

And you just like, what is that? Eight thousand four hundred times, you just lit a hundred thousand dollars or something of building value on fire with that one stupid mistake. Yep. Right. Like that, you probably want the operator to be hands-on regarding what they're doing management-wise.

Other markets are much more forgiving in that way. So we don't want to prejudge and want the operator to lead us slightly. 

Chris Powers: What is my economics with you? Or what am I giving up to partner with all of you? And is that in perpetuity? Like how does it work?

How does the partnership work? 

Rhett Bennett: Yeah. So we start with what we give, right? And so I think we've talked a lot about that. There's a mentorship component, there's a services component, and there's a capital component. And then what do we get? So the deal is structured by providing operating capital, as we've discussed, to pay salaries for pursuit costs, et cetera.

And then, in exchange for that, we'll also provide Co-GP capital and, in some instances, LP capital. In exchange, we will take the 10% royalty stream on the business.

Moses Kagan: So that's, sorry, just to be clear, 10% of revenue in perpetuity.

Chris Powers: 10% of what? Revenue. Also, the operating, the operating revenue, or even the revenue on the building itself.

Moses Kagan: The operator, it's the GP entity. So we will have a 10% revenue share in the GP. So that means gross. So, a fee asset management fee promotes at some point 10% in perpetuity for us.

Rhett Bennett: Yeah. And we'll have a first rider refusal on the deals that you generate. So we want to be your LP capital provider, especially early days. As the business grows, we expect you to move away from us as you become independent.

Moses Kagan: Yeah, and we're getting a right of first refusal on the LP capital on market terms.

And what we mean by that is, if you are a great fundraiser and you can raise on terms that we don't like, right? That happens. Some people can raise on terms. I'm just like, look at it. I'm just, oh my God. Again, go in good health. From our perspective, we helped you get into business.

We have got this 10% rev share, and you go, and you can raise on zero, pre-50 50. Like, great. We'll happily sit alongside you in the GP and provide GP capital to your deals. Are we going to wanna provide the Lp? Probably not. Right. The likelihood is, particularly for these beginning operators, because they don't have such a long track record, is that they won't be able to extract such ridiculous LP terms.

And we were going to be happy to do the LP for that. Yeah, but to be clear, the way we think about our business, where we believe that we will create value for ourselves, is in providing the LP capital, let's say, a traditional seeding business that would go out seed GPs.

They're making their money by extracting the most significant portion of the GP that they can. We have consciously decided to minimize the share we take from the GP and make our money on a 1% asset management fee on the LP capital. We're not even taking a promotion on the LP capital.

It's just we are in business to put a bunch of these operators out into the world, have them come back to us with the kind of deals that our allocators want to fund, and then for us to sort of vet those deals and make sure that they're good and oversee the operator, make sure they're not screwing things up, but really to funnel capital to them and then have a recurring revenue business from the asset management fee on what we believe will be steadily and rapidly growing pile of LP capital that we have allocated.

Rhett Bennett: Yeah, I'd say this is part of the business that took us the longest to think through, and we thought a lot about incentives, and once again, we said, okay, how do we help people? Think long term, how do we not extract so much of the economics that they want to kick us out the minute they're successful?

And so the model that we've landed on is because we've set up incentives where we can be partners for a very long time. 

Chris Powers: And if I take a salary from you for the first year and at the end of the first year, I'm like, I don't like this anymore. Do you guys eat the salary?

Is it paid back? 

Moses Kagan: We eat the salary & we don't advise that. And no one's getting rich on these salaries.

Chris Powers: Yeah. Can you tell to what the salary is? Is it market dependent? If you're living in New York City, that's different than if you're living in San Antonio, Texas. 

Moses Kagan: It will be, to some extent, a market.

We want people to be able to live, and what we don't want them doing is doing a bunch of low-value stuff to get cash. So, it needs to be enough for someone to live reasonably.

Chris Powers: And after year one, that salary's cut off, and at that point, the thought is they're sustaining their life by the deals they've done.

Moses Kagan: This is an essential point because one of the critical problems in building one of these businesses, as you know better than I do, is how you eat, have a co-invest, and survive long enough to do your next deal, mainly if you're not selling because we don't want these people to sell again.

We want to hold these things long term. And so, the answer is that we need to get them into a cycle where the fees they can personally take exceed their co-invest. Right? That's the only way this would be; that's how adaptive works. That's the only way you can do it if you'll have people hold long term.

So what we are saying is we are going to put up the co-invest money. So that they will be able to take the ACT fee and the construction management fee, well, that will be negotiated, and it depends on the market and exactly what kind of deals they're doing, etc.

But fundamentally, I call it the fee balance. Like how much cash is coming in the door and fees and how much is going out and co-invest. We have to make it such that that balance from their perspective is net positive. Yeah. For them to be able to live on, because otherwise, it incenses all kinds of behaviors that we don't want, like doing quick flips.

Chris Powers: So you'll get 10% of revenue out of the operating company. Does that also give you 10% of the GP of their GP economics since you own 10% of the GP? And so, in theory, they could come to you and say, I'm a great capital raiser, and I did a zero pre-50 50, which shout out to anybody that's getting that.

You would say we won't be your LP but will participate in fees. So you have a right of first refusal to look at the deal, but regardless if they do it with somebody else, you will still be their partner. Is that forever? Can they buy you out at some point? I know we haven't even gone through cohort one.

Does my mind always work with how I get out of what I get into sometimes? Like, what do you think about that? 

Rhett Bennett: Yeah, I think every partnership you have to have exited, right? So, we know that. And, but our goal, maybe I'm overusing the term, but we are thinking about this long term.

And so if somebody's plotting their exit strategy out of the gates, probably not. 

Chris Powers: But even in 10 years, like they weren't, let's say they've become the next Keith Wasserman and are huge. And they're like, why am I still given 10% to reseed from  10 years ago?

Moses Kagan: Yeah. They are the fundamentals & we need to continue to be valuable to them.

Yeah. To the extent that we are not now. The good news is at a 10% rev share, that's not huge. Yeah. Right. So it's not like 50 or 25 where you're just like, okay, I have got to get these guys out of here. Yeah. At 10. We're hoping that's, so that's like the hurdle. That's the bar. We need to provide enough value to them.

That is worth their while to keep us around for that 10% revenue share. And we think that bar is low enough that we will be able to clear it. Okay. And if we can't, it will be an awkward, unpleasant conversation, to be honest.

Chris Powers: Holding for the long term, is that just something written into the documents that we will hold this?

Or is it just a, obviously, at this point, let me be clear, I'm asking these questions as if we're talking to people that we might not trust if they've made it through the week, made it through an application? The best thing created is mutual understanding, trust, and clarity of thought.

So the question becomes, when you say we're going to hold it for ten years or longer, that is just all of you saying, look, we've aligned with people that wanna hold for the long term. But is there anything in the document or anything that forces that?

Moses Kagan: Promote crystallization? 

Chris Powers: Because you don't have that, you technically could sell tomorrow.

Moses Kagan: I could. So two different things are going on. One is to the extent that we're providing the majority of the LP capital, we'll get decision rights. Yep. Which is standard. If you write a considerable check, generally, they get to approve the sale and refinance.

But crucially, we also, in addition to, uh, to the control rights, we have this promote crystallization clause and the other, the understanding, and I don't have this in our deals, we don't have it. It's something I learned. Shout out to our friend Kendall. Because we had a Chris and I long talked to Kendall about that at A Y B O, and we were just like, huh.

I remember sitting there and going, damn. And for those unfamiliar with it, the idea behind promoting crystallization clauses looks like if the LPs, if the capital wants to hold the asset, it's understandable that the operator wants to get paid and not be sitting behind this pref clock.

And so there are various ways to strike it, but what you say is, we deem a moment where your work is done. You've stable, you know, you've renovated the asset, you've stabilized that, okay, let's market, deem it sold, run the waterfall as if we had sold it. And then allocate ownership of the asset based on who would've got what cash if we had sold it.

And the idea is that the operator has done the. We deem it sold. Now, depending on how the numbers work, maybe they end up owning 5% of the asset. Maybe it's 10. Maybe if they've shot the lights out and it's 20, like whatever the number is, they own that. They're not sitting behind a puff anymore and just getting cash flow.

And so we think that that does an excellent job of aligning interests. Like they're, they're incentivized to add the value and the way that we want them to, but they're also not going to get killed by pref while we're all sitting around doing this wonderful long-term compounding.

Rhett Bennett: Yeah. I think that's better than if you're forced to sell the asset. Because then there's a high probability that you will stay in place as the asset manager over time. So it gives you some durability of cash flow and the opportunity to create a liquidity event.

Chris Powers: We don't have to go too deep into this. And, I'm asking questions like we've been doing this for five years, but these people will get out on their own. And let's say we have a superstar, and they've found three deals their first year. If they want to start hiring their people again, all of you are a resource to them in perpetuity.

If you're still an owner, they might still be able to come to you and say, whom should we hire next? How should we hire them? What should the job description look like? 

Rhett Bennett: Yeah, so we talked about a revenue royalty stream that was very intentional. Right?

 And as I mentioned, I think, you know, creativity and independence are essential components of people building big businesses. And so we don't want to be in the position of trying to tell you how to run your business. Right. In that first year, there'll be some constraints, but over time, you ultimately get to decide whom you hire, whom you fire, what markets you go into, and what asset types you'll be involved in.

We'll preach our theory and hope it sticks, but at the end of the day, it's their business.

Moses Kagan: I want to make two other points about that. I hope many of these people will surpass my achievements in this business. Success for us looks like a power law distribution, as just like everything else in life, there's probably a huge one that gets built and a bunch of pretty big ones.

The huge ones, and big ones, are going to be bigger than adaptive. At a certain point, those people will surpass what I know.

What we are hoping to do is, in the beginning, it's very much like Moses and maybe some of Moses' friends.

I'm looking at Chris right now, like imparting what we've learned about the business to these people. But ultimately, part of what we're trying to foster is a network effect where these operators teach and learn from each other. As best practices get developed, they get shared.

No one will put a gun to their heads and say you have to share. There's a secret sauce that gets developed in every business. But we think there's a kind of peer mentorship that will grow up. We'll give it a bit of gas, so to speak, in the beginning, but hopefully, it develops organically among these people. 

Chris Powers: To where those cohorts are becoming friends with each other.

And they're sharing. And they're learning.

Moses Kagan: Well, cohort one hopefully returns and teaches cohort five. Here's what we did, what worked, and what didn't work. Please don't listen to what Moses says about this because it's like this. Like that, and we want that.

Chris Powers: Is there anything off-limits? So you guys said it has to be a market that you all could scale in, and it has to be a market that you could reasonably get done. Is there anything that's like, we will not do this? 

Moses Kagan: That's a great question. For the time being, we are not going to take anyone who's directly competing with me.

Chris Powers: Okay, so you, sorry, LA West side of LA folks.

Moses Kagan: It's not for the time being; in other words, I think that that will become a possibility over the long term and maybe not even that long term. But look, part of what's going on here, as I have, along with my partner, with a lot of blood, sweat, and tears, developed a playbook.

And not every play in the playbook works for every deal, but a large portion of it will. And I want a part of what we're doing here is transferring the parts of that playbook relevant to other markets to these operators. And so I want to be frank with them, teach them everything I know, and not feel like I'm training a bunch of competitors.

So, for now, we will refrain from doing that, but the idea is to be open and share everything else. 

Chris Powers: I know a million things; I'll put you on the spot. That's like, when people think, oh, Moses, he's learned this playbook.

How great could this playbook be? Name one thing that would be like, and I had to eat glass for a long time to learn this one thing that somebody sitting there that hasn't gotten in this business yet would, it would take them years to figure this out.

Moses Kagan: Our friend Eric Weather Holtz always talks about big windows.

If you pull the window off a 1960s stucco building in Los Angeles, what you'll see is there's a header above the window that generally extends a couple of inches past where the glass is. You can; if you're willing to rip the framing, you rip the old window out, you rip the framing, o then the stock will open and open it up.

Inspectors will let you expand the window's width by the two inches on either side that correspond to where the header ex extends past where the current window is. You can drop the bottom of the window down almost to the floor without compromising both; neither of those compromises the structural integrity of the building and force you to restock, shear, and restock the building.

So you can increase the window size without much re-engineering of the structure. 

Chris Powers: And that's the higher value.

 Moses Kagan: Because people like large windows. If you look at our buildings, everyone loves natural light, and that's what's going on. There are like 50 of those.

Rhett Bennett: It's not a magic bullet. It's not a magical hole business. Right.

Moses Kagan:  Exactly. I mean, none of those like that. Okay, great. Congratulations. I just told everyone how to make more enormous windows in their apartments, and I feel like I've done something good for many tenants for the next generations.

Each of these things is not a silver bullet, and it's just making things a little bit better. And the accretion of a bunch of little advantages results in a somewhat higher unleveraged yield on cost. And then you're either, you know, getting better returns or able to buy more deals or, however, you want to think about it. 

Chris Powers: I should have asked this earlier, and I think I know the answer, but why multi-family only to start? Is it the most accessible asset class? Is it because of Moses's background?

Rhett Bennett: It's around Moses.

 Moses Kagan: Okay. And I predominantly focused on multi-family in my last role as well. But you know, a big part of our thesis is that we can teach people the playbook.

Right. And so he has a lot of credibility. His brand on Twitter is about teaching people how to run operating partner businesses and how to buy multi-family assets. Fair enough. 

Chris Powers: If I'm listening to this and I'm like, this all sounds great to the extent you all can share, and I'm leaning on you possibly for one funding co-invest LP.

How you've raised this money? Does it all come out of one fund? Are these long-duration, I'm assuming, private investors? Can you share a bit about where the money's coming from and how it works? 

Rhett Bennett: So we've raised a discretionary pool of capital. That's very long-term in nature.

That capital will predominantly be used to fund the operating capital for the GPs and the Co-GP capital. We also have anchor investors who have expressed an interest in investing in the deals. As you probably saw on Twitter, we are also starting to take indications of interest in investing in deals. People are starting to specify what markets they may be interested in.

And so we'd expect to build a syndicate, a process that we may or may not have learned something from you along the way.

Moses Kagan: Yeah, I think the scale of what we are trying to do is vast. So if you start to think of cohorts of five to 10 Operators, two a year and hopefully using, even if it's just five to 10 million of equity of our equity a year, and you start to think about what that looks like when you have 3, 4, 5, 6 cohorts out in the wild sourcing deals.

And things will change year to year based on how attractive it's, but we are talking about having to raise an enormous amount of capital and maybe to bring the conversation a little bit full circle, it's like five years ago, I would've been like, you want us to raise how much?

Yeah. But people always write a hundred billion dollar checks from you and his business. And so, whereas five years ago I would've been like, oh, my, this business model, like on the face of it, I'm not going to attempt because whom the hell could raise that much?

 It's like, paradoxically, the business for which some substantial check writers might want to write checks. 

Chris Powers: And that's because they get access to sub-in institutional deals with higher returns. It's a long-term platform, so they'll benefit like the families we discuss.

Are there any other reasons why they would want to be in this? 

Moses Kagan: Well, I think one thing to say is it's expensive. If you, let's say you're a family and you want to do a bunch of these sub-institutional deals. It's like if you're to put out an amount of capital that moves the needle for you, it's expensive.

Like, you have to hire a bunch of people to look at deals, make relationships with operating partners, and follow up, and how do you even get the reporting back? Suddenly you're in a hundred little deals. And so what we're trying to do is create a structure. That is amenable to those who don't have to hire many people to sift through stuff.

So, in other words, the deals they're being served are pre-selected for what they want to do. Another thing that we haven't talked about at all during this conversation is we are going to standardize the reporting, Because you can imagine a scenario where you have all these operators out there sending back different reports and forget about from the alligator perspective, just from our perspective, like you can imagine that becoming like a mess pretty quickly.

Yep. So it's enforcing some order in how the deals are presented. Instead of having a hundred different forms, like we will standardize when you bring us a deal, this is what you show us. So that we, we have the data that we need to make a decision So we're, we're kind of like socializing the getting the operators to organize what they're doing in a way that makes it digestive even to digestible to large pools of capital.

Rhett Bennett: Yeah. When I started playing around with this idea for the business, I thought a lot about what in this business is scalable, what you can centralize, and what's not scalable. And that's one of our frameworks of thinking about what we build internally, how we support the operating partners, and what stays in their business.

And so, as Moses said, it'd be interesting to hear your thoughts on this, but I'm sure a lot of what you do in the back office, you started a scaled management business, right? A lot of the accounting that scales, what doesn't scale, is understanding what block, street, and assets are attractive.

Chris Powers: And to the extent, and there's institutional knowledge, but there's also the risk that you hire someone that becomes the expert in that one market, and then they leave, and then you've got to rebuild it again. We've found ways around that, and I think technology helps, but we've had to think through a lot of that because I'm not trying to make it about me. Still, you hire a bunch of acquisition people on a team, they're the highest paid, they're the first to leave, they all the things, and they leave with their broker relationship and institutional knowledge each time.

And so it's something we've solved, but for years. As you said, everything else scales well, but institutional knowledge is more challenging, and you, it is the cream that makes Alpha.

Moses Kagan: Yeah. And I, from our perspective, I mean, I think it's another way. My hat is off to you for what you guys have done here.

It's pretty incredible. This is another way to skin that cat, and it's to say, " Okay, let's make it their business. Like, and we'll help them with all the other stuff that maybe they can't do, like capital raising and building the systems and all stuff. Make it their business.

Yeah. So that they're not tempted to run away because it's their business.

Chris Powers: Have you thought about this? I'm going through it again. This is we, and I'm coming back to Fort Worth, and in cohort two, another Fort Worth person comes up. How many people can you have in one market before there are too many people?

Rhett Bennett: Yeah, Fort Worth, Dallas, it's a big market. You could have many people, and that's not our objective. I could see a 0.5, 10 years out where maybe we're putting a second version in the same market. But we won't have overlap in the same market for the foreseeable future.

Chris Powers: So it's going to be mainly across the country. And then the second might just be getting into different asset classes. That's right. Before you start dropping more people in. You mentioned three other partners. Can you talk about them for a second? What else is everybody on the team doing? 

Rhett Bennett: We have a fourth that works for us.

She's not a partner but works for us part-time as well. Doug Mcgreror is the C F O of Columbia Business School, worked at Goldman Sachs, working in private equity, and has a ton of transaction experience. A very bright guy, David Bergeron, ran a business called T3, a commercial brokerage business he ultimately sold to, so he'll spend much time on the capital raising side.

Laura Crank, I mentioned earlier in the BOD story, but she's the director of operations and strategy. I worked with Laura in a previous role. And so much of what you saw regarding the rollout, she was responsible for the timing, the infrastructure, and the scaling.

And she will be very involved in that side of the business. And then Hunter Breckenridge, pursuing her MBA, has also been working with us on the digital strategy and a lot of the tech infrastructure.

Chris Powers: Sorry, I'm just kind of going through now, like questions.

Talks about capital. One of the hardest things early on for us was getting guaranteed loans. Is that a service all of you will offer, or what do you think about that?

Moses Kagan: Great question. So currently, at the very beginning, no. What we'll do at the very beginning, particularly for the kind of heavy value add type stuff that might need to be personally guaranteed, is instead be willing to do those all cash.

 If we have to, that's how we do stuff. It was adaptive, anyway. 

Chris Powers: So You are weird. 

Moses Kagan: Well, I've sent it to you before. It's super funny, where I was talking to LP of ours recently about a deal we're renovating, and he was like, um, well, are you going to put a loan on this?

Because it's a deal we own where the structure is such that it is sort of indifferent as to whether we put a loan on it. And I didn't know whether he meant after we had stabilized the property or while renovating it. And he's like, will you put a loan on it?

And I said. You don't want to be borrowed. I thought, you're not trying to borrow at 9%, which caused you to get a bridge loan or something in Los Angeles. He's like, no. And in general, like the rich people who capitalize our deals, they're like, we loan money at 9%, and we don't borrow money at 9%.

And that's how we've operated the way we have. And I think we will continue that for these people initially, and we will probably create some guaranteed vehicles. I want to say that setting up what we're talking about is hard.

It's super easy to talk about it now, for sure. And it's like Doug has been banging his head against the wall, like putting together, working with Red obviously on these docks. Week after week after week. And it's just like, a guaranteed vehicle sounds easy to say. And it's like, that will be a month of someone's time figuring that out and everything.

So we're working on it, and uh, I think we'll have some solutions in that regard.

Chris Powers: In that regard, it's not like if I'm in the Fort Worth market, I'm probably going to a Fort Worth lender bank to try and get my loan. I'm not going through you all and saying, who's your network? Get a loan from those folks.

I am running it on my own. 

Moses Kagan: Yeah. To the extent that we can help, we'll help. For example, I have relationships with loan brokers who work in other markets besides Los Angeles; of course, I'll make the introduction and try to help. However, sourcing debt is crucial to a standalone real estate operating business.

And they need to learn to do that. 

Rhett Bennett: We might not say, Hey, see Sally Smith down the street. But what we will say is, here's how you present a transaction. Here's the way you should think about it. Here's how I would approach the problem. And a lot of what we will be doing is sharing best practices across the cohort.

Moses Kagan: And helping them understand if, like when the LOI comes back from the lender, is that reasonable?

What are the things? Where are the mines? Where's the minefield in here? What are the terms that don't make sense, etc.? 

Chris Powers: You guys have thought a lot about this, and we talked about kind of the things that you might do in that first year. You're going to call brokers, and you're going to meet property managers, you're going to walk units, you're going to learn opex.

Is there anything, or maybe a few things, you see as? What are the things you hope people spend the most time on? Out of all those that separate them, or is it, hey, here are five pillars of ways to learn, and they're all equal, or is it weighted differently? If you're thinking about somebody new to the market buying sub-in institutional, where should most of their time be spent on deal flow on meeting brokers?

Moses Kagan: I think it's deal flow. Like that playbook, we discussed, one of the key learnings from my career so far is the window thing. You don't come up with that from sitting around staring at a whiteboard, and you know what I mean? You can't like magic that into existence.

It comes from buying a deal, being presented with challenges and opportunities, and then trying to resolve or take advantage of them. And over time, you look at what works and what doesn't, how much it costs, and everything else. And then saying, okay, now this goes into the playbook, and then obviously the playbook gets developed so that we can transfer a bunch of that knowledge to them.

But what works in their market will inevitably be a trial and error process. So yeah, initially, it's deal flow, and then over time, as they start to transact and get in the weeds, I think there's there. That's where the real learning kind of starts.

Chris Powers: Do you guys have a bias toward technology? Should they be using technology, or are you all going to offer? Here's some stuff you should use. They won't be doing their property management, so they'll use whomever their property manager is, but is there anything on the tech side that shares services or recommendations?

 Rhett Bennett: Once again, it's their business, but we will have some pretty strong opinions on it—the technology you deploy. There are, as Moses alludes to, there are some non-negotiable things. And the accounting, the back office, the investor relations, those are going to be non-negotiables. And, we expect little pushback given how much, you know, the experience and how much we've thought about the products. But, on the technology side, it will essentially be recommendations instead of the mandate. 

Moses Kagan: And I'm far from cutting edge in this department. When I, adaptive, is certainly not perfect in these ways. So, we're being very open-minded. Talking to other people about how they run a syndication process, what should this, because it's one for me to run a syndication for a one-off deal with 20 or 30 LPs, like, yeah, it's okay if we do that by hand, right? Like, right When may not be the most efficient thing. As trying to do it at scale, when you're trying to raise vast quantities of capital from, potentially from, large numbers of LPs, all those processes need to be buttoned up. So that's why it's non-negotiable. We have some thoughts about what best practices are. We're going to continue to investigate them, and then we're going to come to what we want them to do, and they're going to do it because that's the only way to manage a business like this. 

Chris Powers: Is there a minimum size deal? Like a four-plex wouldn't be worth our time. LA, it might. That's like a 10 million deal.

Moses Kagan: You know where to get them for 10?

Let's go. It's a tricky question because we've gotten back and forth about this. I imagine a scenario where you could have a market with a bunch of like one in 2 million deals, but you had a clear pathway to doing 50 or a hundred of them and a way to execute. We have renovated, and I've renovated over a hundred apartment buildings. At various times, we have been doing as many as 20 of them at a time. Okay. It is very challenging. I like it, and to do all that without screwing things up and losing track and getting your accounting jumbled and all that stuff is tough. To the extent that we can help them avoid getting into that swamp, we will try to do that. So, what does that mean? In real life, the minimum is 3 million or 4 million, so we want to be open-minded and guided by our scars. 

Chris Powers: I'm going to wrap up a reseed discussion about another topic I want to go into, but if we just said ten years from now, this has an opportunity to be a big business. What can this thing look like ten years from now? Is this just because we now have hundreds of people in the world? Are there ways you're thinking about how the business evolves ten years from now, and we're starting here, but it could go here? Like how have you thought about it long-term?

 Rhett Bennett: Yeah, we think about market and asset type. And so if you, just to put a little math behind it, how many markets in the US could we be in 30, 40, 50? Yeah. A lot more than that, but let's use 50. What are the primary asset types?

Industrial, self-storage, maybe life science, go on and on. And so you can think about it, this could be a big asset management business. If we put ten people in business a year, each doing two transactions, that's 20 transactions per cohort. If that's an average check size of 10 million, that's a couple hundred million dollars of capital. And you can imagine how that can stack if we do two cohorts a year. Suddenly, you're at 400 million capital, which can get large.

Chris Powers: And then cohort number one, five years later, is now doing 20 deals a year. So they're accelerating. 

Moses Kagan: Yeah. Now you're starting to see why this is appealing to me. It's easy for us to sit around a table, an excellent podcast studio, and talk about this. In real life, this will be complicated and a little easier for these people than for me. But it is a complicated business, so I do not want to minimize the challenges we're facing, but the opportunity is to build a vast asset management business.

Chris Powers: I want to hear your thoughts about the market. I don't know much. I know a little bit about multi-family. It seems like there's a lot more bridge. There's more bridge debt and multi-family, which tends to be the headline. Right now, it's more financing issues rather than vacancy issues. But what do you all think about the market? I mean, this is, you can make an argument about a fantastic time to launch a business, right? At a fractured time where there are going to be some opportunities. Are the opportunities going to be in the bigger or smaller deals? Let's have a market discussion to bring it home.

 Rhett Bennett: Yeah, I think this is the most significant risk to the business right now. And if you gave us a significant amount of capital to deploy and multi-family be very hard to do. I mean Moses' case in point number one, but we believe you're starting to see the signs of stress, right?

Chris Powers: Okay. What are those signs? 

Rhett Bennett: You're just starting to see some at the end of the day. For me, it's the fundamentals at the asset level. So, especially in Texas, you see pressure around your insurance and tax costs. We all know what's happened with interest rates. As you mentioned, many people have bought assets and, you know, 21, 22, not well capitalized with loans starting to mature. So, what we don't know is how bad it will be. Will we have a recession? How much will that impact the operating fundamentals? And then you need to know the answer to those questions. To know how much distress will be in the marketplace and whether it'll be in the large or smaller transactions.

Moses Kagan: Yeah. And I'm more focused on the fundamentals than the financing. Yeah. If the employment situation's perfect, anyone who wants a job in America could get one right now. Notwithstanding some of the doom and gloom sometimes here. On Twitter and other places, like anyone being dark on Twitter. I don't want to rant here, but sometimes people talk with information from five or ten years ago. Some politicians are like this too. It's like they're talking about a world where it's hard to get a job, and it's like if you have a pulse and you can fall out of your front door right now, you can get hired. So as long as that is the case, and people can keep paying their rent, then okay, you have these financing issues. They'll be rescue equity, and they'll be people, maybe the banks, let them work it out. Like there's, you can solve financing problems. And by the way, the Fed is pushing in this direction, employment weekends, and people are not filling those apartments, and you start to see vacancy go up, and then you start to see rents come down.

Then the financing becomes more of an issue because it's one thing to come to your LPs and say, look, we need a couple of million bucks here to avoid losing the building. It sucks, but we're going to do a cash-in refi. The building's performing pretty well, and you liked the asset before, so you still like it now. And that's all fine. Your LPs hold their nose, and they write the check. It's another thing if you're coming to them and saying, I need the 2 million, and the wheels are falling off at a functional level. To me, it's about employment and whether people are paying.

Chris Powers: And in your market, you have. Go ahead.

 Rhett Bennett: I was going to say that it's fun to talk in generality. And in reality, when you look at the supply in Austin or Nashville, it's very different from the supply and Denver Birmingham, or Picks your market. So at the end of the day, it's very micro-market specific.

Chris Powers: That's why I love it. Are you seeing any signs, like the first cracks in LA?

Moses Kagan: LA's So interesting. The city has not allowed owners of rent-stabilized buildings to raise the rent since March 2020. And will not again until March of 2024. And so what that has meant is that the average turnover of people left. That's all fine. What has happened previously is there's much less turnover than there was because people's salaries are going up, and rents in the spot market are going up, but the rent that they're paying their landlord is flat. And then, flat in nominal terms, in a high inflationary environment means down in real terms; it's like an enormous wealth transfer from me to tenants. So, what's going, so? There's this weird thing happening in LA where the vacancy rate is shallow, right? No one's moving. So, there's much less turnover than you would expect because of this rent stabilization issue. There was minimal vacancy there, so rents were going crazy for rents in the spot market. It was awesome. Like last year, rents were going nuts. That has tailed off, and that's now rents. It depends on the neighborhood. It's very neighborhood specific, but like in our best neighborhoods, they're still up. 

In our worst neighborhoods, they have started to come down slightly. So that's what I'm observing.

Chris Powers: When you think about if there was a coming recession, we just heard yesterday Blackstone raised their new 31 billion funds. I've been in meetings and heard 270 billion of committed capital. You come from a big money world, your career. Is that all hearsay? Is that all, or is it different this time in that there is a lot of capital, and there's a floor baked into this real estate market because of how much capital there is? What goes through your mind when you think about the cap? The committed capital?

 Rhett Bennett: Yeah. There's capital available, and a propensity commits capital when you start to see stress. Yeah. And so there is a ton of capital that's on the sidelines. But when you think about large institutions where you're investing through an investment committee, it's not exactly where they will double down and get aggressive when the markets start to fall apart. So if we see a lot of stress at the operational level, some of that capital will come into the market, but I think there'll be a lot of opportunity.

 Moses Kagan: The other thing to say is that the last time we went through one was when we were all getting started. The regulators allowed or encouraged the banks to extend and pretend on the loans, and I think it's reasonably likely that that will not happen this time. So I think the banks are better capitalized. Already you're seeing people send keys in and stuff like that. There seems to be a willingness from the banks to take back assets that were not the last time. And who knows early days, but there's not that buffer. So maybe there's equity available, but there may not be debt available. 

Chris Powers: Do you, when you think of sub-institutional assets, and I'm generally curious. Do you think the substitutional has more distress than the bigger stuff? Or is it because most of the bigger stuff is non-recourse? It's professionally managed where they're like, take it back. We know you'll lend to us again. And in the more miniature world, these are people's livelihoods, and it's much more at stake. I can speak to Covid like every credit tenant we had were all the ones that wanted to, that we heard from their lawyers like week one, and all the mom and pops were the ones who'll do anything. If you think about that at the ownership level, I was young, in oh, eight, so I haven't thought about it. Will there be less or more distress depending on how big the deal is?

Moses Kagan: I'm not an expert across all asset classes at all sizes. I have seen both in my market and on Twitter that there are a lot of under-capitalized syndicators. Who got into the business to do a 5 million or a 10 million? And then crazily, you started seeing them do 20 million and 50 million. This ding dong in Houston, who just got himself lost a few hundred million portfolios about five minutes after he bought it. The LPs are looking at things for those who didn't have long-term LP relationships. The LPs were very transactional. So when that guy turns around and calls the 75 LPs and says, Hey, I need you to double down on this asset where the wheels are falling off, the LPs are like, who is this? Yeah.

Like, I don't know you, and you just screwed up. And like, no, like, you know. That's so true. And so I think that that's going to be some distress there. We wouldn't have paid the prices the guy paid on the first way in. Like that, that's why he bought it, and we didn't buy it. So, many of those people were buying assets we wouldn't want to own. I think there will be distress there. Many people also use floating rate bridge loans, like a list of do not, do not. The question is, do you know, do we want to own those assets and at what price? And the truth is that there are a lot of assets that you're willing to own if the price is right. And the question is, does the price get right? 

Chris Powers: Yeah. You said something earlier. I'm just looking at my note, but I think this recession will be. We're about to discover a lot of middle management and white-collar work that was just unnecessary. You've already seen it in the tech world. But I think you could make the argument, and then it's the first time our blue-collar economy is so underemployed right now. The joke is like, what does a plumber make? Whatever he wants. I'm not saying all the white collars when, but it's an interesting dynamic. No, as you think about rent payers, especially at the higher end of the market, I'm not saying they will get fired and hired elsewhere. I think we're about to discover, and I think we're about to discover there are just a lot of irrelevant jobs that didn't need to exist. 

Moses Kagan: Well, to your point, we've talked about working from home on Twitter and other places. You can see this in tech companies. People went home, and productivity plummeted. Because many businesses were doing quite well, the response was to throw bodies at the problem. The people are not productive, but the top line's growing fast. So we've got a service for our customers so that we will hire. And so there's a lot of hiring that took place. As you said, if productivity had been at a reasonable level, many of those people who got hired would not have been hired in the first place.

 Rhett Bennett: The other thing to say is that if you look at the supply, there's a lot of talk about how we're hitting record supply, but the reality is you are in some markets and other markets you're not. And we all know that the vast majority of that supply is in that excellent luxury product. And I would imagine the situation you've described is really, that's the target market. So, It's, our expectation that's where you'll see, uh, the stress. 

Chris Powers: No, I live in the industrial world; they're building. You can build all their big class, a big box you want, and it does not impact. It's a different world than the sub-in institutional class B value add, and it's just a different ballgame.

All right. It has been excellent.

 Rhett Bennett: That's great. Thank you.

Chris Powers: Thank you for coming to Fort Worth. We have a good dinner ahead of us tonight. I'm super pumped about what you all are doing, and obviously would love to help any way I can, but it's something that's needed. And not only do I hope you build a huge business, but I also hope you help many people along the way. 

Moses Kagan: Well, thank you for saying that. And, I've said this to you before, maybe even on a podcast, if in another life, I would've been a teacher instead of a real estate operator. So, When Rhett came to me with the opportunity to help some people who might not have gotten into the business, otherwise build what we hope will be like living and maybe family-changing amounts of wealth in a business that we all love so much like that. I mean, that's like the perfect opportunity from my perspective.

Chris Powers: Awesome. Agree. 

Rhett Bennett: Thanks, Chris.

 Moses Kagan: Yeah, thanks, guys.

Chris Powers: Thanks, dude. I hope you've enjoyed this episode of the Fort Podcast. Follow us on your favorite podcast platform or hop over to YouTube to watch full video episodes. Suppose that's what you'd prefer. For more information, you can check out fort pod.com.