Moses Kagan: The “Indefinite Hold” – Real Estate, Risk, and Capital Raising

Speaker 1

When you look at the real estate private equity business where you raise money from investors, it's all like short-term in nature. IRR driven, know, lipstick on a pig, flipping stuff. Go into every deal thinking that this is something that you are going to be comfortable owning indefinitely. And so you can just go look and find those neighborhoods and be like, this is probably going to end up gentrifying because people want to live like this.

Speaker 2

Welcome to the Building Culture podcast, where we explore holistic solutions to crafting a more beautiful, resilient, and thriving world through the built environment. I'm your host, Austin Tennell. If you are in the market for high quality windows or doors, whether residential or commercial, new construction or remodels, I highly recommend you check out Sierra Pacific Windows, who we use at Building Culture on a lot of our projects, as well as if you are in the state of Oklahoma, check out One Source. Windows and doors and want to thank them for sponsoring this podcast. Moses, I am really happy to have you on the podcast today. Yeah, happy to be here. And I feel like we could have a couple almost completely different conversations. One, running a business and all it takes to do that. And secondly, about real estate and real estate development. And I think we'll kind of start there on the real estate development today. A lot of people listening to my podcast probably actually don't know who you are. So could you start off by introducing yourself and a little bit of your background in adaptive realty? Sure, happy to do it. So my name is Moses Kagan. I am the co-founder and I guess person with whom the buck stops at Adaptor Realty, which is a real estate development and property management company based here in Los Angeles. We own approximately $200 million worth of apartment buildings. And then we manage approximately 1,100 units, about 400 of which we own with investors.

Speaker 1

and other 700 of which are owned by third party owners. I've been in the business since 2008 or so and built a pretty big social media following basically writing about the business which has led to some other opportunities which I'm sure we'll get into. Yeah. And to kind of tell everyone listening, the way I came across you, Moses, was I got on X on October 20, 23. So kind of recently ran across you as I was putting together a real estate deal that I think you've at least seen bits of it on on X of Townsend, this infill, one acre infill with 24 cell town homes. And then we're this commercial aspect. And I've been in business long enough and doing, and I've really come from the design build side and kind of stepping into development a little bit more, even though I am a CPA from kind of an old life back in 2011, 2012. Um, but your philosophy of kind of this indefinite hold, I I read it and was just immediately like, this makes so much sense. How is not everyone talking about this? So I actually want to start there with this idea of an indefinite hold and kind of your pin tweet, even on X. What do you mean by indefinite hold? Yeah, well, I mean, there's a number of different sort of threads that came together to form my way of thinking. But the most important of which is just the recognition that there are a bunch of families that both, you know, in New York, where I come from, but also importantly in California, where I live now, that have done extraordinarily well over the last, call it 100 years, 100 plus years, by buying pretty well located real estate and just holding on to it. that's, mean, and one of those families is our largest capital partner. So I've sort of got like a up close and personal view of what that sort of thinking leads to. so that, I mean, we can talk about some other insights or sources of inspiration, but fundamentally it was like, look,

Speaker 1

this has worked out really well for families on the one hand. And then on the other hand, when you look at the real estate private equity business where you raise money from investors, it's all like short-term in nature. It's sort of IRR driven, know, lipstick on a pig flipping stuff. And those two things are just seemed like totally at odds. And then, you know, in terms of, you know, getting to know you a little bit, when I first saw what you were working on in Oklahoma, And the quality of the work that you're doing, it's like a perfect example. Like, why the hell would you sell that? You know what I mean? Like you're building things that are more than almost any other real estate I've ever seen. These are things that are built to last. And so the idea of flipping it just seemed, I mean, obviously, look, people, it's cool to sell houses, but it just immediately occurred to me that your strategy would really dovetail nicely with this concept of holding forever. Yeah, it's kind of funny that I felt like you have to sell. like you got to achieve this IRR. You're not going to able to raise money. You have to sell in five years or seven years. And when I saw like, you've been doing this for a while and you've got $200 million of assets under management. so I actually use you as an example in Dexam. Like the Moses Kagan style is what I say. Not that everyone knows what that is, but a lot of people do, especially now. Yeah, I mean, I think it's important to understand how weird that is. It's really not normal. And when I was starting to build our capital base, I had phone calls where I called people and I was trying to pitch them a deal and they're like, what's the IRR? And I'm like, well, I'm not going to quote it to you because we don't underwrite an exit. And they're just just hung up on me. And so thinking that way and wanting to do business that way definitely

Speaker 2

What is your mind?

Speaker 1

because it's non-standard, it introduces some hurdles to raising capital. But I think it also leads to a much more, a much sooner and more sustainable business model. Absolutely. And actually wanted to bring up the IRR thing because you're the first person I've heard and maybe there are other people out there, I'm sure. But you're the first person I've heard say like, I'm not going to tell investors in IRR. I will refuse to tell them an IRR. Can you unpack that a little bit? Yeah, I mean, you don't have to be like any kind of like financial genius. If you just start to look at like what the what like how IRR is calculated, I mean, it is it's about investment returns, but it's it is but it's also to a very large extent about how quickly those returns come back. And so the the the way you the way you calculate it is just to say like, OK, like, you know, you're to hold over an X period of time, you're going to look at the The cash yield during that time. Hopefully that yield is going to grow as the rents grow You're to sell it for some price that hopefully is more than you bought it for and hopefully you're gonna that quickly and So so that's kind of the mindset but it leads to a bunch of behavior So it's so personal it required to forecast it to investors requires a bunch of forecasts about what the world is going to be like principally It requires that you forecast rents well into the future Like, what is this property going to rent for five years from now? Okay. And it requires that you forecast a sale price, you know, years into the future, five years, seven years into the future. And in my experience, that stuff is just crazy. I mean, I've now lived through in Los Angeles, two, events that the, great financial crisis and then COVID where asking rents fell like between 10 and 20%.

Speaker 1

you know, it's like, bam, unpredictable, you know, rents collapse. And of course they come back, but like, if you've, if you've done a deal, were forecasting a five year hold and you're used to in the normal, you know, 3 % annual rent increase nonsense. And then rents fall by, by, by 10%, 15%. Like, I mean, it's, just a nonsense to forecast this linear growth. just, I don't, you know, I don't, never felt comfortable. mean, my When I talk to investors about it, it's just like, don't know what rents are going to be next year. I mean, I think over the long term we'll do fine in LA because that's a desirable place to live and there are jobs and all that stuff. I don't, and the American economy is good, but I don't, think the idea of being able to forecast that would be kind of certainty is nuts. And then on the exit side, mean, same thing. There's two different things going on. One is that it's implicitly a forecast about interest rates, right? Because the price you're going be able to sell something at is particularly an investment property is very tied to the rate at which people can borrow to buy it and what the opportunity cost is for them on their capital. So implicitly, there's this rate forecast. And then on top of that, there's a forecast about the relative desirability of owning real estate compared to other investments. Even even even if you knew what interest rates were going to be five years from now You don't know how owning real estate at that point will compare to the other opportunities investors have for their capital So again, like if you can forecast interest rates five years from now anyway, like go trade bonds Like what do we like? Why are we even messing around with building things or anything like you make a lot of money with some pretty straightforward bets that like Morgan Stanley and Goldman Sachs wherever we will be happy to put on for you if you're highly confident What rates will look like five years from now? Anyway, again, it just, never, I'm not, there are people who feel comfortable making those kinds of projections. I'm just, I just have not been the kind of person who's willing to say, look, I'm going to, I'm going to do this deal based on, that only makes sense based on rent growth and an exit price just doesn't, I don't know either of those things. So I'm not comfortable making any kind of promises to investors. So that's, so that's the, that's the conceptually.

Speaker 1

why I have avoided the IRR thing, but I also think that there, that it, it incentivizes some misbehaviors, some, some, some beha well, maybe they're not misbehaviors. It incentivizes certain behaviors, which I think are like, add to the riskiness of real estate deals. Does that make sense? So I, sorry, I'm on a rant here, this is like, am I like, okay. So it's like, Yeah.

Speaker 1

many things in life where if you focus on one quantitative factor and you optimize for it, or you focus on it, you will naturally be incentivized to do things to maximize that one factor, that one number that you're looking to maximize. So let me give you an example. Because IRR rewards you for investing relatively little, Okay, you are going to look, if you want to do IRR maximizing deals, you're going to go to try to find properties where you don't fundamentally have to do very much to the asset. You are trying like hell to limit the amount of capital you put in. you don't want to do things like, a disaster is having to invest in the property in ways that do not drive rent growth. So let me give you an example. You don't want to re-pipe. There's no one pays more rent for re piped building, right? It doesn't it doesn't do move the kneel at all in the rents But you know or roof right like no one it doesn't it doesn't Don't get no one rents an apartment because it's got a new roof But as a good steward of real estate like you can't operate a bill if you operate real estate You know that if you don't periodically repipe the asset and replace the roof You're going to have all kinds of problems owning that building, right? So you're so it So the first thing IRR does is it because you're trying to limit your capital and it causes you to make choices about how to operate the building. And I think are like not in the long-term interests of the building. Right. And then because you're trying to limit the amount of capital you use, you also are intended to lever up, to use as much leverage as anyone, someone will give you. And of course like leverage magnifies outcomes. Of course, if things go well, the fact that you used a lot of debt is going to make it look better. if things don't go well, the outcome to the downside is going to be magnified as well. So you're buying this crappy building with the plan of not putting a bunch of money into it because you don't want to do that. And you're levering the hell out of it. And you're hoping that rents are going to go up and that exit prices are going to cooperate three or five or whatever it is years from now. And if those things are not true,

Speaker 1

And as they've turned out not to be for a whole bunch of people who were pursuing this business model in the Sunbelt and other places, like you've basically constructed like a little time bomb for yourself and your capital partners. And that's just not how I want to my life. Yeah, I think it's really interesting tying the incentives that you're talking about back to like what you're measuring because a lot of people wonder like, why does the world look the way it does today? And I mean, there's a lot of reasons for that besides IRR, there's, you know, zoning and building regulations and all sorts of other things. But I completely agree with you that the incentives that get set up when you are measuring and solving for IRR is a very different set of incentives than if you're doing something to manage your building long term and those are going to be different things. And that's one of the reasons I really like where you're like, when you're holding the building long term, yes, it's a profitable endeavor. Otherwise you would not be doing it. But you're also doing what's best for the building, which tends to be what's best for tenants and what's best for the community and a lot of other ways. So for me, it's a much more kind of holistic way of looking at it and to actually build a better world. And on top of that, people perceive, well, not perceive. I see real estate as highly risky and volatile. And you're right, when you're having to guess at interest rates and guess at future rents and guess at future cap rates and whatever asset class. Yeah, and then people are levered up to 80 or 90%. I mean, it's a very risky, it is kind of like that gambling high stakes game. And maybe some people want to do that, but in a lot of ways, real estate isn't. really intended to be that. doesn't have to be that. And I would argue probably is better if it's not that.

Speaker 1

Well, mean, yeah, these are you're talking about it's such a weird contradiction, right? Because it's like you're you're taking what is fundamentally like among potentially among the most stable kinds of asset. I mean, you're you have a durable asset. I if you think about an apartment building, right? I mean, we can talk about location and whether it's a nicer building or worse building or whatever. But fundamentally, people do need places to live. There's a segment of population who either By necessity or by choice are going to choose to rent and they need housing and that's not going to change as long as we're human Right. mean the this how it's managed There's a bunch of things that will change but fundamentally humans need a place to go to sleep at night That's safe and clean and dry or whatever. Okay, so And these and and the historical record is that these buildings have actually lasted for a really long time like we operate a bunch of hundred-year-old apartment buildings now, obviously we've renovated them etc, but like Fundamentally, they don't look very much different from the way they looked when they were built in 1925 or whatever. Okay, so you've got this like durable thing. It's like, right, that people, it's super Lindy, people have been renting apartments since the Roman Empire or more, right? So you just like very like long-term assets with a Lindy business model. And then we are, for reasons that have to do with the design of the incentive structures, like operating them and financing them in ways that are not at all durable, that are in fact quite volatile. And so that has always just struck me as sort of insane. But the trick is to find capital partners who see the world similarly and are willing to just sort of put money out. and just sort of a stream of hopefully tax advantaged yield over a very long period of time.

Speaker 2

If you want to show your support for this podcast and also have the chance to win a really cool hat like what I'm wearing, if you're watching on Spotify or YouTube, you can leave a five-star review, screenshot it, and send it to playbook at buildingculture.com. When we hit 100 reviews on Spotify and Apple respectively, I'll do a raffle, select 10 people and send out hats. You've got a 10 % chance of winning. It's pretty good. Leave a five-star review, take a screenshot and send to playbook at buildingculture.com. Would really appreciate it. Thanks so much. hit on the two next things I wanted to go into. One being the tax advantage part, because, a lot of IRRs are quoted pre-tax and you've talked about, you know, if that's institutional money and those are endowments tax free. if you'll explain that. then secondly, talk about if you can talk about the investors that you found that are interested in this type of investment and how do you pitch it and how to, you know, what are the ones that are go, yeah, that makes a lot of sense. And what are the ones that say. Yeah. Screw you Moses. Like to go. Yeah, well, I think it's worth like just to talk about the tax angle for a second. It's worth like, you could ask where did this IRR stuff come from? Like how did it become kind of like the norm in the real estate business? And I think the answer is that the real estate private equity businesses has been institutionalized. And what I mean by that is it's, at the larger scale, the Blackstones and the Brookfields, you name it, of the investment world, they're, as you said, they're investing pension or endowment money, which is by definition not tax pay, non-taxable wealth. And so if you are running money for non-tax payers, makes sense to, it makes a lot of sense to focus on pre-tax IRR. That's just not the situation for your garden variety rich person or family office or whatever. They absolutely are taxable.

Speaker 1

And so from their perspective, focusing on pre-tax number is, again, it's nuts to me. It's like, great, we printed a high IRR, but the joke is obviously that you can't eat IRR. hand over whatever. And by the way, California is a high tax state too. So on top of the federal capital gains taxes, we also pay like a pretty hefty 10, 11. Sometimes I think up to 13 % state income tax. So it's just like, what are we doing here, guys? There are better ways to own and operate real, and finance real estate than that. So that's the historical genesis of, I think, where the IRR thinking comes from. In terms of finding the investors, as I said before, you're setting yourself up for a harder road. Because IRR and short-term flips are kind of like the standard way things are done, there is like a pre-existing pathway to financing deals like that, right? There are like, there are capital advisors or, know, brokers who find capital, who are used to thinking about things in terms of IRR. There are people sitting at big private equity funds all over the country, in New York, wherever. who are looking to put capital out, who think in IRR terms. There's a, I mean, it's probably less the case now, because a lot of them have got burned because of this kind of thinking. But there's a whole bunch of individuals who have been trained by other syndicators to think about the world primarily in terms of IRR. So if you are going to raise, if you're willing to put your hand up and say, oh, I've got an 18 % IRR opportunity, there are grooves that exist. for fundraising to follow those channels and you'll raise money or at least it'll be easier if you'd raise money. Trying to raise indefinite hold capital, almost by definition or by definition takes you out of those existing grooves. When you call the capital introductions broker and you're like, I'm trying to raise permanent capital. He's like, I don't know what to do with this guy. Hang up.

Speaker 1

Most of the institutional shops will just look at you like you're crazy in the past, right? So you are by definition almost going to have to go direct. And what I mean by that is you are going to have to do the work of going and building those capital relationships directly with rich people who understand the tax treatment that taxable capital gets as distinct from untaxable capital. and who have got themselves comfortable with the idea of owning real estate for a long time as a way of building wealth. So your goal, if you're going to go down this path, to just say, okay, I am going to go direct, and these are the kinds of people I need to find. Taxable investors who are comfortable with the idea that you put capital out, you finance things reasonably conservatively, and you get a yield over time that hopefully grows. as rents grow. Yeah. I think, you know, that's, it seems like you in some ways really have, figured out the crowdfunding thing that people have been trying to figure out for a long time. And I don't mean crowdfunding, you know, taking $500 checks from non-accredited investors. I right. talking about crowdfunding of, know, from accredited investors, where you're kind of like announcing here's what we're doing. Here's our strategy, making those direct relationships. I hate that

Speaker 2

And then people are investing on, you know, into projects and values. They believe in you and all that. And I think that's a really a, it's something I've been thinking about more with this idea of faceless money. A lot of people blame capitalism for the state of the world, which, you know, I think we could both critique the world in a lot of ways, how bad it is. Also the world is amazing in a lot of ways. But this institutional money that drives IRRs, what's interesting that I just kind of had the thought of like that is really pension funds. And so it's not actually a very it's not individuals trying to protect and preserve and grow their wealth. It's faceless money. And their only job is to maximize our because they're literally managing thousands of people's money. And so it's kind of interesting. I'm not saying it's anti-capitalist. I just mean There's a disconnect there and I can't help but wonder if the more that we can actually connect and it's not faceless money, it's, I don't know what the opposite of that would be. Well, no, it's relationship. Yeah. No. And for me, mean, look, we, so we have done like traditional syndications, but, and we've raised, a series of small discretionary funds where, you know, people write checks of like, I don't know, a couple hundred grand or a million bucks or whatever, into a discretionary fund that Ben goes and buys and renovates. pool of assets with an indefinite time horizon. But the vast majority of the capital that we have deployed has come from probably five or six very wealthy families. And they are families who, we can talk about the kind of people it is because it's kind of interesting, but they are

Speaker 1

Typically families that are well, obviously they're very wealthy Often they have accumulated the wealth By owning things for a long time themselves. So they're kind of like bought into this idea that you should probably do that One of the interesting things is we've raised a lot of money from people who are themselves Professional money managers who are in the IRR racket. In other words, they yeah, they've made their money doing the IRR thing, which by the way is great for the operator. you know, selling is the reason, reason like the incentive structure works. Like if you're the operator, great, sell it. You don't care about the tax efficiency for the LPs, like clip your, know, crystallize your promote, take your money, like whatever. So we've had, we have a lot of investors who are themselves professional money managers who are investing their own capital. In other words, having, doing the IRR thing in their day jobs. They have had the experience frequently of owning assets in one of these IRR driven vehicles where they have to sell it. And they're like, because they're coming to the end of a fund life. And they're like, this is really stupid. Like, why are we selling this asset? Like, we should just own the asset. And an interesting anecdote. I ran across a story, I think it was a magazine article, about one of the founders of about KKR, the, the, you know, the, the huge private equity fund and one, I I can't remember which, which of the founders it was, but he was related to the story about how he was sitting on a plane and he was reading about Berkshire Hathaway or Buffett's company. And he sort of like did a back of the envelope on what would have happened if KKR had not sold all the stuff that it owned. In other words, that if it had just sort of. bought these companies and just operated them, which is effectively what Berkshire Hathaway did. And he's like, we'd be as big as Berkshire Hathaway. And of course, like KKR is on incredibly well. make, know, dynastic fortunes out of that. So I think it worked out fine for them. But that, I think that that is a, that that feeling of, you know, when you've got something really good, why would you exchange it?

Speaker 1

for something that you don't know is good. You think you hope it's good. hope it, you, you're, you're, know, you've done your diligence, you hope it's good, whatever, but, but, you you don't know it's good. And meanwhile, you have this asset that you do know, cause you've been operating, owning and operating for a long time. Like maybe better to hold that and, and not, not chop and change. So. Yeah, it's interesting. by the way, clarification, when you say wealthy families, are they wealthy families as an individuals or family offices? A mix. One of the interesting things I've learned from this business of raising permanent hold or indefinite hold capital is there is enormous career risk associated with investing in something like this. In other words, if you're talking to a family office, that is highly professionalized, they've got a bunch of like MBAs running around there. And you go to them and you're like, listen, I've got this thing that I want to do and it's going to involve like you guys writing a big check and like, I don't know when you're going to get your money back and maybe never like assume you're never going to get it back and I'll just be like a stream of yield. They're going to be like, there is no effing way I am taking that to my boss because there's not like what are from their perspective, from the perspective of the employee. right, the MBA working at the family office. It's like, what are the potential outcomes here? It goes pretty well and I get like a pat on the back, or it goes badly and you're like, you fucking moron, you invested us in a permanent thing and it's gone badly and we can't get our money out, you're fired. Right? And so from the perspective of an employee at one of these highly professionalized family offices, this is like, it's a no win. Like they will not, you're almost certainly not

Speaker 1

going to have them recommend the investment to the principals. Now, interestingly, if you talk to the principal and you're like, hey, what we're going to do is we're going to get a hold of this well-located asset. We're going to build it or transform it. We're going to make it great. And we're going to finance it conservatively and operate it well. it's going to throw off a stream of indefinitely. The principal, particularly if it's the person who made the money in the first place, is going to be like, yeah, that's smart. We should do that. You see what I'm saying? because they don't have career risk, it's their money. So they're like, yeah, that is exactly how my family got rich. We owned a company and we took the cash flow from that company. And over time, we bought real estate and we've owned the real estate for a long time. And the yields in the real estate have gone up over time. They have experienced this in their own lives and often with preceding generations of their families. So for them it makes perfect sense. It's just that it's hard if you are approaching these family offices and they are highly professionalized It's hard to get to that principle because the NBA is standing in the way are going to be like absolutely not That makes a lot of sense because I've always thought that not every family office, they've all got different priorities, but a lot of them are kind of predisposed to thinking generationally. How do I protect and preserve and grow fortune so I can pass it down to the third, fourth, fifth generation? But it's so hard to get in front of the family office because there's the gatekeeper and yeah, that makes a lot of sense. And they frequently hire, not, it makes sense. They go hire people who have finance background, who are coming out of this IRR driven world. It's the same kind of thinking, which is what you learn in finance programs and all that stuff. And I understand why they do it. by the way, I just want to be very clear. There's a bunch of stuff that I wish I had sold in 2020 and 21.

Speaker 1

Do you know what mean? Like there, I think one of the things, what are the lessons that I've learned is, particularly as we've gone through this, like rate environment change is not every asset is one that you want to own forever. Like we, we own, we don't really, you we're only, we're in Los Angeles and we're in a relatively small number of neighborhoods. And, but even, you know, most of the buildings we own are kind of pretty similar. But even within what is objectively a pretty narrowly focused portfolio, there are assets that I'm like, absolutely, I want to own this forever, and I'm so happy we own it. And there are other assets that are more marginal where I'm like, shit, I should have sold that when the prices were good. I think that you want to be careful about saying never sell. But I think you want to go into every deal. thinking that you're gonna want, that this is something that you are gonna be comfortable owning indefinitely. And you wanna finance it and operate it in a way that allows you to do that. That makes a lot of sense. And that actually answers one of my questions about just what you mean by indefinite hold sometimes. Because yeah, everything rent appreciation to happen enough cap rate compressed enough, not every building is equal. So that makes a lot of sense before moving on to I want to as quickly because I know you don't really, you know, don't really like IRR. So just want to touch on the financial metrics you really do pay attention to. And I think that's unlevered yield on cost and untrained cash on cash. Is that right? Can you talk about that and any others that you really

Speaker 1

Yeah. mean, the two most important numbers from my perspective are unlevered yield on cost and all in price per square foot. let's take the first one, unlevered yield on cost. Just for the listeners who aren't familiar with that concept, it's really simple. It's just what is the annual net operating income that you could expect the property to generate? So, that's like the total annual rents minus the total annual operating expenses. that is not like ignore the mortgage, assume you own it all cash. So forget about financing costs. just annual rents minus annual operating expenses. And then you take and divide that by the total cost of buying and renovating the property, inclusive of any like fees that are gonna be paid to the operator and also inclusive of any carrying costs that the partnership will bear. while you're in the midst of renovating. property taxes and insurance and you name it during that hold period. So you have the annual net operating income in the numerator and then the total cost of the project in the denominator. And what you'll get is some percentage and that's your unlevered yield on cost. historically, For rehab projects, in other words, where we're going to do a lot of work to make an older property good again, what we have tried to do is to target an unlevered yield on cost that is roughly 150 basis points above the interest rate at which we think we will be able to borrow on the property when it's done. And the thought process there is if you do that, You ought to be able, if you build in that kind of a margin, a delta between your unlevered yield on cost and the interest rate at which you borrow when you refinance the property, you'll get, the deal gets, when you start to, when you borrow money to finance it, the yield gets better. The cash on cash gets better. Exactly how much better depends on where interest rates actually end up, et cetera. But if you have that nice fat spread there,

Speaker 1

then you're probably going to end up doing pretty well. In today's world though, that means, and this is too bad for me, but right now we could borrow senior loans for apartment buildings in Los Angeles are like six and a half percent ish. So to get that 150 basis points, you really need to be looking at an unlevered yield of eight. And that's just like, doesn't exist in real life in Los Angeles. And so that has meant that we have been on the sidelines for a while. Because we're looking at tons of deals all the time. I have even been willing to relax that threshold. So, okay, maybe we'll do a seven or a seven and a half or really low well-located property. Haven't been able to find it. we have not been as active. We've not been active for a couple of years now. So anyway, that's unlevered yield on cost. The other thing is Though you want to be careful to look at the all in price per square foot. And what I mean, and the reason is that as a renovator, which is what I am or have been for the most part, you don't want to find yourself with an all in price per square foot that like exceeds the price at which you could just go like buy a new building, right? There are, you can get yourself into these situations where you start doing more and more like complicated. renovations, we're going to add bedrooms, we're going to add bathrooms, we're going to add, you whatever. And you can get it so you keep juicing the yield by doing that. There's all kinds of tricks you can use to kind of like, we're going to do private outdoor spaces, we're going to... You're juicing the yield and that's, you should do that. But you could sort of get yourself to a point where you're like, I'm doing all this work and I'm basically, I could have just bought the build, bought a brand new building and not had to do all the work and take all the risk. And so that's why I keep an eye on the all in price per square foot as well, just to sort of make sure how does that compare to what you could buy a new building for.

Speaker 2

That makes a lot of sense. What about your waterfall structures? I've seen a little bit of it. Usually, I think you have a pref and then you do have some kind of GP crystallization and a profit split of 80, 20 or 90, 10 or something. Can you walk through a fairly standard example or range of what you guys typically do or maybe there isn't typical, I don't know. Well, I should say, yeah, we have a pretty wide variety of structures. We've done one of the things you can do when you start to build relationships with families is you sort of can start to put yourself in the position of being a problem solver for the family. And what I mean by that is like, know, sometimes families have 1031s that they have to do. They own a property area, they don't want to own it anymore. There are structures by which you can facilitate that 1031, help them do your business, do the deal that you want to do with 1031 proceeds, and then you're solving both an asset allocation and a tax problem for them. That's very valuable from their perspective. You can negotiate non-standard economic structures that make sense for everybody. Like so that gets you out of like the preff and promote world and make you like a first dollar partner or whatever or close to a first dollar partner. So I want to just say like that's a useful tidbit. you should be willing to be creative with capital sources to help them accomplish their goals. And that may mean coming off the standard kind of real estate private equity, preff and promote structure. That being said, we've done tons of deals that do have a standard real estate private equity, preff and promote structure. Our typical structure is some kind of preff. Crucially, we do not do IRR preffs. We will only do simple interest preffs.

Speaker 1

And the thought process is like, can't hold indefinitely behind a compounding preferred return where you're like, you'll, you'll never catch up. It's, it's so hard to catch up. And so you end up like you're effectively, it forces you to sell like that, you know, so that's, you don't want that. our splits are typically have typically been somewhere between, so you, after return of, after paydown of all the accrued preff and return of investor capital, We've typically got something like a 30, 70, 30 in favor of the investors. So 70 to them, 30 to us after return of all the capital and paid on all the prep. We also get pretty considerable fees. So typically it's been in a range of 5 % of the total capitalization of project. So in other words, not like an acquisition fee and an estimate of just like 5%. the total capitalization project has paid to us. This is really important if you want to be a long-term holder. Because you're not selling, you are not going to be liquid. Okay? Just add personally as the GP is the sponsor of the deal. Because you're not selling, you're not going have these liquidity events. You're not going to be that liquid. the investors, maybe for the first deal or two, they can insist on you doing large co-invests. But afterwards, you're going to run out money. You won't have enough money to keep putting up 10 % of the total capital or whatever. You'll do a deal. You'll put up your 10%. Maybe you can do another really put up your 10 % and then after that, you're like, don't have any money left and we're not going to sell these things. I, I like, can't. So the investors ultimately have to get comfortable with you doing much smaller co-invests than is kind of more standard. And, um, so, you know, for a ton of our deals, like we, we have investors with whom we can put up zero. If that's what we want to do now, typically, obviously we want to put more up.

Speaker 1

And I think one of my regrets is that I did not put more money up into those deals, particularly the really good ones. But you definitely need to get investors comfortable with the fact that you're going to make more in fees than you're going to put into the deal. Does that make sense? That allows you to live as you're waiting for those promotes to pay off. Something that we did not do at Adaptive, but which we do at a business that I own, or I co-founded and partially own called ReSeed, where we are seeding emerging managers to do this business around the country, is what you referred to before, which is a promote crystallization clause. These can have a number of different flavors, but the idea is that it's not fair to stick the operator behind this preff forever. Like once the value has been added, ordinarily the operator would sell. Like in an IRR world, the operator will sell like, okay, we've renovated the building. We've got the rents up. Let's sell and take our profits. From the investor's perspective, if they want to hold in that scenario, they should be willing to have the prefs stop. Like, okay, like you done your, you dug your bit. So the way promote crystallization causes work is you say, okay, you pick a defined moment in time. Like, okay. whether it's three years after you bought it or whether it's after you finished the renovation plan or whatever, you say, okay, what is the building worth as of this date? And you can figure that, you get an appraiser, you can talk to brokers or whatever, you agree on a value of the building. And then you pretend that you sold the building for that amount. Okay, we're gonna pay out and you run the calculations. Okay, well to pay the brokers and the transfer taxes, whatever else pay off the loan. Okay, here's the equity that's left. Okay, pay down preferred return, pay down that your return capital. Okay, what would be left split it according to whatever the split is. And this you kind of like do the calculation to figure out how much money everyone would get if you sold at that price that notional price we talked about. But instead of selling you hold you just say, okay,

Speaker 1

If you were going to get $85 and I was going to get $15, now we're just 85-15 partners. No preff, no nothing. It's as if I put 15 % of the money into the deal, even though I didn't. Does that make sense? So then thereafter, the operator, after that promote crystallization clause has been triggered, the ownership percentages are adjusted to reflect the the calculation I just talked about and thereafter the operator is the operator but it's as if he invests in the deal and he owns 10 % or 12 % or 15 % however the numbers worked out and obviously the better the deal went the larger the percentage the operator will have and the smaller the percentage of the LPs will have and vice versa. That makes a lot of sense. the way, that was a great explanation of promote crystallization because it's been, it was hard for me to kind of like understand first. Boy, that makes a lot of sense with the idea of the long, the long-term hold and why it's so important too, because that's been part of my question is this preff. Like if you get behind the preff, I mean, you're just kind of screwed at that point. And what's weird is, you know, LPs might want a preff, but as a GP, if you start getting behind that pref, like you're actually incentivized in a very bad way because you're kind of like, well, there's literally no way for me to make money from this at this point. And so that's interesting. The other thing I thought was really helpful for me personally, frankly, is just even acknowledging that as a GP, if you are going to do these long-term hold deals, you're going to run out of capital. You know, I don't, I don't come from like a bunch of wealth, you know, and I've been running a business and my money's in bad and I don't have a lot of cash and co-invest are very difficult for me and I'm kind of looking at future deals and there's a lot of, you know, upcoming things I could do and I've been, you know, thinking about that. It's not like I can just tell an investor that, you know, that's about relationship building and trust building and all that, like you're saying, but that's just helpful to hear that your kind of professional opinion as a developer and GP that that's something that is achievable with the right people.

Speaker 1

For sure. And it's very simple. Like once you do a few good deals with someone and you're like, okay, this is a person who knows what he's doing is trustworthy, uh, executes like, you know, like then you're like, Hey, uh, I would like to do another one of these deals, but I don't have any money. Can you get past the co-invest thing? The answer is that the deals were good enough. The LB, the LBs are like, yes, we like that. In fact, I mean, we, we got to the point with most of those families where like their strong preference was to minimize our our co-invest because they're like look like this is in retrospect I was so stupid because when your investor is like I'm fine with you minimizing your co-invest you should probably be like well, maybe I should actually maximize like But but one of the learnings think from reseed and and I would is not That's funny.

Speaker 1

everyone. This structure of no co-investor, very low co-invest and more fees, it really depends on having really trustworthy people. When I said from recently, we really spent a lot of time thinking about not just is this someone who can go find a deal, but is this someone who we would trust to make the right decisions even if they don't have a lot of their own capital. And so I don't know how to recommend, I guess the point is as a sponsor, it's to be the kind of person that someone should trust to put out 10 million bucks of their money or whatever it is without a lot of their own money on the line and without a lot of your own money on the line and know that that 10 million is gonna be taken care of and the person's gonna do what they're supposed to do. So you really, it's, I as I say often, this business that we're in of buying or building or whatever real estate with other people's money and then getting an ownership stake that we didn't pay for, it's like one of the best businesses in the world. But your permission to do it depends on the continued trust of your investors. so properly understood, who gives a shit about your co-invest? What matters is you have capital partners. We're to put up 10 million bucks for you to realize your vision. Like that is extraordinarily valuable. The hundred grand or 500 grand or whatever that you're going to put up is compared to that is nothing. Right. But like it's easy to say that you have to like beat you really have to be the kind of person who internalizes that it has a sufficiently long career time horizon to act like that's true. think that's I don't know if everyone would think this and certainly not everyone would agree with me on LPs or something. But what you just said there, it's like, I, I get a lot more stressed about taking other people's money than putting my money into something. And I kind of have had everything on the line for a decade now in my own life. And I love what I do. Like I don't.

Speaker 2

I do I like making money, of course, but like I don't do what I do to make money. make money so I can build a lot of ways because I really do love it. And I'm like, me putting in money actually really doesn't feel I don't feel any more incentivized because I already take it so serious. And I don't tell LP or something because it's not like they're going to believe me. But like that's how I feel. mean, Yeah, and I think that comes across when you just sort I you and I don't know each other particularly well, but I mean, just in looking at the kind of stuff that you're building, it's like quite obvious that this is not someone who's doing this stuff for like short term IRR, you know, like trying to... should build self storage units if I was, if I wanted to make money. I'm going to share a little trick we use at building culture. So if you're designing a house, you have to have egress windows or egress in any bedroom, for example. And the problem with that is egress windows are very large, especially if it's a double hung window or something like that. And because of design constraints, sometimes we want a smaller window. If it's in a dormer, or just for the hierarchy of the elevations. Well, a really cool trick that we use with our Sierra Pacific windows is we'll take something from their urban casement line and we'll put what's called a piano hinge on it. And so rather than kind of a normal casement that kind of slides open where only part of the window is open, this is almost like a door hinge. And so the entire window opens and you can meet egress with a two foot by four foot window, a 2040 window. It's the smallest possible. egress window anyone makes. And that's a nice little design trick. If you're as nerdy as I am, you will actually think that's really cool. So check out Sierra Pacific windows and if you are in the state of Oklahoma, check out one source windows and doors. We at building culture use both of them regularly. Your approach to raising capital. I you've talked a little bit, of course, you you've got a handful of individuals that are putting in, you know, maybe a pretty big proportion of it, but

Speaker 2

something I think really interesting that you've tapped into is this, you know, social media and newsletters and not being a grant cardone. Like, I'm selling something all the time. You're, literally just sharing about your business, sharing about your thoughts. And then every once in a while you're like, by the way, I'm raising money and it seems to have worked pretty well for you. Could you talk a little bit about your strategy there, how you think about that, what you do. Sure. So the first thing to say is I don't come from a particularly wealthy family. I went to Andover in Princeton, which gave me like probably a better network than your average person. that network, even that network took a while to come to fruition. In other words, like the other 17 year olds that were 17 with me, it took them a while to get to the point where they had real money. So particularly early in my career when I was like in my early 20s, sorry, late 20s and early 30s, those people were starting to have money and some of them substantial amounts, but like not the way it is now. So the problem that I had was I don't play golf. My parents were like ex hippies. and I started my career in investment banking in London, which was fun and everything, but is not, if you're gonna go be a real estate developer in Los Angeles, probably you should not build your early professional network in London. Not like not a not a for variety of reasons so I was left with this problem of So how do you like what do you do? Like how do you from nothing? build a capital base and I was fortunate I should say my best friend from high school did make money early and so he staked a bunch of early deals for me so that was like how where I by the way, I Fucked him up to a large. I we did. Okay, but like

Speaker 1

I made so many mistakes. learned a lot on his dime, basically. Still one of my best friends. so then the question became like, okay, how do you broaden that out? Like, how do you actually go meet strangers and turn them into the kind of people who would be willing to invest money with you? And I, this is like in the like 2007, eight, nine kind of timeframe. I came across a book called Permission Marketing by Seth Godin, which is all about what we just talked about. This idea that rather than interrupting people with advertisements, as a marketer, you are much better off putting out valuable information, like basically teaching people and asking in exchange only to start with that they give you the right to basically the permission to contact them again. So that could take the form of like giving you their email address or their mobile phone number to text them, or maybe it's just a follow on Twitter or Facebook or whatever. But it's like, I'm providing you valuable information, you give me the right to continue to provide you that information. obviously for most people, that's a very good trade. they think that you're teaching them something valuable, they're very happy to give an email from you or whatever it is. Okay. So then over time, if you are consistent and you continue to educate them, right, they come to trust you. You're building trust, but instead of building it like one... whole of golf at a time with like the two or three people you're playing golf with you're doing it with initially tens and then hundreds and later thousands of people simultaneously. Brad B. Shore who I look up to very much. He's younger than me, but I look up to him very much. And he does a kind of an indefinite whole deal with small businesses that he buys, small medium sized businesses that he buys. And so I stole this wording from him, this idea of building trust at scale. so that's what you're doing. So you're, you're, you, you are, continuing to educate. People are continuing to give you permission to educate them. And then after you've been doing this for a long time with consistency and people, people really feel like they know you and they do like, you're like, write every day about what I am doing in the business. Like over time, you will see who I am, like how I think about things, which deals I like, which deals I don't, you know, the problems that we run across river.

Speaker 1

They'd come to trust you and think of you as an expert, which you are and they should. And then when you have a project that you want to finance, when you go to these people and you say, look, I found this building I want to renovate or I want to build or whatever. You're not coming to them cold and saying, Hey, I'm, I'm Austin. I'm trying to create this relationship with you. And by the way, please trust me with a million dollars, even though we've never met before you're saying like, you've built this relationship with me, this sort of parasocial relationship with me over the course of years. you know, I'm smart and you know that I'm not going anywhere. I've been doing this and what I'm doing. Like, and I have this, this is the thing. This project is the one that I'm staking my reputation on. That's a much, much, much better sale. It's not like you, you, by the time you go to pitch, it's not like, I'm Moses, I've renovated a certain number of apartment buildings. They're like, yeah, I already know that. Let's talk about the project. I mean, obviously they're not like, they still want to be able to talk to questions. It's they're not like hypnotized. But you've sort of like gotten over the here's who I am and here's why you should trust me. and you're into actually talking about the deal and whether it's good or not or how it's going to work and everything. And that's just, in my opinion, that's just a much, much better place to start a capital raising conversation for a project. I love the way, yeah, trust, building trust at scale is such a cool and real concept. And what I find so interesting about it is I think it's something that's made possible very recently, like what past 10 years, 15 years with the advent of social media. I mean, before that, the real estate game. I mean, even if you go just 2012 jobs act, know, but not even that, just the technology wasn't there to build trust at scale as a normal individual, unless you're like a radio host.

Speaker 1

Yeah, I know people used to do infomercials and do seminars and all that shit. And I remember that from when I was a kid and it was always kind of a little sketchy and weird or you could sort of write a book, but then you were depending on like, how do you get the book distributed? Yeah, it's, a, it's a, it's a bad model. so, it was very, for me, it was, it was a really nice confluence of, as you say, the technology, the distribution becoming available. and also I just like to write like, you know, I, I'm, I'm, pre-verbal, like I thought about this stuff a lot. I like teaching and in many ways if I were less financially motivated, I would probably be a teacher. So it was like for me, it's like this natural thing where you teach and in exchange when you need capital, you get capital. It's a yeah, no, and your writing is very good too. I really do enjoy it. Just following you on X alone. In addition to your newsletter, but going back to the raising capital is, you know, I think it really has democratized democratized capital raising to kind of normal individuals that, know, they want to be trustworthy, right? But when I say normal, you know, they can still be experienced, but just being normal people and the potential for that to unlock new types of development over time. Cause we're really in the very beginning stages of this. Like once again, jobs act of 2012 and then social media, maybe people have been kind of doing it for a little bit, but really we're at the beginning of this. And then with software like Epfolio and other things where you can actually, um, you know, verify investor accreditation, manage, you know, larger list of investors. That's all very recent. So I don't think we've really, we've barely begun to experience the potential outcomes. of what it could mean for individuals in their own communities to be raising money and then pursuing meaningful projects in their own community. And so that's one of the things. go ahead.

Speaker 1

Yeah, no, mean, so yes, and it's exciting. I mean, I also want to just inject a note of caution too, which is to say that a lot of people got their fingers burnt in deals that they did in 20 and 21 and maybe 22, that were maybe because of these technologies. There were a lot of people who took advantage of the opportunity that I've been describing in the business You know the the strategy that I've been describing of building trust at scale whatever and did a lot of dumb shit And we're not so dumb shit and they just got you know, like I mean I've you know There are deals that I own now that you know We find it some pretty conservatively and when you have when interest rates go up the way that they did like it's still not good so So so I do want to inject a note of caution. It's it is It has democratized access and that can be good or bad. and, and I think it, it, it, the, problem is that there are a lot of people who have a spare a hundred grand or 250 grand or whatever, who are even pretty successful in their own lives. They, they're, they, they know how to run their plumbing company. They, they're a great partner to law firm, whatever, but they are not. like experts in evaluating real estate sponsors and real estate deals. And there's a lot of people who got themselves who lost a lot of money or in the process of losing a lot of money as a result. so I just want to caution everyone like this is not all like honky dory and everyone's singing kubaya and holding hands and everything like people definitely got hurt doing this. And I think the normal rules apply of investment like caveat emptor don't do you know, like don't risk more than you can afford to lose like real private real estate deals are speculative and risky. And, you know, there's a lot to be said for having your money in the stock market. Yeah, I don't don't want to but I but I will say this, this is, you know, this is an important thing I was talking to one of our actually our, our largest capital partner recently, and Speaker 2 (01:01:57.642) I think that's totally fair. Speaker 1 (01:02:09.784) We were sort of talking about returns and yields and, you know, deals that we had done that we're not happy about or deals that we did that we're happy about, whatever. And he was sort of like, well, you know, we've, we've created a lot of really good housing and we've operated it really well for a lot of people for a long time. And I was kind of like, like, I care about that, but it was sort of pretty surprising to hear an LP care about that. Cause it's like, it might, my. Like I still have this model in my head where on some level these people are like, you know, rational profit maximizers who are like thinking about what investments to that. And that's, that's not true. They're not, but I still have in back of my head that this model that that's how they are. There are a lot of people who are like, you know what? What Austin is talking about building here is beautiful. It is something that is enduring. it will make our city better. And you know what? I can make a reasonable return on it. Is it going to be better than like on a risk adjusted basis than investing in Metta or buying Blackstone stock or whatever? I don't know, but I don't, that's actually not, I don't care. Like I have enough money. I'm not, or about like, they're just not like, they're not computers. They're not, they're like, they're people. and they value their community and they think that people should have nice places to live and shop and work and all that stuff. And I, and that's not invalid. Like that's it's not, they're not stupid for feeling like that. It's cool. It's community motivated. It's awesome. And we, we as operators need to not take advantage of them. and we need to, you know what I mean? We need to do smart things and we need to actually deliver quality housing and operate it well and all that stuff. But it's really awesome. It's actually quite exciting that there are people who are willing to do that kind of thing. Look, it's not charity, and they'll get pissed off if you fuck it up, but they're like, okay, I'm okay with a seven. Yeah, could I do a little better, whatever, maybe, but fine. A risk adjustment, a tax advantage seven, great, fine, sign me up, I'll do that. Speaker 1 (01:04:29.176) And that's awesome because it allows you to do the kind of things that you're talking about, which is really making a local community. Have you heard of new urbanism? you familiar? Yeah. Yeah. I mean, I know just the way you talk, understand, like, like walkability and generally like those types of things. Um, and one of the, you know, I've been part of the kind of the, when I say part, I mean, new urbanism it's been around since the eighties or nineties started with seaside, you know, and, and, and I think I read a book in 2013 that kind of like opened my eyes suburban nation. was like, Oh, that's what's wrong with Houston. Um, where I grew up, you know, uh, And one of the challenges with New Urbanism, I the first 40 years, they've really been fighting kind of the philosophical battle and the regulatory battle and trying to get zoning changed. So a lot of the Yimby movement really comes out of that. A lot of the movements have come out of the New Urbanism and it's largely been just really positive things. think kind of the next evolution of it, in my opinion, is figuring out how to capitalize a lot of these smaller projects, infill projects, and I say smaller projects, even larger projects too. A lot of the New Urbanist projects kind of as proof of concepts have been greenfield developments. And I think those are great because then you can point to them. You can take wealthy people or you can take city councils and say, see, this isn't scary. This is amazing when you see the kids running around and all that. creating compelling alternatives is wonderful. At the same time, I think the New Urbanist movement and my goal and a lot of people's goal is to transform where everyone actually lives, you make our cities better. And so that's infill and infills very difficult. But what's interesting about the whole walkable neighborhoods is, you you talk about quality real estate in a supply constrained market when you're talking about kind of your indefinite whole strategy and walkable places and walkable neighborhoods have shown for centuries to be highly desirable and highly valuable. And they are inherently supply constrained because they're so dang hard to do. So one of the things that when I did come across Speaker 2 (01:06:26.986) you and kind of, you know, been following you, I've just been realizing, I kind of feel like this is one of the keys to unlocking a lot of the, do you want to call it? New urbanism or something else. But some of these other types of developments where that whole in depth longterm thinking works because it takes longer to build. It takes longer to get through entitlements, but then you're truly creating something that's valuable. And it can be even be shown that like the highest price per foot and really any city is probably going to be in some highly walkable neighborhood. I mean, like almost without a question. And so I am really interested in kind of like fusing those two things together. And I think a lot of other people could probably do it too. I mean, I completely agree with you, like, and just because someone's an accredited investor doesn't mean they can lose $100,000. Like that could be a tremendous amount of to someone that's accredited. But I do think that long-term thinking how you think about it. And so I actually wanted to ask you, have you ever thought about doing ground up because I know you've mainly done multifamily value add and there's good reasons for that. You can't get a good deal on a new building. It costs what it costs to build when you're doing ground up. It's more risk, yada yada. Have you thought about it though? Yeah, I have. the truth is a number of different things. One is for a very long time, that on a risk adjusted basis, it was very obvious to me that renovating older buildings in Los Angeles was just a much better deal than than building ground up. it wasn't it just wasn't close. Like it. Because the one in Los Angeles, it like tortures ground up developers. I mean, the stories I could tell you, like you and everyone listening to this would be like laughing and crying. it's just, it's just, you know, let me give you one example. There's a, there's a fan, the largest private landowner in Los, wait, large individual landowner in Los Angeles. Uh, I was at a panel with his daughter. It's a big, big company. Guy's a real estate genius, uh, built a building. I think like 90 units in Los Angeles. Speaker 1 (01:08:27.982) infill area, you know, nothing weird, like according to zoning, it wasn't doing anything. It finishes the building and it took nine months for the gap for the, for the, the, utility company to come and hook them up so that they could turn on the gas and, and, right now, imagine you have your, your, building is built to all the capital is in, you know I mean? It's not like they held up in the beginning when it's just land. Devastate. Your all the money is in and you're sitting there for nine months and you can't get the goddamn. utilities. You're thinking about it. Just sitting here, you know, like, So, for me, I had a few sort of abortive experiences on a smaller scale where we raised money, bought land, and then by the time we got through the process of getting the permits, which was like a year or whatever, the unit program that we had expected to be able to build, we couldn't build. There was some tree somewhere and so... Speaker 1 (01:09:31.278) We didn't have the half a parking space. And so we thought we were going to get eight two bedrooms. And instead we were getting six two bedrooms and two studios. like on a small deal, as you know, that's enough to like make the numbers bad. So that's principally what's happening. There's something else going on too though, which is to say that, and it goes to your, what you're saying about new urbanism. The zoning and building codes here really suck. Like in particular, And I didn't really understand this until a little later, but the double loaded, having to do like two staircases. I'm not understating. It just destroys. It kills the layout. Yeah. And it's very good for me because I with these smaller older buildings that we renovate, they are, they're, smaller buildings. And so typically, the units have light on multiple sides, like they don't have these long double loaded corridors where the units only have one side of light, these older buildings, their point access usually, and they so yeah. The unit grandfathered in. Speaker 1 (01:10:44.43) And they're the built in the twenties and they either have two or something. have a lot of buildings that are like bungalows where they have four sides of life. And it's just like, it's so much better to live in an apartment that has windows on multiple sides than on one. So, and there's some other things like that too, that I can't stand, like side setbacks, you're, what you want is a walkable neighborhood. But by definition, you put side setbacks and driveways. It makes it horrific to walk around. And so. It's there. is the rare new construction building in Los Angeles apartment building in Los Angeles that I look at. I'm like, I wish I had built that. Like there are better examples and worse examples, but like, it's not, mean, there are better developers and better architects and worse and whatever, but like fundamentally it's a code. It's a zoning code and building code problem that makes it so that these, they kind of suck. They suck to all. They're not nice to look at. They're not nice to live in. And mean, you know, and so anyway, so even separate from the financial and risk considerations, it's just like, even if I was going to put that aside and be like, okay, well, you know, I still want to build something beautiful. You can't build something that's that beautiful. Yeah, I mean, we have all the project that you've seen on that we're doing in Oklahoma. We actually have all the zoning in place because it's CBD Central Business District. So there are no setbacks, no height. You know, we basically met all the requirements off the bat zoning wise. It still took us 18 months to get their entitlements, which might not sound long in L.A., but because to get through the engineering and the utilities and the fire and the trash, because it's still so bureaucratic and unaccustomed. to building walkable neighborhoods that it's still kind of well-intentioned people, know, kind of blows their minds and it's just like, it's very difficult to navigate through. You really have to be motivated. It reminds me, you were just talking about the double-loaded corridor. I was recently in New York and I was staying at this hotel called The Marlton, just fantastic hotel. I mean, I was just, I loved it, just amazing. And the entire time I was just going like. Speaker 2 (01:12:50.764) Illegal, illegal, illegal, illegal, illegal, None of it would have been allowed to be built today. And the same with like the neighborhoods around. Illegal to build today. If you look in LA, if you look where we own stuff in LA, it's like you could predict where we're going to want to own stuff simply by looking for where the 1920s retail has not been torn down and replaced by suburban style bullshit with big front parking lots. Silver Lake and Echo Park, you've probably read me writing about these neighborhoods, Highland Park, like all these cool neighborhoods that people want to live in. It's not like a coincidence that they're all 1920s single and double, one and two story retail buildings with no side setbacks and no parking. And it's because that's what you need to have like nice walkable neighborhood. And so you could just go look and find those neighborhoods and be like, this is probably going to end up gentrifying because people want to live like this. And yet it's literally illegal to build that today. It's so infuriating. It's so infuriating. call it tyrannical bureaucracy at this point. It's just so unbelievably stupid and people just aren't aware of it. you know, we're at our hour, so I want to just leave with at least you at least giving a little bit of a plug for ReCeed. I know you don't have time to kind of like get into all the ins and outs of it, but I think it's a super cool program and I know you're on like your second cohort or something if you want to. Yeah, we just briefly we some partners and I set up a business where we're providing capital to emerging multifamily operators all over the country. We've got I think 12 or 13 of them today. And we've given a little bit of money into their operating companies and we take a small stake in the operating companies. And then more importantly, they go out and find deals and we kind of have the option, not not the obligation, but the option to capitalize those deals. And we've raised, I don't know, I think we have like, Speaker 1 (01:14:49.258) It's like closing in on a couple hundred million bucks that we have to do for us to deploy. So I think we've deployed, I don't know, 25 million or something like that of it. So we've got these people out, operators out in different cities all over the country looking for sub-institutional multifamily deals for us to money in. And we're over time building a portfolio of those deals all over the country and selected and capitalized and finance. and operated for long-term holds. So with the idea of doing exactly what we've been talking about, like creating a kind of a diversified portfolio of just like good stuff that you own for long time and you have the checks coming in once a quarter or whatever, get some tax advantages. So very early days, but the partners that I've done it with are really top notch and it's been exciting and growing pretty quickly and excited to see how that unfolds. Congratulations on your success there. think it's a super cool program and for anyone interested, I highly recommend you check it out and you can listen to, you did a podcast on Chris Powers, what is it, the Fort Podcast? And you can search Moses Kagan on Fort Podcast and one of those is specifically the whole thing is about Reese Eater on YouTube or something. Because if I was at a different stage or a little younger or something, I would have been like signed up so fast. Cause I mean, even the terms you have. yeah Speaker 2 (01:16:13.23) Oh, fair and reasonable and you want people to be able to eat. And so it's a way to get in the real estate game. Not risk free, but I mean, you you're gonna have to work hard and all that. But anyway, I just love how you've created a path for other people. You said you might be a teacher in another life. And I'm like, that's what you're doing. You're doing both, which is really cool. So. Well, I'm really enjoying it and people, shameless plug, people should find me on X. I think it's probably the best way. It's at Moses Kagan or you go to moseskagan.com, sign up for my mailing list. And yeah, I'm sort of to keep them to write every day on X and then I write like weekly or every couple of weeks on the newsletter and try to teach people and hopefully attract the kind of operating partners and capital partners and management clients and all that kind of stuff that we want to work with for a long time. Well, Moses, thanks a ton for coming on and I look forward to, reconvene. Tell us that what, just one more point for reconvene. yeah, dude. No worries. I appreciate that. Yeah, so my wife and I started a real estate unconference, which we do annually in Santa Monica in the fall where we bring together private real estate operators and capital partners to come talk about the business and opportunities and challenges and everything. And so we're in our fifth year. This year's, think, is the 16th through the 18th of September in Santa Monica. The website is reconvene.com. People can find out more there. Speaker 2 (01:17:40.238) And I'll just kind of give a plug myself because I past year. Great experience. I love the combination of the GPs and LPs. Like you said, it's kind of minimal comp. It's like, you know, a couple, maybe two hours of talks a day and the rest is conversation, curated conversations. I mean, I think it's so cool that you look at every invite and replacing people at tables to try to facilitate productive conversations and just, you know, beautifully executed, done great food dinner on the beach. mean. Just awesome for anyone interested in that. don't think I'll be going this year. If I'll probably try to do like an every other year type of thing for me. anyway. Well, I appreciate that. Thank you very much for the reminder to plug it and also for that very kind endorsement. So thank you. All right, Moses, thanks. If you've been enjoying this podcast, please like, subscribe and share with your friends. And if you're listening on Apple or Spotify, please leave us a five star review and take a screenshot, send it to playbook at building culture.com. And when we reach a hundred reviews, I'm going to send out 10 building culture hats, like up there behind my head. If you're watching video and I'll send it to your house. Thanks so much for listening and catch you on the next episode.