#402 - Moses Kagan & Rhett Bennett - ReSeed Partners: Backing the Next Generation of Elite Real Estate Operators

Chris Powers: Okay, so David Senra tweeted something yesterday; he said the best conversations are the ones you're most excited about. And I'm freaking pumped about this. I have two of my best friends on here today. We haven't done this in three years. The last time we did was episode 278. So, you can go listen to that if you want. And you guys were just launching this business. It was the Y Combinator of real estate. It was going bananas. We're now three years in, and I really wanted to spend time today going what's happened over the last three years. I think to do that, let's just start with what is ReSeed today, and has it evolved or changed at all from where we were three years ago? 

Moses Kagan: Well, first of all, thank you for having us. The first episode that you did was incredibly helpful for us. It opened all kinds of doors, and we appreciated it very much and we appreciate you having us back here today. This is great. What's ReSeed today? We have come a long way. We have invested in 13 operators. We have put out more than $100 million in equity. We have another $100 million or so in dry powder. We're working on raising some more now. And we've built a great team, mostly credit to Rhett there, and some improving internal systems to handle the volume of both deal flow and also the asset management from the portfolio as it grows.

Rhett Bennett: One of the things we did before coming today is listen to the last episode. And we did it independent of each other. And one of the things that was fascinating and, frankly, I think reaffirming was that the business model has largely tracked what we originally talked about. But looking back on that moment... we were talking about the business as if in some ways that it was further along. And what I mean by that is we had just- Moses had sent the tweet that went viral. We had 1,300 people express interest in 12 hours. And we were in the middle of effectively turning into a college application process, trying to sift from 700, ultimately 700 applications down to eight. But at that time, we had not bought a deal. We hadn't actually capitalized any of the operators. But we had this vision for the business, and I think we've largely executed on it. 

Chris Powers: And can you just- what was the original vision for the business? Like, why was it different than what most people had seen before?

Rhett Bennett: I mean, the original vision was that there- the need was that there are a lot of people that either want to start a real estate operating business or already have started a real estate operating business. They know a lot about real estate. They know how to identify it. But maybe they don't know how to raise capital, or they don't know how to go find long-term capital, or they need help in the back office and thinking about how to scale that. I mean, you've built one of these businesses successfully. It's hard. And so, the vision was that we could find great up-and-coming emerging operators, we could support them, and in a lot of ways, help them avoid some of the mistakes that maybe Moses and I have made along the way, and really just kind of get them going and create momentum that would be hard to do on their own. 

Moses Kagan: And then from the other side, the idea was, look, there are a lot of taxpaying investors, family offices, just high-net-worth individuals who are not necessarily that well-served by the traditional real estate, private equity, IRR-driven, high-leverage type model who are looking for long-duration, relatively stable cash flows that come with some tax benefits. And also, that there are opportunities available in the sub-institutional space that probably generate higher yields than in the institutional world. And so, it was marrying those two things together, figuring out how to help these wealthy taxpaying investors build diversified portfolios of cash-flowing, sub-institutional real estate all over the country. 

Chris Powers: As you say that, it's like years of tweets of just reading what you talk about. I'm like, oh my gosh, this is like music to my ears. Before we move any further, I think it'd be important to also set the context. How did you all get together? Like, you were in a different world. You were in a different world. You're like more of an investor type that saw an opportunity. You've been doing this sub-institutional for a long time. How did this come together?

Rhett Bennett: So, at the time, I was sitting in an investment seat where we were building a real estate portfolio for a family. It was a long-duration, taxable real estate portfolio. And so, I was going out and trying to find local operating partners. And I'm not very active on Twitter, but certainly a lurker. And so, I was going through and reading content, and I stumbled on some of Moses's writing. And I said, oh, he thinks about the world exactly the way that I think about the world from an investments perspective. And so, I went down to LA to meet him. We looked- and we talked about this on the first podcast, we tried to find deals together, but he didn't need the capital given the environment in LA. He actually came out to Colorado to look at some deals where I was living at the time. And then, I ultimately ended up going to the first Reconvene conference, which was maybe the first time that we met, and the light bulb went off. I was like, oh, this is how we can recruit operating partners. His distribution, as opposed to what you traditionally do is you get on an airplane, go talk to brokers, kiss a lot of frogs. This, to me, looked like a much better distribution mechanism. And that kind of all came about from Reconvene. 

Moses Kagan: Yeah. And from my perspective, fundamentally, what we were doing in LA was just a niche thing. I mean, there's just- we're pretty quantitative about how we look at deals. And you're either in a good buying environment or you're not. And if you're not, from my perspective, I'm not going to do stuff. So, we were kind of slowing down in LA at that point. But we had all this institutional knowledge about how to underwrite, how to do construction, how to manage, you name it. And so, when Rhett came to me with this idea to basically get on the ground floor of a bunch of these emerging operators and kind of implant the way of thinking that we had kind of developed by trial and error over the years into these other operations, and by doing that, have the ability to build like a scaled business was pretty appealing. 

Chris Powers: One of the most impressive things about you is you've stuck to your guns. Like if you read the writing, you can go back as far from when we were like neophytes trying to get to a thousand followers on Twitter, the writing and the thought process has stayed the same. I know you're just now getting back into buying and sitting out for three or four years. I know ReSeed has been doing some deals, but to hear you've got some stuff, it's just super impressive. Let's just go like a little bit deeper and just the strategy. What's unique about... you keep saying long duration, tax advantage, all these things. If you could spell out like the perfect subset of deals would look like this, our thought process would be like this, why are you different than most? 

Rhett Bennett: And I don't think any individual component is different. I think it's really the aggregation of how we have done it. But if we go to the perfect deal, what are we trying to find? We're ultimately trying to find durable real estate, so a great long-term real estate, that we can buy at a price that creates attractive returns for our long-term investors. And we want to hold those investments for a very long time. When I started in the real estate business, I was looking at much larger transactions originally. It just became obvious that as you go down the spectrum in terms of transaction size, it's much less efficient. I mean, in our first few deals, we could tell you some stories that really outline like how inefficient it could be, including the first deal we bought, they didn't have any leases. So... like don't argue with me about whether it's inefficient at this point because we've got data. But that's really- we're trying to find great real estate. Oftentimes, they're smaller assets that we know that we can run efficiently and generate great returns for investors and hopefully hold those for the very long term. 

Moses Kagan: Yeah, I think there's sort of some tension. What you would ideally like as an owner is to be in an affluent developed area that you know people have wanted to live in for a long time and are going to want to continue to live in for a long time. Those sorts of neighborhoods, they push back on new supply. They create supply barriers. However, we can have an argument from a public policy perspective about whether that's good for society or not, but that's what they do. And so frequently in those neighborhoods, there are older, smaller assets that a big institution or institutional real estate firm is not going to be interested in looking at a $3 million deal, an $8 million deal, they're just not. That's just not going to move the dial for a big player. But the families that have owned those things have been able to generate very nice returns over very long periods of time because people want to live there. And so, they don't really even need to put that much capital back into the buildings, and they can still continue to push the rents. And so, I think if not the perfect ReSeed deal, a perfect ReSeed deal would be that kind of deal, going in, buying at a reasonable price, putting some capital in to refresh the building, and then just sitting there and letting the neighborhood do a lot of the work for us.

Chris Powers: And when you say put some capital into the building, is this a lot, is this like a gut to the stud start over? Is it deal by deal seeing what you need? Like are you trying to get back to a quality that is beating the market on how well constructed these units are? 

Rhett Bennett: It really depends on the deal. One of the things that we've certainly learned about our business, because we're looking at multiple geographies, multiple strategies, is you have to try to find a way to compare those deals. Like a gut renovation where you're taking everything down to the studs, different risk profile than something we bought that there's really not a value-add business plan. And we've done both of those at this point. But it really differs depending on the business. 

Moses Kagan: Yeah... it's just the nature of things that new construction is going to take place in areas where new construction is allowed. And sometimes, if we can buy it at a price that's attractive and particularly if there's a mark to market play on the rents, like the deal that we just recently closed in a suburban Detroit... Great building, relatively recently constructed, being run in a less than optimal way, let's put it that way. We can talk about how, about some stories there. And that's just a pure mark to market. The San Diego deal that Rhett was just referencing, I mean, that's a gut. I mean, it's an 80s building, great bones. We walked in, I'll never forget because it was our first ReSeed deal. I was nervous, 80s building. And you could see that the second floor had vault... the roof line was vaulted. So it was like pretty confident that the upstairs units were going to be nice, but it was the downstairs ones we were worried about, and the strategy involved turning several of the garages into ADUs. So, basically adding units for the non-Californians among us here. And so, we want to open the door to the downstairs units to see what we're working with. And first of all, the owner was there with his like huge bundle of keys trying to... it was a real mom and pop type operation. And he opens the door and it's like nine foot ceilings, and it's like we can make these into good units. You know what I mean? And that building, we gutted that thing to the studs, and it's almost totally leased up now and just looks great. So, both of those strategies will work.

Rhett Bennett: And one thing I'll add is, I mean, if you think about markets and rents, I was driving around with a potential operator in Dallas yesterday, and I was explaining to him what we had spent on a per door basis in San Diego and in San Francisco, and you could see like it didn't compute. And so...

Chris Powers: It's like, that's more than the whole unit.

Rhett Bennett: Exactly. So like, obviously you can't take that to suburban Detroit, so it's very market strategy specific in how you execute.

Moses Kagan: I mean, just in San Francisco... are we pro forming $5,000 for a thousand square foot two bedroom plus office units or something like that? Maybe more than 5,000. I mean, it is... that's another planet. And you can afford to spend a lot of money on construction if you're going to get those kinds of rents there.

Chris Powers: So, the viral tweet goes out. You’ve become quickly a- you're going through 1300 applications. You narrow it down to eight. I kind of want to talk about the profile of the operator and how that's evolved. How many cohorts have you done now? 

Rhett Bennett: We've done two cohorts and we are recruiting for our third right now. 

Chris Powers: And will the model continue to be cohorts? 

Rhett Bennett: So far. I mean, we've debated that internally, but up to this point it's worked. We really believe there's value in the community and bringing people together and launching the business at the same time, or oftentimes, we're providing growth capital. And so that group coming together we think has value. 

Chris Powers: So, we're going to spend some time on cohorts. I've got several questions. From cohort one to cohort three, what have we learned? What gets in now? And this has to have evolved. There's no way there's not lessons learned along the way.

Moses Kagan: I think one thing to say, and we'll have a lot to say about this, one thing to say, this is an area where I think we were a little off when we met with you last time is we were expecting, or at least I was expecting, to have to do a lot of teaching. I thought that we were going to end up with like some brokers who knew their markets but maybe hadn't done deals before, or people who had, maybe they had done one deal or something like that. It turned out, even in the first cohort, that we got people who are considerably more experienced than that. And then for cohort two, and now I think for cohort three as well, really experienced, really people who know what they're doing.

Chris Powers: Like describe that, what's experienced? 

Moses Kagan: People coming out of like serious real estate private equity firms, MBAs from the best MBA programs, people who really know real estate. And I think part of that evolution is that over time... at the beginning, we were very unproven. Like we didn't- we had never bought a deal before. We were asking people to sign up to effectively a permanent deal with us, and we hadn't delivered capital. As we have now demonstrated, we can deliver the capital. Obviously, people who have higher opportunity costs or are maybe a little bit more risk averse about their careers look at that and say, okay, now it's validated, and they're willing to get involved. So, the profile of the operators has changed significantly from what I thought. And even from cohort one until now, we're getting more and more experienced people. 

Chris Powers: So, how big is a cohort? 

Rhett Bennett: That's one of the things that's changed. So, originally, we had eight in the first cohort, we had five in the second, and then we're going to stay in that kind of four to five range.

Chris Powers: Okay. 50 killers submit applications. They're all coming out of real estate, private equity. They're awesome. We got 50. We got to get it down to five. How are we getting to five? 

Rhett Bennett: We're in the middle of that right now. 

Chris Powers: Are we flipping coins? Are we...? 

Rhett Bennett: And the process has evolved a little bit, but it's largely stayed intact with a couple of additions. So, we start with, I'm the first, I read all the applications. So, when they come in, Laura, one of our partners, set up the workflow in a way that's really helpful. 

Chris Powers: May I interrupt one second? Also explain what's on the application.

Rhett Bennett: Yeah. So, I mean, it's probably relatively intuitive. You're basically- what we're trying to do when we get an application, I'll come back to what's actually on the application, is get a sense of what is your work experience? Have you done a deal or led some deals that give us confidence that when you're out on your own, or if you've already started your business, you can actually execute the deals? We're trying to get a sense of track record. So how do you do that in the application? Obviously, there's a lot of personal information. We ask for a resume. You can attach a case study if you'd like. You're describing what markets you're interested in. You're describing the strategy that you want to implement in those markets. You're talking about transaction sizes. You're saying what yields you potentially would want to try to target because it's different by market. And then we ask some very simple questions that occasionally create some pretty funny responses. I mean, we ask people if they've ever been in trouble with the law. And credit to applicants, people are truthful. And so, have you ever been through a bankruptcy? What is your real estate portfolio today? Do you have any upcoming maturities? And so all of it is in an effort to give us clarity around who- how can we narrow that funnel very quickly? 

Chris Powers: Is there a wrong answer of any kind? Like is there something, if somebody was listening to this, that's like an immediate no?

Rhett Bennett: If you've never done a transaction, you're trying a career switch. We're a fiduciary. So, if you've had legal trouble, it's probably going to be a pretty tough yes for us. 

Chris Powers: So now he's read. Now, it gets kicked over to you.

Moses Kagan: Well, I mean, I think there is... we're always trying to balance because, on the one hand, the quality of the applicant matters and quality along all the axes that Rhett just explained. There also though is the market. And so there are markets that we are more or less interested in being in. And so, there's tradeoffs where like, do you take the perfect applicant in a market you don't love? Probably. You probably don't take a terrible applicant in a market you love, but where is the... And unfortunately, it's not- we've tried to quantify things to some extent, to the extent that we reasonably can, but a lot of this stuff is feel. And I guess maybe the final thing I would say is these are really, these are partnerships where we are... it's not write them a check and call us when you have a deal. We're meeting with them constantly. When they do have deals, we're spending a lot of time with them. After they buy it, we're spending a lot of time. So, these have to be people that we get along with. It's actually a partnership.

Rhett Bennett: Maybe just to finish kind of what we do, if that'd be helpful. So after that, and Doug really leads kind of the next step in the process, Doug's the president of the firm and our partner, we call it a behavioral panel, and this is one of the things that we've added. And so, it's really, we'll do an hour long basically case study with them and say, okay, tell us times you failed. What did you learn from it? If I went and talked to your old bosses, which we might, what would they say about you? Just kind of ask probing questions, because at this point, we've got a pretty clear sense of like who's technical and who can underwrite. But then we're trying to get to some of the questions that Moses mentioned around, do we want to be with these folks? Because we're going to be with them a lot. How do we get a sense of their integrity, their fiduciary mindset? And then we go from there to we'll actually do a case study with, they'll show us models, et cetera. And then we're in the market, driving the market, we're looking for, do you really- how passionate are you about real estate? Like if you don't know every block, every owner, every broker, then that's a pretty good sign that's probably not your passion. And then it gets down to kind of the legal side. But that's a short description of a long process. 

Chris Powers: So they've gone through, you've narrowed it down to five. I assume an offer letter or call comes to them. What does an offer look like? What am I getting myself into if I'm one of the five? We've talked about a long-term partnership, capital to go buy deals. But like, what am I signing up for? ... If you can't tell, I'm now becoming a ReSeed partner in real time. 

Rhett Bennett: You need to submit your application... There's quite a difference between expectation and reality is disappointment.  And so, what we're trying to do is really make sure that the operating partner, potential operating partners know exactly what they're signing up for. So, we'll send them the operating agreements. We ask them to review it. We ask their counselor to review it. And then we set up a call to discuss it. And there's not a lot of flex in the operating agreements between the operators because we're trying to standardize the business. But we're having multiple calls and multiple meetings where we're going through and, line by line, telling what the economics look like, what the governance structures look like, what the deal level economics and just making sure that we're on the same page. Because the last thing we want is for them to sit in the seat, and then all of a sudden, their expectations are out of line, and they're disappointed. And I'd say that's kind of the partnership piece. The other piece is we, and this is a change from the first cohort, we established the buy box. So, in the first cohort, we had a sense of that. And then once they came on board, we really nailed it down. We've pulled that forward in the process to make sure that, once again, that there's alignment on strategy and process and the types of assets we want to buy. 

Moses Kagan: I think just to kind of... at a high level, what the deal is, we're giving them some money into their operating company. In exchange, we're getting a small revenue share in the operating company. And more importantly, from our perspective, we're getting the right but not the obligation to provide up to a hundred percent of the GP and LP capital for their deals. Now to give you a sense for what that has meant in real life, we've done 13 deals now. One, we just did the GP. It was a deal that was... it didn't- wasn't quite thick enough from an LP perspective for us, but we did the GP. All the other ones we provided approximately a hundred percent of the capital.  And every deal has been done all cash. We haven't used debt on any of them. So, this is capital that would be very hard to raise, I would say, as an emerging operator to go take down a $20 million deal all cash.

Chris Powers: You're going to give me money into an operating company, which is going to allow me to live for a little bit. You said a percentage of rev share. I'm assuming that revenue is fees that might be generated by the deal. Can you tell me how much of the revenue I'm sharing? 

Rhett Bennett: Yeah, for sure. But one thing I want to clarify is, as Moses mentioned, a lot of our operators already have businesses.

Chris Powers: Oh, really? 

Rhett Bennett: Yeah. So, most of them at this point, it looks more like growth equity than a seed equity. And obviously given the name, we thought it'd be a lot of seeding, but that's one of the things that's changed. So, they may not need the money to live on. They're trying to- some of them do, but oftentimes it's really to accelerate the growth in the business. 

Chris Powers: Okay. So real quick, is it usually a one man or one woman band, or is it usually a team of three or four people already hustling? 

Rhett Bennett: It differs. Some people have much larger teams than that. Some of the times, it's a one man band. I would say the ideal situation for us is that it's a partnership. So oftentimes two people with a complimentary skill set. So, we've got a couple of examples of folks that were the CFO of a real estate property firm and they partnered with a director of acquisitions. And so, we really like that setup, but we're not- we've had success with one-man bands as well. 

Chris Powers: So, let's just say it's more of an established company. Are y'all putting some kind of value on that and saying we're now coming in to be a partner, or is it kind of like we want a percentage...? How do you think about something that's already kind of existing? 

Rhett Bennett: Yeah. So, we're trying to keep it simple, and I don't want to be in the business of telling people what their current operating businesses were at this point in time. So, the way that it works is everything they've done to date is theirs. All future revenue is theirs. We're starting effectively a new co that now all future real estate revenue, whether it's consulting, transaction, et cetera, goes through that entity. And then to your question, we take a 10% revenue share, and then they retain 90% of it. And it's structured that way because we want to capture this, the power of people running their own business and being entrepreneurs. And I don't want to be in the business of telling people, okay, like, no, I don't approve that higher. It is absolutely their business. They get to run with it. And we take a 10% revenue share.

Chris Powers: Because I'm a podcast host that's been in this business, like my mind's already ticking. So, here's a real nuanced question. If I have payroll and insurance and office leases all in the original entity before I met you, is that now moving to a new entity over time?

Rhett Bennett: It doesn't because it's all, we have a revenue share. 

Chris Powers: So, it's just rev share. It's off the top. Expenses are theirs. Got it. God, I love that. Okay. Then you said we're going to give you GP and LP capital. So, I'm assuming a $20 million deal, let's call it a $20 million check. The GP would have to put up a million to 2 million of that, 5 to 10%. You're saying we'll help you be that million or 2 million and we'll help you build the other 18 million?

Rhett Bennett: We are. I mean, we go through a process that we call pursuit notice. So let's say that an operator finds a deal. We've probably talked about this deal because we're doing monthly pipeline calls and asset management calls. So we're interacting with the operators quite a bit, but they've probably talked about a deal, and they say, all right, I'm going to submit an LOI, and they're free to do that. At that point, they get- once they want to start spending money on that transaction, then they submit a pursuit notice. And part of the pursuit notice is a model and a memo and then also a due diligence schedule and a phasing schedule. And so, we're approving that. And if we approve that, then we are on the hook for most of those pursuit dollars. And then the whole time, we're riding alongside of them, trying to verify that that deal meets our requirements and our buy box at the point in time. And then, yes, we're communicating, like we think we can raise the capital here, or we have the capital for it, or this doesn't meet our buy box, maybe you should go find an alternative provider. 

Chris Powers: What are the economics of GP capital versus LP capital? 

Rhett Bennett: So, the way that it works is, I'll use rough math. You basically- and by the way, whenever we talk about GP carried interest coming back to us, what we mean is it comes back to the fund that we raise. So ReSeed does not actually get the carried interest. Basically 30% of the carried interest will go to ReSeed. 

Chris Powers: The ReSeed fund. But is there a different economics on the actual capital too? Is it unpromoted on the GP side, or does it flow through the capital stack the same way LP does? 

Rhett Bennett: It flows through the same way.

Chris Powers: All right. So, I get my offer. I've signed my document. I'm on. You said you guys will sometimes call their ex-employers to see how they're doing. If I went and called cohort guys and said, what does ReSeed actually provide you once you've signed on the dotted line, what would they say? What do you hope they'd say? 

Rhett Bennett: No, they would say... first of all, I think it's incredibly important for people considering cohort three to do that. So, we really encourage it. I think what they would say is that they... it's a highly analytical bunch. They stick to their discipline, because we should talk about when we deployed capital because it's been pretty lumpy. They do what they can to support us, but they largely let us run the business.

Moses Kagan: Yeah. It's an interesting question. I would say, my guess is that they would say that we are all over them is the truth of it. And I think part of that is because they're entrepreneurial people, and we've done this. It's like, you're used to just making all the decisions. And suddenly, I mean, it's their business, but like, and I knew this intellectually, but now I really understand it viscerally, our reputations and particularly Rhett's reputation is on the line from a capital raising perspective here. And so, we're like raising money from these networks that are incredibly important to us. And we're giving it to people who we might not have met until somewhat recently. As fiduciaries, we have to be all over them. Furthermore, and maybe we'll get into this a bit later in the conversation, one of the challenges from the ReSeed perspective is once you have a group of operators each doing their own deals, you very quickly run into issues of data standardization and formatting and et cetera. And so, we just have to be in the weeds with them, particularly early on, to establish the procedures, the checks and balances, the format. I mean, we have a standard underwriting model, for example, that we require they use. But it's not just that, we also have a standard set of assumptions that we would like them to use in underwriting the deals. And if they want to come to us and make an argument for why one or more of those assumptions doesn't apply in the particular case that we're talking about, they need to come bring evidence, and we're happy to have a conversation about it. But like, you're not going to tell us that there's no bad debt. We’re just like, we own a bunch of apartment buildings and there's bad debt. And so, we're going to account for it. And so, I think for people who are used to totally acting like just on their own, I do think that that actually can feel a little bit challenging. Now the flip side is, when we say we're good for the money, we're good for the money. And particularly over the last couple of years, it has not been an easy fundraising environment for independent sponsors. And even for the people who can raise money, the idea of being able to raise like long duration capital where you're not being forced to rip and run or anything, I mean, that is really hard money to raise. So that. And I think part of what has been interesting, part of the change, I would say, in the sort of experience level of the people who are applying and being selected for the cohorts is people who have been in the business really value that in a way that maybe they wouldn't have three, four years ago.

Rhett Bennett: One thing I'd add is that it's not a one-way street. And what I mean by that is like, if you think about Tom in DC or Coleman in San Diego, these are guys that have been CFOs at large businesses. And so, yes, the information flow oftentimes goes one way, but like I'll pick up the phone all the time and say, hey, this is an issue that we have. How would you think about it? So, in a lot of ways, I mean, it is a peer-to-peer kind of relationship as well. I don't want to it sound like it's totally...

Moses Kagan: Yeah. No, I mean, I literally have learned... you were talking about the cohorts... we have an operator in Kansas City who is a spectacular property manager. And I've just like picked up operating tips that we have for sure applied in Los Angeles from him. So, yeah, it's definitely a two way street. 

Chris Powers: That's actually the cool thing. Y'all are getting like all these different learning experiences from all over the country. Okay. Intermittently, we can talk about how process has changed. Let's just take this one process. We don't... I know there's multiple things that have evolved in how you guys- the systems you've built and how you think about this stuff. But okay, what is the life cycle of a deal from, if I'm now out looking for a deal and I think I found something? And you kind of said, we're all over it. So how am I getting that deal through the system? What approval checks are happening? Is there investment committees, multiple committees? Like how do I know, what's my pathway to success? 

Rhett Bennett: So, I mentioned the pursuit notice earlier. That's where it starts. That's when it's like officially you're submitting the pursuit notice. And as part of that, there's a diligence plan that you've laid out, dollars and dates of how we get from here to a closed transaction. Now, obviously a lot of that, the timing goes back to the PSA, and each market has different timelines, et cetera. So, we sit around as a group. I mean, we have legal decision-making. We have the reality. The reality is that all of our partners are very involved. And so, I can't imagine that Moses and I would do a deal if Laura was really opposed to it. But so, we'll sit around, we'll review the pursuit notice. We have to formally approve the pursuit notice. And then you're just kind of going down the list. And we have some requirements like we're at all of the inspections. And so, when Moses said we're all over, it's not only like we're sitting at our desk, we're actually at, we have been to all of the properties. And so, from that point, it probably looks like a traditional investment process where we're riding shotgun in the diligence, we’re reviewing models. And then we have a couple of check-ins before we go, the deposit goes hard. Then we have another internal meeting just make sure that we're still tracking. And then kind of post it going hard, most of the time we've done 95% of the work before the deposit goes hard. And that's when- that's the most important meeting, but we do have a final sign off down to the point of Lee, the CFO will send out an email to Doug, Moses, and I and say, please, one last time confirm before we send the wire.

Moses Kagan: Yeah. I mean, I think one thing that we have implanted that I learned at Adaptive and I actually learned it from an operator who we did deals with, so this is knowledge that's been passed down several times now, is we have a really strict due diligence checklist, which we need to sign off and we need the operator sign off before we remove contingencies. And ReSeed started with the due diligence checklist that we had developed at Adaptive, which in many ways is sort of generally applicable to apartments, but obviously also has California and LA specific facets to it. Over time, as we have encountered other issues in these other markets that we're doing deals in with ReSeed, we've added to that list. So it's like a living document that over time has come to embody the experience of ReSeed. And so, everything from, might someone develop something that will block the views from these apartments that we've been depending on to get good rents, do gangsters hang around after hours, like really granular stuff, which that can be the difference between a good deal and a bad deal. And God knows I've made so many mistakes. And so, the idea is to sort of try to accelerate that learning process for the operators by pushing them to kind of learn.

Chris Powers: So, I'm going to keep just going back for a second. So, I've gotten my acceptance. I now know probably immediately there's six, five other cohort members with me. Am I meeting those folks? Am I going on a retreat with those folks? Like how am I interacting? How are they becoming part of my orbit? 

Rhett Bennett: Yeah. So, we start with launch week. And what launch week really is, is that we host it in Boulder. So, everybody will come on a Monday and they'll leave on a Friday. The first couple of days we’re spending, we're kind of going back over the ReSeed way and how we underwrite and just making sure that we're on the same page, but they're also doing some social events, so that relationship starts and that they feel comfortable picking up the phone when they have issues. And then in the back half of that week is where they start to tell their story, and we bring in a lot of our capital providers, so that they can do two things. They can start to tell their story. So the capital providers will, when they see a deal from them, they'll recognize them. But also, it gives them a chance, what I think is pretty unique, to ask questions in a space to people that are potential clients of theirs. They can ask them anything they want. And so, we spend a week together. Part of that's with some of the capital providers. Most of it's just with the ReSeed team.

Moses Kagan: And then over time, we do cohort calls where we will talk about issues in the business. Sometimes we will bring in speakers to address specific issues that they've seen or that we're seeing in the cohort. Obviously, there's sort of a check-in where everyone talks about how they're doing. But the idea is really, as Rhett put it, to kind of foster relationships among them. Because there's a lot of knowledge there. Certainly coming in, there's a lot of knowledge. And then over time, as they do deals with us, like they're all learning together. 

Chris Powers: Are they on like a Slack channel together? 

Rhett Bennett: Yeah, they are.

Chris Powers: We're going to get to like what happens once we've closed. But I wanted to just talk about the real estate market for a second. So, when we recorded, I think this probably would have been late ’22, the market was changing pretty drastically. And I think even as I checked in with y'all that year, I don't even know if you did a deal the first year, which was probably like, shit, we just launched this thing. We got to get going. Moses, like I said, you've been on the sidelines for a few years in LA. You're finally starting to dip your toe back in. So, let's just have like a market talk irrespective of, we can talk about how that impacts ReSeed. But like, what have y'all seen in multifamily at the assets that y'all are going after over the last three years?

Rhett Bennett: So, I think it was ’23 when we sat down. And I can remember a point in December. So we launched the business in March. The first cohort was in August. I remember in December, I was leading the weekly meeting, and I was like, are we ever going to buy a deal? It was like... literally, that came out of my mouth. And so, it's changed a ton. And so, we didn't do a single deal in ’23. It’s not to say, we looked at a lot of deals. We did one deal that's relatively small in the first quarter of ’24. And then the kind of third quarter of ’24 is when we started getting really active. So, a lot of our activity has been over the last 18 months. And that's, when you talk about the market opportunity, obviously our original hypothesis, like when we looked at the market, we said, okay, there's a lot in the Sunbelt that we love what's happening in terms of population growth, but the pricing really isn't reflective of the supply conditions. The operating fundamentals hadn't really turned over quite yet. And so, we expected a lot of distress. We haven't seen as much distress as we thought. But that hypothesis of the Sunbelt really getting weak, I mean, you look at what's obviously what's happened in Austin. Denver's a very difficult place to operate right now. But most of our capital we've deployed in the Midwest, a little bit in Washington, outside of Washington, DC, and then San Francisco and San Diego. And those markets have performed very different than some of the markets here. So, I'd say, now we're getting really excited about what's happening in the Sunbelt because you look, I mean, we were talking about it this morning at breakfast. We're starting to see deals where pricing is kind of 2015, 2016 levels. And so, I think the market opportunity is changing in terms of where the opportunity it to look at.

Moses Kagan: Yeah, I think... maybe we should zoom in on San Francisco. That's been a real bright spot. We bought two deals there. We'd love to buy more. 

Chris Powers: Let's do it. 

Moses Kagan: Obviously San Francisco was bombed out during COVID. I mean, you name it. Obviously, the jobs, people went remote, the law enforcement situation was a disaster. But a combination of some turnover in city government and then obviously the AI boom has really like transformed the city. And we were fortunate to get in. We have a very strong operator there, perfect example of the kind of guy we're talking about, like had an institutional background, but also has comes from a real estate family. So, he's like kind of- his dad's a contractor and a developer, like the guy will swing- His dad will swing a hammer. He doesn't swing a hammer. His dad will swing a hammer. But real like perfect combination from our perspective of like really analytical kind of institutional background, but also like absolutely an entrepreneur. And he just has sniffed out so far two great opportunities of buildings that are, they're old buildings. They are in different ways underutilized with opportunities to add units and fix up units and everything. So, then those are some heavy lift deals, but man, the yields that we're underwriting there for really high quality real estate, post renovation, we're talking like mid sixes or north of that. 

Chris Powers: In a market that traditionally does what? 

Rhett Bennett: I mean, these are like four and a half caps, five caps when things are bad. I mean, that's a place that people really want to own real estate. And these are deals that probably, certainly when they were done and even maybe... and some of the institutions are coming back into San Francisco because everyone sees the story now. But at the time that... we kind of bottom ticked it, I would say, and would love to buy more, but even just those, I mean, just, I could not be more excited about...  

Chris Powers: So, let's zoom in on just those real quick. So, you had said earlier, we're buying them all cash. Business plan’s complete. He's knocked it out of the park. We're at a mid sixes. Are we refining ever? Are we pulling cash out? 

Rhett Bennett: Yeah, we are. I mean, almost all the business plans, assuming that we stabilize with an appropriate spread, we can't control the debt market, we'll return a significant amount of capital once it's stabilized. I mean, a big part of our- we're not opposed to using debt in acquisition. It's just a lot of the time we're buying assets, we expect rents to go up a lot because of what we're doing. And the difference in the risk profile of a deal, if you lever that in the beginning and you don't have tenants... versus levering it at the point at which you stabilize, we think the risk profile is, it's totally different. And it doesn't change the IRR as much as most people would think. 

Chris Powers: Okay. Are there any markets that you won't touch? 

Moses Kagan: We've stayed away in ReSeed from LA, in part because LA has been challenged over the last five or so years. 

Chris Powers: I just figured it was because you already had it conquered.

Moses Kagan: Well, no, I did not have it conquered. I don't know if anyone has it conquered at this point. But partially it's just, I'm not sure I wanted to create competition for myself and my own... because part of what's going on here is I really am an open book with the operators in terms of... down to, we're looking at a deal with one group right now where it's changing the use of a building, and it's an area that I happen to know pretty well. And there's all kinds of implications around seismic retrofitting and changing stucco to be able to- because you're going to have to shear wall the building, but then that allows you to put windows... I mean, this is real in the weeds stuff that I've learned at high cost in several cases. And so, I want to be able to be like totally transparent with the operators about what we know about this kind of stuff. And I just... I wouldn't feel great about kind of growing someone in LA to compete with me.

Chris Powers: So not LA. Is there anywhere else in the country you wouldn't go? 

Rhett Bennett: A couple of markets that we...

Chris Powers: Alaska, probably ,not going to Alaska. 

Rhett Bennett: I mean, there's some tertiary markets that we definitely won't go. We said that we wouldn't do New York and we wouldn't do Chicago out of the gates. It looks like New York was probably the right call and Chicago was probably the wrong call, but there are a couple of markets that we just looked at and said, hey, from a regulatory and fiscal situation, we're not going to play there. 

Chris Powers: What happened in Chicago? 

Moses Kagan: Rents have gone crazy in Chicago. 

Chris Powers: Scott just bought a big deal in Chicago. That's interesting. Real quick back. So third quarter 2024 hits. What had happened in the market at that point that you think, okay, the door started opening up? Were people getting fatigued? Maturity is coming due and people are ready to finally move? Like what was happening? 

Rhett Bennett: Yeah, I think it's just...I  think it really was fatigue. And I mean, every situation is nuanced. We had one situation where there was a foreign lender that decided to exit the market, and that created a fourth seller. A lot of what we see is that families have owned assets for a very long period of time and they start really milking the asset very hard. And so, they ignore the CapEx. And then at some point, it almost becomes obsolete in terms of the product. And it was strong in terms of rent growth, so they're able to hide it. And then the minute rent growth changes, all of a sudden, they're not competitive and margins get squeezed. 

Moses Kagan: I’d also say, the sub-institutional world, for those who are listening who have not played in it, you would be amazed at the incompetence of owners, brokers. I mean, a lot of the stuff that we've bought, the processes have been busted. So, it wasn't even, maybe the assets maybe weren't being run optimally, but separate from that... deals advertised on like the residential section of the MLS. 

Rhett Bennett: True story...

Moses Kagan: So it's not- I mean, the person wasn't distressed. They just hired a broker who just didn't know who to call to sell that kind of asset. And that's part, one of the virtues of... it's sort of a heavy lift to do what we're doing, which is like set up and capitalize all these different independent operators all over the country. Like there's a real cost to that. But the benefit is we've got a bunch of scrappy people running around who really know their markets who are constantly looking under every rock. And we have another deal that we're looking at now where the opportunity exists because the people who own it don't understand the zoning. And so, they don't know what can be done with it... They've owned it for a long time, they're tired, and they just don't know what they have, and neither does their broker. And so anyway, in this world, there's plenty of- there could be plenty of interesting opportunities, even if there isn't that much distress. 

Chris Powers: You said something about buy box. Is the buy box a few square blocks? Is it a state? Is it a city? And let's say we've done really well, and I know this is just kicking off, so maybe there's not precedence for this. Can my buy box grow over time? 

Rhett Bennett: Yeah, I think there's two parts of the buy box. There's the quantitative, what yields do we think we need in order to transact in a certain market? And then what are the physical characteristics? And then I think when we're talking about geography and expansion, we're absolutely open to that. But it goes back to like we have to have confidence that you know the market as well as anyone. And so, we do have people that are looking in multiple markets, but they have experience in that and/or they've done the work to get up to speed.

Moses Kagan: I think that is actually one of the things I think we've learned is... I think we're more insistent that the operators really be in their core market. Obviously, people have done well investing all over the country. There's no question about that. But for these smaller deals, it's pretty important that you'd be able to get in your car and go over and meet the property manager to see if they're screwing up or the contractor or whatever. So, while we are certainly open to people who are doing multiple markets, we would like them to actually be in one of them and really be an expert in that market. 

Chris Powers: Is there a deal that's too big? Like, I know that the returns and the inefficiency are in the niches, but you pick a market like Austin where it's like in free fall, there's probably going to be a $50 million deal that you go, this pretty much checks all the boxes. Would that work? Or are you just saying we want to stay small? 

Rhett Bennett: We'll largely stay small. I mean, less likely that that happens at $50 million. But I would say that our average transaction size has been a little bit larger than we originally thought. And we expect there'll be plenty of people that do go upstream over time. But right now, we're trying to stay in that kind of sub $20 million. 

Chris Powers: So, what kind of... if we just got down to real summary of underwriting, what type of spreads are you looking for? Like what's passing right now? 

Rhett Bennett: So I think there's- we think about it in two ways. So, I'll give you a little bit of a nuanced answer in that I think there's an absolute yield that we're trying to hit, some number north of six and a half usually on a stabilized basis, not upon entry but when we stabilize. 

Moses Kagan: And actually, let me just jump in to say conservatively underwritten. And everyone says that, but we really, like we're not messing around.

Chris Powers: I have listened to your writing for so long, I'm like, he's never going to get a deal... I’m kidding. 

Moses Kagan: It's just, you see enough, like you see enough assumptions in these things and you're just like, this just does not...

Chris Powers: And the truth is they don't work. People in this industry will lie to themselves like you've never believed.

Moses Kagan: Yeah, exactly. And look, the incentives... particularly in our situation where since we are providing all or almost all the capital and the operators are getting fees and promote, like we've created an incentive structure where they should want to just do deal, deal, deal, deal. And we understand that. And so, it's on us to be the check to make sure that we're not doing stuff that's dumb. Now we'd like operators who also have an investor mindset, but we have to be mindful of that incentive that we've created. So, anyway, sorry to interrupt you, but it's very important to... because six and a half can mean, as we all know, six and a half can mean different things...

Rhett Bennett: And I think it's 150, 200 basis points above market cap rate is ideal. I would say, if you look at history, if rates go up, it's less of a spread analysis and more of an absolute yield. And if spread goes down, we lean more into the- because if we get back in an interest rate environment like we had in 2021, and you can finance in the twos, I'm still not buying things in the fours. So, it really depends on the interest rate environment. 

Chris Powers: And that yield just is different by market. 

Rhett Bennett: That's right.

Chris Powers: What would be like a South Detroit yield versus a San Francisco yield? 

Rhett Bennett: Well, I don't know that we're going to South Detroit. 

Moses Kagan: ...Suburban Detroit. 

Chris Powers: Oh, Suburban Detroit. Okay. I knew it was an S. 

Moses Kagan: ...This is interesting... and this is on me for being ignorant about America. I had such misconceptions about that market because you read all the horror stories about what used to be going on in Detroit, although Detroit Metro, Detroit city is actually doing pretty well now too. But we went out to go look at the suburbs of Detroit, and it's just like town after town of this like wild affluence. I mean, there's Porsche dealerships, there's yoga, there's great coffee shops and restaurants. And I had no idea. And meanwhile, there's just all these little apartment buildings in these really affluent suburban towns that are not being bought by institutions because they're too small or older or whatever. So anyway, the opportunity is there, but not... maybe not in South Detroit.

Chris Powers: You guys said when we were taking notes, you said this concept on what's gone right, you put in quotes default alive. What does that even mean? 

Rhett Bennett: That's really referring to the operating company. So, if you're making money, you’re default alive, you have a lot of optionality in the business. If our operating business is losing money, then you’re default dead, that's the way... So the operating businesses now will be profitable. 

Moses Kagan: Yeah. I mean... let me just make it absolutely clear. So in the beginning, people were taking these bets on ReSeed, and they're going to make this deal with us. We're going to have this permanent partnership, but they don't know that ReSeed is going to exist. We have now got to the point where we've deployed enough capital and the fee stream coming into ReSeed itself is more or less efficient to pay all of ReSeed itself’s costs. 

Chris Powers: And I know this is private. We're not going to name names. I will say as somebody who's a little more intimate, you guys have incredible LPs. But what- if I'm sitting here going, they are going to give me money, what's the profile of the LP as you continue to raise money? Is this syndicated individual checks that you're just herding together? Are these family offices, institutional? What kind of money am I taking if I'm taking money from you?

Rhett Bennett: So, I would say there's two avenues, and we really think about, we have to match the type of money and what they're looking for and the deals that we're looking for. And the common thread is long-term tax efficient. Most of our- a significant portion of our capital has come from large single family offices or multifamily offices. But in almost every deal, we do do a syndicate where we take checks of $100,000, $200,000. But most of the capital has come from single family offices and multifamily offices. 

Moses Kagan: And part of that, the sort of syndicate strategy, and as you know, because you've done it and I've done it, it's a lot of work to take small checks. And to be honest, we don't really necessarily need that money, but it is useful to allow people to try us out with a relatively small check size. 

Chris Powers: That you could grow into. 

Moses Kagan: Yeah, exactly. So, it's a bit of, I don't know, maybe it's almost like marketing effectively. 

Chris Powers: Asset classes. We've talked about multi. Have you ever thought about retail, industrial, anything else? 

Rhett Bennett: We have. I mean, there's probably a few segments that are so capital intensive that... hospitality, et cetera, that I love, but we probably wouldn't. 

Chris Powers: We'll just stay at them for now. We'll just sleep in them. 

Rhett Bennett: That's right. And so... multi, we own one industrial asset to date. The next cohort three will have a number of operators that are largely focused on industrial. So right now, it would be multi and industrial. I think the big vision for this business is that we can operate- We think that if we prove that we can generate good returns, and I think we're well on our way there, then we can expand to additional asset types over time. 

Moses Kagan: And multi-tenant industrial, as I learned from you, is in many ways, like fits very nicely with multifamily in the sense that the tenants are fungible, you're not taking binary vacancy risk, not super capital intensive. You don't have to keep putting money back into the deals for the most part. So that's a nice fit with what we're doing.

Chris Powers: All right. So, we've made it through pipeline. We've bought a deal. Now we're operating. What's your requirement on property management? These things aren't always, especially sub-institutional property management... if I was going to poke a hole in something, I would say, it's not like you have an onsite person, an onsite maintenance person. This tends to be where novices get hung up. Now you're not letting on novices in through the cohort so we can get rid of them. How do y'all think about property management? Because you can buy a great deal and it goes south if you can't manage it.

Rhett Bennett: Yeah. I mean, we could probably fill a couple of podcasts... on this question. So, I mean, look, I think that in the institutional world, oftentimes there's a bright line between property management and asset management. I think in our world, you can't really allow that to impact you. So, some of our operating partners have property management businesses. We spend a lot of time making sure we're comfortable with those before we buy a deal. We always have the chance, we could choose a different property manager. But oftentimes if a property manager has, sorry, an operating partner has a property management business, they will- we'll hire them as the property manager. In the event that they don't, we have a very active asset management kind of guidelines and templates. They're meeting with the property managers weekly, there are set agendas that we've weighed in on, they've got accounting standards that they have to meet. So, it's a pretty comprehensive process. And the thing that we talk a lot about with our cohorts is this notion of intensity. And it is incredibly important that people take a very proactive stance in asset management, even if it means they're bleeding into property management. I think we both know Gabe Bode, and he spoke at our first launch week. And so, I mean, one of the things that he says, he always requires logins for his- when he hires a third-party property manager, he's always going to have access to their system, whether it's [?]. And so, our folks are doing things like that to make sure that they're obsessed with lead conversions, response times, like getting really... 

Moses Kagan: But even with all that part, part of what Rhett's describing is a reaction to the experience that we have had, which has been variable, being candid. You're talking about some institutional property managers. There is a very wide variance in terms of quality of the accounting teams. One aspect that I think that we have always appreciated at Adaptive and I think that we have now come to appreciate at ReSeed is the incentive structures that are created, not just by the property management agreement, in other words, between the management company and the owner, but also the incentives faced by the employees within the property management themselves. In other words, it is not enough as the owner to say, well, we're going to have a nice, generous leasing commission that gets paid to the property management company when they fill a unit. Who actually makes that commission? Who in the... because if the property management company is taking a thousand dollars to lease the apartment, but the actual leasing person is only getting a hundred dollars, there is an incentive created there, but it's not necessarily the incentive that you would like to have created. And so, it's been a lot of... it's not just looking at the reporting that's coming out and like giving instructions, but it's really like getting under the hood inside the property management companies themselves, looking at who specifically is doing the work. Are we comfortable with them? In some cases, changing the vendors that they're using. I mean, we're really having to get in the weeds there, and I think probably to an extent that we maybe didn't appreciate when we started the company.

Chris Powers: You've said heavy asset management, and you've also said in this asset class, it kind of... in bigger assets, it's like asset management, property management, and we can talk about even the problems that exist there. I've got plenty to name. But here, let's picture they’re kind of, maybe it's like a Venn diagram. There's a middle. Can you just explain a little bit more maybe what's different in sub-institutional versus what you might see at the bigger level? 

Rhett Bennett: I mean, you mentioned that oftentimes in the smaller assets, you don't have people on site. So, one model that you've seen a lot of people try is that it's all virtual tours. Like part of your asset management duty is to say like, first of all, we're not going to do that. We're going to have people... somebody that's on site... Let's go to lead, maybe it's easy to talk about lead gen. So let's say that you hire a third-party manager, and they've posted the units on the various websites. How quickly should you expect the property managers to respond? Like that is a metric that you should know, you should lean into, you should monitor on a daily basis, and you should be pushing them on that. So, it's not like, hey, at the end of the month, we had 12 tours and we converted two people. It's like on Tuesday, we had two leads and we took 30 minutes to get back to them, we converted one, and here's the pricing. So, it's just a level of detail and granularity, and that's just leasing. We can go across maintenance and accounting, et cetera. We just expect them to be in the weeds. 

Moses Kagan: Yeah, I think... actually one of the interesting challenges that we've had with the operators, I think this is a challenge across, for all real estate operators, when you buy a deal with a pro forma, it is very easy and understandable for you to get hung up on getting the rents that you pro forma-ed. You promised your investors that you were going to get these rents, et cetera. But in real life, sometimes it doesn't happen. Sometimes you deliver the building, and it's Christmas, and you're just not- there's just not enough tenant activity to get the rents. And so, one of the challenges for us has been to really make it clear to the operators that when we signed off on moving forward and buying the deal, now we're partners. We signed off. We are in this with you. Like we all agreed to buy this thing. And if that means- and if subsequently the market is telling us because it's Christmas or whatever, that the rents that we can get are lower than what we pro forma-ed, that's life. We need to go and adjust our expectations and meet the market and lease the unit and we'll move on and we'll raise the rent next year. You know what I mean? And so that has been, I think- and it's one thing to tell the operators that, but to really get them to understand that we're not angry at them. We don't think they're jerks. Like we signed up too for the same projections. And that's been, I think... now... they do understand that we're on the same team in that regard. But the reason I bring this up is because it's extremely pain... rent, in any space, but in apartments, it's a perishable asset. Like you miss a day of rent, you can't go back and get that. And so, it's literally insane to sit there with an overpriced unit. So, someone needs to be paying attention – okay, is the advertising good? Is the marketing good? Is someone picking up the phone? And then if those two things are true, then you can monitor the lead traffic you're getting, how many inquiries are we getting? How many tours are we getting? And if you're not getting enough action, cut the price. I mean, there's no secret other thing that you could be doing. But there is this tendency to not want to do that. So, we have to kind of like hold their hand and be like, it's okay. Like, we're all big boys here. What we care about is the cashflow, not the optics of you hitting 1400... 

Chris Powers: Because you don't have to sell next week or next year.

Moses Kagan: Yeah, yeah, exactly. Like go fill the unit with a good tenant and let's move on. 

Chris Powers: Okay. So, we're operating. What's my cadence of reporting to y'all, and what are y'all expecting to see from me? Is it monthly, quarterly, weekly? Please don't tell me daily. 

Rhett Bennett: Definitely not daily unless we're in diligence. We're trying to get through. So we do have formal reporting on a monthly basis, but we have two meetings a month that we're in front of you. So, one's designed to be a pipeline meeting. One's designed to be asset management. But the reality is those two things... yeah, certainly play together. And then, you're expected to meet with your property manager at least weekly. We should get some notes from that meeting just to make sure we're tracking. And then... we have this financials guidelines or accounting guidelines, and you're taking the first review of whatever the property manager has given us. We have a- our CFO and controller is also spending time on that as well. But largely it's kind of a biweekly basis that we'll meet formally. And then I probably talk to two or three operators a day. They're calling to ask about strategy or capital or buy box, et cetera. So, a lot of informal connections as well. 

Moses Kagan: And I expect, I think, the cadence varies too. Like, particularly early on, if it's the first deal we've done with the operator, we are going to be all over them. And particularly if it's a value add deal where they're making decisions about construction agreements and things like that. Over time as the assets stabilize and they demonstrate that they know what they're doing and if they have a property management company that knows what it's doing, of course, we can sort of ease off a little bit. 

Chris Powers: We don't spend a ton of time on it, but it is a critical piece of the puzzle that can often get sideways quick – construction. So again, do a lot of these operators you're working with have construction in house? Are they hiring third party people? How do you keep people on budget? Like, this is something that the greats get really- do really well. And this is where something gets sideways really quick.

Rhett Bennett: So I don't think any of our operators have construction in house. And this is something Laura spent a lot of time on, obviously leveraged a lot of Moses’ experience... And that's kind of when we're not going to go a month. Like if you have a large construction project... well, maybe I should take a step back. If you're presenting a plan to us that's a heavy value add, before we say yes to that, we're thinking about your ability to execute it and your experience. So, Moses mentioned the guy in San Francisco, he's been around construction sites since he was a little kid. Like we felt very confident, and he's absolutely delivered. If you've largely been an Excel jockey your whole life, and then you're coming into the real estate business and maybe done some small rentals, we're not going to go to a full scale renovation. It's just not going to happen. But we put a lot of systems in place. We're tracking budget to actuals, byline item. And then before you get the next construction draw, it looks very similar to what a bank would do. So, we're asking for lean releases and we're looking at budget to actuals, we want pictures, et cetera. So, I mean, the processes on the construction side, they're all out there. It's a matter of like most people get in a hurry and they're not willing to follow them. I mean, I can give you a live example. Some of our operators were probably a little bit annoyed when we said, look, we have to have lean releases on every draw. And they're like, well, we're dealing with small time contractors. Like too bad. So, we actually brought a guy that has a big business down in Orlando, just a guy that I met through YPO, and he came on a couple of months ago and talked about his experience where he lost a lot of money because he didn't get lean releases. And so, that helped enforce the message...

Moses Kagan: Well, I mean, because it's our money. I mean, you can't... we just can't have disasters. Another thing I think that we've done well with is specifically around negotiating construction agreements. I think we bring a lot of rigor to that process. I mean, we're just- you've probably [?]. The contractor is going to... we're not going to put ourselves in a position where the contractor has got our money and they owe us work. Like, so we're just not going to do that. And so, we're like paying attention to how... and by the way, to do that requires like carefully reviewing the construction agreement and making sure that the progress payments match up to objective milestones in the construction. And also at the same time thinking about what the contractor's margin is overall on the project, such that he's not magically in profit at draw three or whatever. So, helping the operators, and some of the operators have plenty of experience and don't really need that much help, but some of them definitely do need those kinds of interventions.

Chris Powers: Okay. Something I think about is, all right, we have five or six in a cohort. Originally I was kind of thinking, well, okay, probably each operator is going to get 20 million allocated, but the reality is in a cohort of six, there's always going to be your shining star. I think, Moses, you called it the power law. Again, we only have a few years of operating, but eventually it's just like in Y Combinator, you get your Doordashes and your Airbnbs and you get some that- How do y'all think about capital allocation? Is it really just we're going to pick the best six, and if one or two kind of break out, they might start getting... like, is there a promise that everybody gets capital forever? Or do you kind of fit a power law dynamic? 

Moses Kagan: Well, let me just also say that, obviously, there are some operators we mesh with better than others, like that's just the nature of reality. But there's also... they are facing very different market opportunities. It is going to be the case that some markets are going to present more and larger attractive opportunities than others. And so, how the money actually gets put in and what proportions, it obviously to some extent reflects our comfort with the operators themselves, but it also is unavoidably just the markets. And it's not... we like these guys, we picked them. But sometimes there just aren't deals.

Rhett Bennett: We have some high level constraints in our fund documents of concentration limits by operator and concentration limits by geography. We're a long way from those constraints. And so, if we find great assets that we want to own, then we're happy to really lean in.

Moses Kagan: And I think one of the things that's exciting about the model from the, particularly from the perspective of the LPs who invested in the fund that we have that takes the stakes in the operators and provides the GP capital is you can imagine getting one or two breakout successes where you build these asset management platforms that turn into the next Ford or whatever, you know what I mean, that use a billion or more or whatever. And that's really exciting. And so, to the extent that we run it, we find ourselves with one of those opportunities, we are for sure going to lean into it. 

Chris Powers: So essentially y'all are becoming, if there is a sub-institutional professional real estate operator that is wanting to start, they should, it'd be very silly of them not to try and talk to ReSeed first. Like you are becoming the go-to for first time company owners, obviously not deal doers, come talk to us before you go launch your platform. 

Rhett Bennett: We hope so. That's the brand we're trying to create for sure.

Chris Powers: So, let's just kind of talk about what the future would look like. So even if we- maybe more people that listen to this are familiar with Y Combinator; they probably started out with one cohort a year. Now it seems like every two months I'm getting an email that there's demo day. Once you go to one demo day, they keep you on the list forever. Do you want to do more cohorts a year? Do you want to do multiple at one time? Do you want to separate them by geography? How are you thinking about just cohorts going forward over a, let's answer these in like five-year vision, ten-year vision type things. 

Rhett Bennett: So, this is where the model has changed a little bit in that I think the first time we were on, we said we'll do five to eight people and a couple of times a year. That was probably a little bit naive. And what I mean by that, it just takes a ton of work to integrate people. And also, the positive side of it is we don't need as many, if we have five cohorts or five people in a cohort and they're doing a couple of deals a year and they're using $10, 20, 30 million of equity, the numbers get pretty big pretty fast. And so, I think there's a realization that we just don't need to- it doesn't need to be as frequent, and the class sizes can be smaller. So, we've actually slowed it down. But I think the five-year vision is we're going to meet the opportunity. So, if at some point self-storage is something we get really excited about, we think that... I've done some self-storage investing, we think we can go there. So, it's kind of like, we want to execute on the business plan that we have now. We want to prove that it works. We want to kind of methodically expand. But, I mean, as you know both of us really well, we're pretty conservative guys. So our risk is probably actually holding it back a little bit more than the risk of like being too aggressive. 

Moses Kagan: And both of us, I would say, are like militantly opposed to setting capital deployment targets. And I think you saw it with our discipline in the first year or so of the business where we just really didn't buy very much, despite the fact we were burning money on the OpEx side at the ReSeed level. So, we're just not going to do stuff that we think is dumb. And we are aided in that by the fact that we're default alive again. So, we're at the point where we got enough money coming in, in terms of fees to ReSeed itself. And if we have to go through periods where we don't deploy that much, like that's okay. I mean, obviously our preference is we want to grow, but we're just- the North star is we're just not going to do dumb stuff.

Chris Powers: One thing that's just been a common thread is obviously learned a lot in three years. And as you think about going forward, one thing I really didn't ask is when I sign up, am I getting like... a doc or a folder of documents or like you're kind of here's the ReSeed playbook from day one. And then I kind of just want to ask internally from y'all’s side, like what are the systems and processes that you envision needing to build out over the next five years? Because in five years, if we do this again, you're going to have a hundred operators all over the country sending deals in. I mean, we can talk about all the choke points that will exist. How do you think about it from that perspective? 

Rhett Bennett: We really separate, when it comes to systems, we think about non-negotiables and suggestions. And the non-negotiable is the model, our OpEx study, sales comp model, like how we do that. You're going to do it in that format, because you can imagine if we let all the operators have their own model, the probability that we get that right is pretty low. 

Moses Kagan: And by the way, sorry, just to step in, that is a problem that we are solving from the capital's perspective too. As a family office, even if you have relationships with a bunch of operators you like, they're all sending you stuff in different formats. They're capitalized differently. The fee structures are different. Like how do you- even just normalizing that to begin to say, okay, like from a risk reward perspective, which of these should we do? Because that's a really serious analytical challenge. And my bet would be that even most family offices are just not equipped to really... So, part of the value add at ReSeed is that standardization that we're doing.

Rhett Bennett: So, you got accounting guidelines. We mentioned the model. Like those are things that are just non-negotiable. Things that are suggestions are, we've got folks on Buildium, we've got folks on AppFolio, different property management softwares. We can't mandate that, but there are certain preferences that we have. And all of that's delivered via basically like internal wikis, whether it's in the Slack channels or on SharePoint where there's... and once again, Laura does a great job of this, of like, here's the guidelines, here's the supporting evidence, here's how we need it presented. And then, those are resources or libraries for you to go tap into. 

Chris Powers: When's the next cohort? 

Rhett Bennett: We are going to hold launch week in April. I think it's the third week of April. So, we are dead in the middle of interviewing and going to market visits and working through the list of applicants. 

Chris Powers: Well, this goes out in four days or on Tuesday next week. So is there still time to apply, or is this going to be for next year? 

Rhett Bennett: It'll probably be for next year because we've technically closed applications. 

Chris Powers: We'll see about that. 

Moses Kagan: At breakfast this morning, we were like, well, if one came in...

Chris Powers: All right, guys, this is awesome. It's been really fun to see the last three years. Obviously, always rooting for you guys and appreciate you coming down to Fort Worth. And to anybody wondering, Moses will be in a cowboy hat tonight at the rodeo. We are getting him in a cowboy hat. Rhett's been to one already, but we're getting Moses in one.

Rhett Bennett: Chris, we can't thank you enough for hosting us. It was really helpful, as Moses mentioned, in our first interview. So really appreciate your time.

Chris Powers: Appreciate it, guys. Thanks.