Ep. 58 Moses Kagan

Chris Rising (00:00:50): Welcome to The Real Market with Chris Rising. I'm very excited to have Moses Kagan with me today. His company Adaptive Realty is apartment owner here in Los Angeles. It's really cool, because Moses and I, this is really the first time we've seen each other. We've gotten to know each other a little bit through Twitter and Clubhouse, but I was really struck at the things that he was working on and the topics he was talking about, so I think the audience of The Real Market is really going to enjoy today's conversation. Moses, welcome to The Real Market.

Moses Kagan (00:01:16): Oh, thanks for having me, Chris. And great to meet you in person, or on Zoom, or whatever they say.

Chris Rising (00:01:21): It's in person in pandemic 2021. Who knew this was going to go 10 months? But nonetheless, I really have been intrigued and captivated. You use the 140 or 280, whatever characters [inaudible 00:01:37] out on Twitter, so effectively in communicating the challenges you've gone through in real estate and how you got there. So why don't we just start off and tell a little bit about Adaptive, what your focus is, and maybe give a little history of the company.

Moses Kagan (00:01:51): Sure. Absolutely. So Adaptive Realty is kind of a, let's call it a boutique, real estate private equity firm. To give you a sense of the size, we've got 150 million of assets under management, so time. We are 100% focused on buying, renovating and managing apartment buildings in Los Angeles. And actually, we can talk about it, it's actually probably only five or six neighborhoods in Los Angeles currently, although we'll look anywhere. Unusually, I think for real estate private equity, we are not flippers. So our business model is not buy, renovate and flip. Instead, what we do is we buy, and typically with very little leverage. We do these really nice gut renovations, we re-tenant the properties, and then crucially, we refinance them to return capital to our equity partners, and then we hold the properties indefinitely. I like to say permanently, I mean, obviously, there are scenarios where we would sell and everything, but all of our investors are signed up, either legally in that for funds, or with our JVs and programmatic JVs. Kind of like spiritually or morally or whatever, for permanent holds.

Chris Rising (00:03:06): So just to be clear, do you find yourself IRR-driven under that model? I would think not. I would think you're probably multiple driven, that kind of thing.

Moses Kagan (00:03:13): Yeah. So first of all, I have, as far as I know, never quoted an IRR to any investor on any deal ever. And honestly, I mean, obviously, you know this, but just for the audience, and the reason we don't do that is because an IRR calculation depends to a large extent on the exit price. And since we are not-

Chris Rising (00:03:33): And the time of the hold.

Moses Kagan (00:03:35): [inaudible 00:03:35], yes. Exactly. So we know our time to hold is forever and there is no exit price that we're willing to forecast, so we can't really quote an IRR. I'll get in a second, there actually is a backdoor way to get at thinking about the IRR for these kind of deals, but it's certainly not the way that a standard real estate private equity firm would calculate it. In terms of what multiple or what metrics we do use, we are first and foremost focused on the unlevered yield on cost. So basically, we have a very, very simple but painfully strict criteria for doing deals. And that is we want the unlevered yield on cost to exceed the interest rate on which we expect to be able to borrow over 30 years up at least 200 basis points, and ideally more like 250 basis points.

Moses Kagan (00:04:32): Another way of saying that is we want the unlevered yield on cost to exceed the debt constant. And the thought process there, we can unpack all this, it's a little bit jargony, but the thought process there is we want... When we put debt on the property after we finished to return capital to our partners. We want the levered yield to exceed the unlevered yield. We want to be getting positive leverage so that the more we borrow, the better it is for us and our capital partners.

Chris Rising (00:05:01): Well, my father ran two public companies, one of which was Catellus Development. And I just felt like I was talking to him right there, because as a public company, an IRR didn't mean anything. It's exactly what you said. At the end of the day, if they invest $1 of the firm's capital, they need to know what that return on that dollar is. And it's the way real estate should be done, it's not the way it is done. So many decisions. I'm going through on our business just some painful stuff, because we've got LPs who decided that the fun's over, let's just get out because we're year five and the IRR is going down. And not necessarily smart things to make a lot of money, but smart things if you're in the fund business, and IRR DRIP.

Moses Kagan (00:05:47): Yeah. Oh, absolutely. And I can't tell you how many times, particularly earlier in our development, I would talk to a family office or a plaza institutional, like a JV equity platform or something. And their first question would be, "What's the IRR?" And I'm like, "I'm not going to tell you, because we don't [crosstalk 00:06:06]."

Chris Rising (00:06:06): [crosstalk 00:06:06].

Moses Kagan (00:06:06): And they're like...

Chris Rising (00:06:08): Yeah. I mean, we get it. My father took Catellus in '94 to 2005, the market cap was 400 million. They sold at 5.8 billion. I can't tell you one IRR. And when we go in front of pension funds, that's an unacceptable answer. It's almost as though those 11 years never happened. And it's ridiculous because... But that's the world of pension fund real estate.

Moses Kagan (00:06:32): Definitely. Yeah, I mean, I think one thing to say is that I think that that is driven... Well, obviously there's just sort of conventional wisdom going on there, whether it's right or wrong. But another thing I would say is that I think that that's driven to a large extent by the tax consequences. So if you're a pension fund or another non-taxpayer, it's not necessarily irrational to be IRR-driven, because you don't pay taxes, so the sales don't hurt you that much. But for high net worths or family offices, who are going to pay taxes... I mean, I just think it's insane to be sitting there evaluating deals on a pre-tax basis. I mean, that's not what a smart family does if they're thinking about their own real estate. So why should they invest as LPs with real estate private equity firms and things like that?

Chris Rising (00:07:21): I mean, it's taken you, I'm sure, a lot of fight, biting and scratching to get get to there. I did hear you say you had a fund vehicle, so is it set up as like an evergreen fund?

Moses Kagan (00:07:31): Yeah. Now, we just finished raising the sixth one of those. They're tiny. Okay, first of all, the fund one was like three and a half million dollars, plus or minus. So it's like four fourplexes. The most recent one's 23, so in the grand scheme of things, they're tiny.

Chris Rising (00:07:52): Hard to live off those asset management fees.

Moses Kagan (00:07:54): Oh, yeah. Yeah, I know.

Chris Rising (00:07:56): [crosstalk 00:07:56]. Can't do that.

Moses Kagan (00:07:58): Oh, man. When we were getting started we built a small brokerage, we do all of our own property management, in part because it's important for the deals performance, but also because we wanted those recurring fees. So yeah, it was building a firm with a never sell model. And without starting with a lot of your own capital, it's like crawling across broken glass. I mean, it was three, maybe four or five years of just brutal entrepreneurial hustle to get to the point where the flywheel was spinning fast enough with enough deal fees, and enough carries paying off and all that stuff to make it to make it sustainable. It was really rough.

Chris Rising (00:08:45): Well I'm nine years in on this firm, and it's not gotten all that much easier. I don't know. I mean, every time you think you got it figured out, the world pivots on you.

Moses Kagan (00:08:54): Oh yeah.

Chris Rising (00:08:56): So let's talk a little bit about your background, because a lot of people I have on here have a private equity background where they worked at a big firm and took some investors who seeded that to them. I have a lot of prop tech people that are on this, but what I found unique was you're an extraordinary well-educated person, but it wasn't that you spent your whole career learning the ins and outs of real estate. So why don't you tell us a little about where you went to school and what got you into to this real estate [crosstalk 00:09:28]?

Moses Kagan (00:09:27): Yeah, I will. But I want to start out by saying that one of my favorite things in [inaudible 00:09:31] real estate is that no one cares that much about where I went to school, at least as far as I know.

Chris Rising (00:09:35): You're right. [inaudible 00:09:36] said about Los Angeles too. Southern California is pretty unique in that way.

Moses Kagan (00:09:41): Totally. Yeah, no, absolutely. Yeah, I am over-educated, I went to Andover... And I want to start off by saying my family is not fancy. My dad was a college professor and my mom worked in New York State government. They had a little bit of a real estate background, but this educational background I'm about to talk about was not... There wasn't any legacy action going on there. I had a middle school girlfriend who I followed to Andover, so I went to Andover for high school, I went to Princeton, undergraduate, studied politics, took enough history classes, I could have been a history major, but kind of decided to write my thesis in politics. And then I thought I was going to go be a corporate lawyer. And I wanted to have a year between graduating Princeton and applying to law school, so I figured, let me go to London School of Economics and get a master's degree, and basically screw around in London for a year awaiting to go to law school. And so yeah, tons of educational background.

Moses Kagan (00:10:47): What happened is that while I was in London, I was living with one of my best friends from Andover who was helping this billionaire... He wasn't a billionaire then, but he has subsequently become one. Go around buying small European media companies. And I saw how my friend and this billionaire treated the corporate lawyers that worked [inaudible 00:11:09]. It's Friday, and my 24 year old friend would be like, "I don't care that you're intending to spend the weekend with your kids at your beach house, I need that sale and purchase agreement by Monday morning." That kind of stuff. And meanwhile, this billionaire and my friend we're using this really small investment bank in London called LongAcre Partners for all of their deals, and so I sort of decided I didn't want to be a lawyer and then decided maybe that I would be interested to be involved in the deals from the banking side. And so Max got me an interview with LongAcre, and they ended up hiring me as the only person who they had ever hired without any experience. So I got thrown in the deep end.

Chris Rising (00:11:57): They saw something.

Moses Kagan (00:11:59): Or they just liked Max. I mean, I don't know. When I think back to how unprepared I was to go in... I mean, I got hired as an associate without ever having been to business school or been an analyst anywhere. [inaudible 00:12:12] the stupid things that I said in those meetings early on, I can't believe they didn't just fire me in the first couple of weeks, just because... I mean, I'm so green. The truth is that over the course of my time there, I certainly did not become a particularly good investment banker. We were doing M&A for small and medium sized entrepreneur-owned tech and media companies. And the modeling, the PowerPoint, that kind of stuff, like the proofreading and getting all the... I was not particularly good at that. The things that I was good at, though, which turned out to be really important for banking, is that I was good at spotting underbanked companies, in particular, underbanked internet companies, because this was immediately post the .com meltdown.

Chris Rising (00:13:11): Early 2000's?

Moses Kagan (00:13:13): Yeah, exactly. And so people are just written off the internet sector as a joke. Meanwhile, there are all these little companies that were actually doing well. And no one was calling on them, because I don't think they realized how valuable these companies actually were. And so I realized I was going to be crap at the stuff that I was crap at, so I knew I need to do something. So I just started reaching out to these companies and saying, "Hey, look, we'd love to come and meet you." And then I would bring a managing director along to the meeting. And so I weirdly ended up doing director or MD level sourcing stuff instead of doing the [inaudible 00:13:55] and marker we usually do as a junior person. So that was my finance experience, couple years of that.

Chris Rising (00:14:02): Uh-huh (affirmative). But I mean, you got to see a lot of different ways that deals could be done, how they could be structured. The idea that you got to see early on is that you saw technology as being something important. I know at that point, early 2000's, I was a broker at Cushman Realty, and we were representing firms like EarthLink. And they got through that tech bust, but they were just limping along in some respects. And I was caught up in it too. One of the things I learned about the tech industry that took me a little while to understand is they have an acronym for everything. So they may describe something with an acronym and you think it must be the most intricate thing in the world, and it was always something really simple. Once I cracked that code, I figured I could talk with people in the tech sector.

Moses Kagan (00:14:51): Yeah, I mean, listen, honestly, you can describe marketing for investment banking as basically like how, as a generalist, do you come in and talk to an industry specialist in a way that convinces the industry specialist that you are also an industry specialist, even though you're not? I knew a 10th of what these people knew about their own businesses, but somehow you need to go in there and convinced them that you know what you're talking about. And so you end up just learning a ton about each business very quickly, and that part was cool. The other thing about finance, I think, in the beginning of your career that's really great, is you see what zero defect output is supposed to look like. It's not always important in real estate, you got to pick your [inaudible 00:15:42]. Sometimes it's okay if there's typos and stuff, but in banking, it's not okay. And there's a lot of money on the line, and if you screw up an MDs presentation that he worked to get for six months, because you messed up the PowerPoint or whatever, that's a big deal. There's millions and millions and millions of dollars of commission on the line and people get really angry.

Moses Kagan (00:16:05): And so sometimes I think that that's a little too motley. A typo shouldn't matter that much whether you get... But it's great at the beginning of your career to get exposed to okay, this is not college. This isn't screwing around, bullshitting a paper. This is like there's a lot of money on the line, and you need to step up and do perfect work. And that kind of-

Chris Rising (00:16:29): I got to interrupt you real quick. I ask you, because you just brought that up. Have you seen Industry on HBO? Max?

Moses Kagan (00:16:34): Yeah.

Chris Rising (00:16:35): There's a whole scene about the kid who screws up the PowerPoint. [crosstalk 00:16:40]. Moses Kagan (00:16:39): Yeah. No, that's what it's like. It's like you're used to, particularly... I found school relatively easy, and so I would write papers at the last minute, and I didn't really care if there were a couple of mistakes in there, whatever. And then you get into banking, you're like, "You know, you're going to get killed for that kind of behavior." And rightly so, because people are supporting families on those commissions, and if you screw up their meeting, you deserve to catch hell for that. Chris Rising (00:17:04): Yeah. So how do you go from London in early 2000s, to now being a pretty active department owner here in Los Angeles?

Moses Kagan (00:17:14): So a couple things happened. One is I decided I wanted to do something more entrepreneurial. I looked around, we were working on what was actually a very big deal for our company. One night and... So I'm working, it's three in the morning and I'm working on this pitch, and I look around and I have gone to Princeton and LSE, and there was a woman, Ellie, who had gone to Harvard and there was an Oxford and we're all there at three in the morning killing ourselves. And I just thought that the people who were making a lot of money in this transaction were not us, it was the people who owned the company that we were selling. They'd done basically a buyout, like an LBO, effectively, on this little company and grown it and they stood to make... The CEO I think was going to make 50 million pounds or 100 million. It was a lot of money, life-changing [inaudible 00:17:59]. And I was 25 or 26, and I was like, "I can take risk. I don't have a family, I don't have kids. What am I doing not being on the ownership side?" At least I got to try it.

Moses Kagan (00:18:14): And so the next realization was that all of my capital network, the people I knew would invest in me and work with me, were all in the States because of me going through high school in [inaudible 00:18:25]. And so it became pretty clear that I needed to come back from London if I wanted to do something [inaudible 00:18:32]. Coincidentally, I came back, I went to the Milken Conference around that time, it was February. And I came to LA where my little brother was living, and he picked me up from LAX in this sweet Mercedes convertible. And I had been taking the tube and getting rained on, and it was beautiful in LA, and the palm trees. And I was like, "Okay, I have mismanaged my life up to this point, I should be in LA." So my brother and I hatched a plan to start a little tech company, did that. It actually existed for 10 years, but it became clear early on... I moved to LA, we started this tech company, but it became clear early on that that was not going to be a huge opportunity. It was like a niche thing.

Moses Kagan (00:19:22): And meanwhile, this is now 2006, 2007 and everyone's running around looking at real estate. For us, not in a professional way, just in a, I want to buy a house. Everyone's buying houses. And my brother and I were looking for a duplex, so he was going to live on one side and I would live on the other side. And we started looking at the numbers and it's clear that the numbers are ridiculous. Without being professionals, it was obviously stupid to buy at the prices that people were... It was just like the price bore no resemblance to the rent. So it was like, "You should just rent this." But my brother stumbled across a guy who had bought a derelict 16 unit building in historic Filipino town, actually around the corner from where I'm sitting right now. And the guy had bought it derelict, fixed it up and basically run out of money before finishing it. And so was willing to sell it at a price that was actually reasonable, even in light of the market conditions at the time.

Moses Kagan (00:20:26): And so with help from our parents for the down payment, my brother and I bought this vacant but basically renovated 16 unit building, instead of buying a duplex. And then we were in the real estate business. I should say that our family had always owned a few small buildings, four units here, two units there in Troy, New York, which is very different from Los Angeles. So it wasn't like completely unfamiliar. We knew that reasonably smart people could buy an apartment building and operate it and it didn't feel like that was going to the moon or something. It felt doable to us. So we did it.

Chris Rising (00:21:12): Well, let me ask you this. So we're about 2008, right? About this time the world is starting to implode, you've transitioned out of probably a relatively well paying job in London to bootstrapping it in the tech world, and now you're sitting there with your first deal. Had you named your company yet, or is it still the Kagan Brothers?

Moses Kagan (00:21:32): At that point it was The Kagan Brothers. But at that point there wasn't the thought that we were going to go make this a professional thing. We just owned a building. And then what happened was, two things happened at the same time. Two coincidences, or a coincidence, let's say. One is, the world fell apart. And the deal we did was not great in light of what happened subsequently, but it was good enough, and that it sort of was okay. We weren't in danger of losing it, and we had experience. We had bought a vacant building and tenanted it, and so we knew actually roughly what we were doing. I mean, at least a little bit. And then the world falls apart, and real estate goes on sale. And at the same time, a buddy of mine, another buddy of mine from high school, made an absolute fortune starting a hedge fund. I invested in it a little bit and he tripled everyone's money in a year, gave it all back and then just went and made a fortune on his own. And so he's minting money in this period, there's volatility, he's making ton of money. There was nowhere for him to put the money.

Moses Kagan (00:22:55): Imagine you're minting money in 2009. Do you put it in Lehman Brothers? [crosstalk 00:23:02]. Which bank is going to... Where do you even put large amounts of capital? And so we sort of approached him and said, "How about we go buy some buildings together?" And despite our relative lack of experience, he trusted us. I mean, we've been friends since we were 15. And it seemed like, okay, owning some hard assets, particularly with no leverage in Los Angeles was actually probably a reasonable way to preserve value. At least you had something. So anyway, so it was perfect timing, it was lots of opportunity to buy stuff cheaply. And then we had a capital source. And so my brother and I started a company called Better Dwellings, we bought 12 or 13 deals or something like that over the course of two years. Everything from single family homes to a bunch of 16 unit apartment buildings, and just basically got a crash course in buying and renovating, and ultimately selling apartment buildings in Los Angeles.

Chris Rising (00:24:13): I think what's interesting, though, and you didn't quite hit on this, is that period of time, apartment values did drop. I mean, it's not like what we're going through now. And there were no eviction moratoriums, and so you really did have an opportunity to buy something. So as tough a time as it was, it was a pretty good time to buy.

Moses Kagan (00:24:36): It was a great time. And I know we made lots of mistakes, we can talk about what I should have done differently, but one thing to know that was, in retrospect, which made it a particularly good opportunity, was that I think a lot of investors who had lived through the RTC in the early to mid '90s were expecting that level of disaster. So they kept their powder dry, they kept waiting for things to get really bad. And obviously, the Fed stepped in and made sure that didn't happen, so because we were naive we didn't know anything about the RTC, so we didn't have any particular expectations about what would or wouldn't happen. It was just like, these buildings look cheap compared to the rents that we know we can get for them. So [inaudible 00:25:24] renovate them, so let's buy them.

Moses Kagan (00:25:26): And that turned out to be really fortunate, because of course, as I said, the Fed did not allow the real collapse that would have... Buildings didn't fall in half, they came down by 30% or... And so we were out there scooping this stuff up with both hands, and there really wasn't anyone else who... I mean, obviously, there were some but even the professional investors with access to capital were not doing that at the time. So in retrospect it was a very good opportunity to buy.

Chris Rising (00:25:56): It was and we were on doing that in the office side as well. I still remember in 2011, to get someone to make any bet was really tough. People were just, no, the knife. I'm not catching the falling knife. I'd rather see it bounce back up. And then there's in Southern California, there's some legendary stories of people who bought and have done very well. So let's take a pause there, and just... So you buy some units that'd been almost done, so you weren't really starting from scratch on your first deal.

Moses Kagan (00:26:31): Yeah. Chris Rising (00:26:32): And the thing I always... More in the multifamily business too, and the thing that I find amazing about it, is the dollars can add up so quickly when you make mistakes. Don't make any mistakes, it's great, because refrigerators are relatively reasonable cost and all that, but boy, you get a countertop mismeasured and you've ordered a bunch of refrigerators that now don't fit, that's a big issue. So when you first got into it, how did you... Did you think about those issues? Did you have to make some mistakes first, and- Moses Kagan (00:27:05): Oh, my God. [crosstalk 00:27:06]...

Chris Rising (00:27:06): ... then put your procedures in place? What happened.

Moses Kagan (00:27:08): [crosstalk 00:27:08]. So in retrospect, one thing that we had going for us was that the deal with my friend, who put up the dough, allowed us... It was all one entity, so it wasn't a set of separately capitalized deals. And he was pretty hands off, he trusted us not to... We weren't going to steal his money. And in fact, he required that we not use leverage. So everything was all cash. And so what that meant was, when we made mistakes, it sucked, but we had the capital there. It was just okay, spend the money to fix it. And so we made unbelievable mistakes. I mean, if buying that first building was like, I don't know, maybe like going to high school, this was like college and graduate school wrapped together. And because we had such good access to capital, we could move much faster. Our career grew faster than a normal career would. Most people, they do a deal, and then they have to wait to see if the deal goes well, and then they do another deal a year later, and then they have to... We just bought the first building with him, turned over a few units and got the rents that we were forecasting. So it was clear that the business model was working, and he was willing to go buy the next deal before we had finished the first one.

Moses Kagan (00:28:38): And then so that worked, and we just boom, boom, boom, boom. And so it was like it compressed 5 or 10 years worth of deals, maybe, for someone just starting out, into two years, which caused all kinds of problems from an operational perspective. I mean, like I said, we made unbelievable numbers of mistakes, but the learning cycle was really fast. So it was like, make that mistake on the first building, don't make that mistake on the second one, then you make a bunch of other mistakes in the second one. By deal 12 or whatever, in two or three years, you more or less had everything dialed in. I mean, we still make mistakes today. I mean, no one's perfect. But there's a list of things that can go wrong, and the trick is to not make the same mistakes multiple times. So by now you're like [inaudible 00:29:34], there's this is really weird edge cases of things that could go wrong, but by and large, we know what we're doing, and that learning took place on an accelerated basis due to the crisis and due to my friend.

Chris Rising (00:29:46): So there's always a kind of a tipping point, I find, in most people's businesses where it goes from passion hobby to, hey, maybe this can be a real business, to, oh shit, everything's on the line. I can't make mistakes and I got to bring in more professional procedures, more professional processes. I mean, what I say over and over again to people ask me on businesses, you've got to have procedures in place. You just don't have to call it a checklist, I don't care what you call it, but there's a reason why every pilot goes through a checklist. And the sad truth of why that checklist exists is because somebody died because they didn't do this, somebody died because they didn't do that. And I say this to our team all the time, if you're not following a checklist, the planes going to crash.

Moses Kagan (00:30:27): Yeah, oh-

Chris Rising (00:30:28): When was that point in your business? Was it at the first project? Was it the third project?

Moses Kagan (00:30:33): No. Embarrassingly, no. It wasn't. It was... And this is maybe a blessing, curse, I happen to have the kind of mind where I actually can keep a lot of complicated things in my head at one time. And my brother and I hired a junior guy to work with us who is very similar, and he is now my full partner in Adapt. I no longer do business with my brother, I love my brother very much, but we stopped doing business together in 2012. I made this junior guy, John, my full partner when we founded Adaptive Realty in 2012. And John is also capable of keeping a whole bunch of complicated things in his mind at once. And so, paradoxically, our ability to do that, retarded the growth of systems in our business, because we were like, "We keep five different deals in our heads at the same time. We don't need to write this stuff down." And it was only when we started to have more employees and more deals, and balls started to get dropped. It was like, oh, ding dongs. Yeah, write this stuff down.

Moses Kagan (00:31:46): So we didn't really start to get systematic until we founded Adaptive. And probably really 2014, 2015, we started to get really buttoned up about checklists and things like that. And honestly, it's a work in progress, because as the company gets more complicated and there's more deals, there's more checklists, and more people and everything. It's a constant battle to stay on top of being [crosstalk 00:32:13]-

Chris Rising (00:32:13): Well, and I know you know this, but there's one thing about going and doing deals and another thing about running a company. Because running a company, you got to worry about employee issues, you have to worry about compliance issues, and that has nothing to do with, is that a good deal, and can we make it happen?

Moses Kagan (00:32:28): Oh, absolutely. I mean, look, obviously, I'm still totally involved in it on every single deal, but I definitely spend more of my time at this point on the running the business. And it's just inevitable. I mean, you can't avoid it. And I wouldn't say I'm particularly good at it. I mean, I think I've got better, but we're all still learning. I mean, that's just the nature of life and business.

Chris Rising (00:32:56): So you had this tech background, and you got into this. Have you employed tech for your company and for your projects in a unique way? I mean, why don't we just start with some basics. What kind of operating system do you guys use, just to run your business? What kind of project management, that kind of stuff?

Moses Kagan (00:33:11): Yeah, so I would not say that we are particularly technologically-focused or ahead. I guess, actually, within the last year or so I would say we've started to do some interesting things, but we're probably pretty normal for a real estate firm. I mean, we use Google Docs, or whatever they're calling it these days, for our internal spreadsheets and everything, and email. We don't use a project management system. We probably should. We actually have a whiteboard that has each [inaudible 00:33:51]. It's embarrassing that we don't have something more technologically-oriented than that, but one of my rules in business, for better or worse is, I really hate unnecessary complexity. I just have such a low confidence in people's, my own first and foremost, ability to maintain systems that I fight like hell against installing any new system until we're well past the point where we actually probably should have had it.

Moses Kagan (00:34:26): And what that's done is it's meant we adopted some systems later than we should, but it's also meant that we've kept out a bunch of stuff that we probably shouldn't have done. So for better or worse, that's kind of the way I think about the world. We use AppFolio on the management side, and accounting. AppFolio's systems for accounting for serious construction projects are not great, so we actually just use QuickBooks from we buy a building until when it's done and ready to be re-tenanted. We use QuickBooks and then we switch over to AppFolio once it's ready to get restocked and manage. And then we run our IR, industrial relations, on AppFolio's version of... There's better ones, I think Juniper Square for... There's some very good IR products out there. We use AppFolio's, which is maybe not the best, because it's integrated with the management stuff, so it makes the accounting really easy.

Chris Rising (00:35:27): I've been fortunate to have a few of those prop tech firms on the podcast, and they all have their pluses and minuses. I think one of the things that we struggle with is, I have this kind of ADD of this product could be better, so we got... My team has said, "We can't switch and switch." So we're pretty static now. We're pretty Yardi-based, and we have our different how we interact with IR. But what I find really difficult is that this interaction that we've had, because of the pandemic, how is that going to play in a world where it's still... And this is great, love doing here, but I also kind of wish we were sitting around a table with microphones. And so it's a long-winded way for me to say, "We're trying to take a little pause, because the natural inclination is, during this pandemic, is to jump to this and jump to that." I'm going to try not to do that, but I will tell you, you're a whiteboard guy, and I found a new one. Have you heard of Captiva?

Moses Kagan (00:36:26): No. That's a good one?

Chris Rising (00:36:27): Well, I don't know if it's good, but it's good if you use whiteboards because they put a little camera on the whiteboard and digitizes it so that whatever you're working on behind you, you can have on a screen. Moses Kagan (00:36:36): That's [crosstalk 00:36:37]... Chris Rising (00:36:36): So I found that. Was watching the demo this morning. Moses Kagan (00:36:39): That seems pretty good. No, that's actually [inaudible 00:36:41]. One thing we have started to do this year that actually was spurred by Twitter, which I think is really powerful and it's going to totally transform our business, and I think every other business in America, to be completely honest, is no-code automation tools. Chris Rising (00:37:01): Yes. Please go further, this is really important.

Moses Kagan (00:37:04): Yeah. I mean, so it's important. As I said before, I'm not particularly technologically forward. So other people have been doing this for years, so I'm not some profit of this. This is well-established by forward-thinking companies. We're a little bit lagging behind in this area, so take it for what it's worth. But what these tools allow you to do is basically to automate processes without having custom software written. So think of the way that a normal person can use Excel. I mean, Excel is actually a fairly complicated, powerful database tool, but it's got a simple enough front end that normal people like me and other people who work here can use it. Tools like Zapier, and I'm thinking... Airtable, and several other of these no-code automation [crosstalk 00:38:03]-

Chris Rising (00:38:03): If not this then that, yeah.

Moses Kagan (00:38:05): Yeah, exactly. Yeah, they allow you to automate business logic. So an example of one of the things that we've done recently is, I have a spreadsheet, a Google Doc spreadsheet of all of our vacancies. And I set all the rents personally in our portfolio. I know it's weird, but I'm just like... Because it's such a important driver of value, I can't allow that to be out of my grasp at this point. So I literally set all the rents. And of course, during the pandemic in particular, we're constantly changing stuff. The market moves around, and you think you're going to get one rent, and then it sits vacant so you got to reduce it. Or sometimes you get a bidding war breaking out, and you actually end up raising. Anyway, so I'm constantly changing the prices. And previously, what would happen, we had a head of leasing who would see my price change and then email the leasing agent to have them change the ads, okay?

Chris Rising (00:39:02): Yep.

Moses Kagan (00:39:02): Now-

Chris Rising (00:39:02): I know where you going. That's...

Moses Kagan (00:39:02): Yeah, you've got this local automation tools in there, so when I change the price of something, it just automatically gets emailed to the relevant leasing agent and they can update the ad. And the truth is that even a better one would be having it update the ads too, but we're not quite there yet. But just that extraordinarily simple thing, and I think it cost us a few 100 bucks to have a no code expert sit there and do it for us to make sure it was right. Has saved an unbelievable amount of time for our head of leasing, and also removed a ton of mistakes, because anytime someone's got to copy something from an email, you're going to get mistakes.

Chris Rising (00:39:48): We sent you that questionnaire that a year ago would have been a Google Doc or a Google Form, and now that's all automated within Asana. We're big users of Asana. And this is probably the biggest difference, I think, in business over the next 10 years, is there are a lot of jobs that you would have paid an intern or a young person to do those things that are going to get automated and those jobs aren't going to be there.

Moses Kagan (00:40:12): Well, yeah. [crosstalk 00:40:13]-

Chris Rising (00:40:13): [crosstalk 00:40:13] a little bit, just moving over to your operation, your properties. Are you buying properties that you're putting in high amount of amenities, or are you using technology, or using things like open door where nobody has to touch anything? And how do you operate with those kind of technologies?

Moses Kagan (00:40:33): Yeah. The answer is no. So just to give a sense for what we by. We buy some institutional size stuff. So we'll do deals as small as three million bucks, and I mean, as large as we can find, but the numbers tend to stop working around 10 million total capitalization. So these are really tiny deals. And our company, one of the things that's interesting about it is, we have built an organization that is capable of deploying reasonably serious amounts of capital into these sub-scale opportunities, because that's where the yield is. So we can do 10 deals at a time. And we buy these buildings and we gut them to the studs, and totally change them, and then re-tenant them. So each one of these things is enormously complicated, and then we do 10 of them at once. So it's a lot of brain damage. It's so much brain damage that a lot of people, particularly early on in developing our business, were like, "Why are you guys doing that? Go do something easier."

Chris Rising (00:41:34): Well, I mean, Los Angeles building and safety is so efficient and so effective. I'm sure they don't slow you down at all.

Moses Kagan (00:41:41): We could have a whole podcast [crosstalk 00:41:44]-

Chris Rising (00:41:46): I was just thinking, we could go an hour on just all those challenges.

Moses Kagan (00:41:48): And I'll end up crying and punching the wall. So these things are complicated. In terms of the technology... So one thing to say is they're small, and because they're small, they will not support large amenity spaces. It doesn't make sense to put a gym in a 10 unit building, you just don't get enough enough pop and rent to justify the use of space in the OpEx you're running. So we're not highly amenitized, our tenant base tends to be people who want a really cool, boutique, interesting Southern California little apartment community, and is not interested in living in 100 unit or 250 or whatever generic, class-A, multi-use building. I mean, look, there's a good business building those big buildings, and maybe someday I'll build them, but for right now we don't, and our tenants seem to appreciate what we do. And then with respect to the tech, this again comes back to maybe a personal bias of mine, which is that I'm always thinking about the cost of maintaining systems.

Moses Kagan (00:43:01): I have a, probably from my background in politics, I have a deep appreciation for the effects of entropy on human affairs. Things break and run down and aren't maintained. And so when you think of, for example, a electronic locking system, right? Sounds awesome. Would make my life a million times easier, because I hate having to have all these keys and our management guys have buckets and buckets and buckets of keys, and it's a total mess. I'd be great to be able to do that electronically. The problem is I haven't found a good solution to hardwire those locks in. And so you're into changing batteries, and it's like if you're in 100 unit building, okay, the resident manager deals with changing the batteries, but when you own and manage 100 buildings, five units here, eight units there, and people's batteries on those doors start going off, you've created this maintenance disaster for yourself. So we're looking at it, I know that we're behind the curve there, and I'd love to find a good hardwired solution, because we're doing the renovations anyway. We don't mind spending a little bit of money to hardwire [inaudible 00:44:16], but I just haven't found a great solution there yet.

Chris Rising (00:44:19): Wat about with your interaction with tenants? I've listened to a talk with Keith Wasserman a lot and Gelt, and they're really out there on making sure they're providing people with their ability to borrow the first month's rent or moving costs. Everything is done with no taking no checks and no cash. Everything is just... Have you guys done those kind of things?

Moses Kagan (00:44:42): Yeah, we're not... I would say we're probably not as far along as Keith is, I know him pretty well. I would say I'm not as far along as Keith is on some of that stuff. Almost all of our rent is collected electronically. Almost all of our interactions at this point with tenants happen through AppFolio, so it's texts and emails. It's very little in person, very little over the phone. Most of our work orders get done and processed electronically, so no one has to manually touch them. So I would say we are up to... we have a good installation and use of AppFolio, which is itself a reasonably tech-forward platform, but we're not millions of miles ahead of that. Honestly, our business is... It's so operationally complex that we try to simplify where possible. It's like the fewer other... I got enough variables to deal with, I don't need to add more variables, if that makes [inaudible 00:45:51].

Chris Rising (00:45:52): Well, I mean, I could just tell that in the last 40 minutes we've been talking that you are passionate about what you do. You can see it behind you with your whiteboard that real estate is kind of top of mind. But so tell us a little bit how do you shut off? What's your life outside of finding deals and measuring what the unlevered cash on cash is going to be?

Moses Kagan (00:46:13): I'm pretty boring. So I'm married for the second time actually. I have two older sons from my first marriage, who are... One's about to be 10, and the other one, seven. And then with my new wife, [Simran 00:46:29], I have a one year old. So I spend time with the kids, I'm a major reader, I read a lot of business biographies, but also plenty of fiction and all kind of others. Love political theory, history, that kind of stuff. So I'm a big, big reader. And honestly, and this is... Maybe I shouldn't admit this, but I'm on Twitter a lot.

Chris Rising (00:46:54): I can tell. I can't keep up between you and Wasserman, man. I can't keep up. You guys are doing Clubhouse two o'clock on a Sunday. And my wife's like, "What the hell are you doing?"

Moses Kagan (00:47:02): I manage to mostly stay off Clubhouse, but we'll see if that [inaudible 00:47:07]. For Twitter, I mean, the thing is... So I built this career, and my partner and I built this business, without a lot of mentorship. I mean, we got experienced investors, give a... And I don't mean to say we did it on our own. Obviously, we got a lot of help, but we didn't have a mentor in the business of being a GP, a general partner. I mean, I'm so jealous of you, because your father...

Chris Rising (00:47:39): I'm very lucky.

Moses Kagan (00:47:39): You know it, right?

Chris Rising (00:47:41): Very lucky.

Moses Kagan (00:47:41): And I'm sure you just knew, or he taught you ways of... Not just about real estate, but separately about being a GP. What do you owe investors? How to communicate with investors. What's an appropriate level of risk? Those are things that we've had to learn, and so I am extremely passionate about helping other people who are earlier in this journey of becoming a professional real estate GP. I have also through Twitter met a bunch of people like Keith and others who are further ahead of me on the journey of building a big real estate private equity shop, so I am also learning. And then, as a result of building a following on Twitter and various podcasts and things like that, we have also managed to attract a bunch of investors who like the way we think about the [inaudible 00:48:38]. And so it's this beautiful virtuous cycle where I help other people, I learn, and then investors who read that come and want to invest capital with us. And so it's rare in life you find something like where everyone is benefiting. And that, to a very large extent, motivates my engagement [inaudible 00:49:04].

Chris Rising (00:49:05): What I like about your use of Twitter is you're humble in it, and I think my biggest criticism of the real estate people in Twitter is, there's a lot of ego, and nobody ever had a bad deal, and nobody [inaudible 00:49:17] ever wrong. I'm like, "Come on, guys." I mean, I've been in this business a long time, and I make mistakes every day, and-

Moses Kagan (00:49:24): Yeah. Look, apart from the fact that bragging a lot is obnoxious, I don't think it actually serves anyone's interest. I mean, I think the trust is, to a very large extent, built by vulnerability, right? Chris Rising (00:49:42): Yep.

Moses Kagan (00:49:42): How do you actually get to know your spouse? It's like you're dating and you open up about what's bad about you, what have you done and lived through and all that stuff. And the same with friends. I'm not interested in being friends with people whose lives are totally perfect, and there's never anything wrong. That's bullshit. That's just not-

Chris Rising (00:50:00): Because you know it's not true, too. Yeah.

Moses Kagan (00:50:05): Yeah, exactly. So I have always felt in my personal relationships that being open and vulnerable is a good way to be. And the same is true on Twitter and in podcasts and everything else. I mean, I'm not a good enough liar to sit around, and to keep that barrier up. I mean, and maybe some people are, but I'm not. You have to be really disciplined to be able to construct some fake, phoney version of yourself. I'm just not good enough at that. So I just found that, hey, look, I'm going to talk about what we've done well, and be open to the extent that we can about things we've screwed up, and hopefully other people will learn from our mistakes. Hopefully, we will not repeat them, and hopefully people will get a sense for actually how we think and do business and want to partner with us.

Chris Rising (00:50:53): Yeah. Well, I'll pass on one piece of advice from my father that is the ethos of our firm, which is, bad news never gets better with age. Something happens, you got to tell people. And I think when you're running a company, there are younger people who make a mistake, and they want to try to fix it, they want to... And they just don't have the experience. And so if you can get people to understand that making mistake is not fatal, not telling us about the mistake is fatal.

Moses Kagan (00:51:18): It's so funny that you say that. So that is literally the last speech that I give anyone before we hire them. I say, "We're being trusted by investors with an unbelievable amount of money. If they stop trusting us, the business stops. We're out of business. That's it. The thing I'm devoting my life to is over." So that's the thing I care about most, is maintaining their trust. And we can fix any mistake, any... I make the biggest mistakes, any mistake you make is going to be smaller than the mistakes I make. We can fix any mistake you make, I guarantee it, but not if you don't tell us. Right? That's the only [crosstalk 00:51:56] fix.

Chris Rising (00:51:57): Yeah, [crosstalk 00:51:57]. And it doesn't change, whether you're running a multi-billion dollar public company or a small operation. These issues always happen, and it's amazing how youth is some of it, and then some people just don't have the character in them to say, "Hey, I made a mistake." There's a lot of finger pointing. [crosstalk 00:52:12].

Moses Kagan (00:52:12): Totally. I think that some of that, though, is on us as business owners and managers, to create a culture where it's okay. Obviously, if you scream at people when they come in your office and tell you they screwed up, no one's going to tell you anything. And we have a... Our biggest industrial by far is this family office that we met, I think we've been doing deals with them for, I don't know, seven years or something. And they're super impressive, amazing people. Wonderful human beings. And even to this day, when we bring them bad news, about refis, [inaudible 00:52:48] out or who knows, okay? Over and over and over again, they're like, "We do not shoot the messenger here."

Chris Rising (00:52:54): Yeah, that's a really important thing, and not every company lives with it. I worked at a brokerage firm, and I've worked at one public company where screaming at people was just what you did. Who's going to be honest with you if you're screaming at them? And when we first started the company, and I was really wound up 10 years ago, I would lose my temper. I'm far beyond that now, but you can't create the culture.

Moses Kagan (00:53:19): [crosstalk 00:53:19].

Chris Rising (00:53:19): That's what worries me about this world we're in right now. I mean, three months is one thing, six months... But if you're not together, it's hard to have that trust, and you can't bring in new people and develop trust over Zoom.

Moses Kagan (00:53:29): I completely agree. I mean, [inaudible 00:53:32] being really candid, I mean, we've had some real problem... Because we've been growing, right? During this. So we need to hire, and we've had really hard time onboarding people. We've had some people who we brought on and had to let go, and honestly, some of it was probably bad hiring on our part, we picked the wrong person, but there's a big part of me that's sitting there and going, if we were all sitting in the office together and more of a chance to kind of wrap around them and show them how we do business, we probably could have made those people into valuable contributors. When people talk about office being [inaudible 00:54:11], I mean, it's insanity. I mean, it's just [crosstalk 00:54:15]-

Chris Rising (00:54:16): It's going to be a cleansing on the office side. There's about 20% of the office product across the country that is pretty much obsolete for the world we live in, and it's going to take this. I describe it as, I'm probably a little bit older than you and remember this maybe a little more, but after World War Two there was this period in the '50s and '60s where all that pre-World War Two technology just atrophied and buildings that just fell apart. And then in the '60s and '70s and '80s, things got redone. We're going to have that happen with some of these buildings that were built in the '50s, '60s and '70s. And the buildings that are going to make are the ones that meet the needs of a 21st century office, not a 1985 office. Yeah.

Moses Kagan (00:54:56): Yeah. No, completely agree. But I mean I think that the overarching, I think, feeling, the lesson that I've learned from this is, in person collaboration matters a ton to productivity in our company. I can't speak for every other company, but this work from home stuff-

Chris Rising (00:55:12): I feel like we could do this as a three-parter, but we're going to have to wrap up soon. But I do have to ask you, you said something that really struck me. When I was a young broker, a gentlemen who'd been in the business forever, I was telling him, "Well, I want to do some deals in San Diego, I want to do some deals in San Francisco." And one time I had cards for there. And he's like, "Chris, I don't understand. If you want to be an office leasing broker, there's millions of square feet just here. Know these buildings." And it always struck me about that, that there is a lot of opportunity here within Southern California. You said earlier you focus on about four neighborhoods, maybe five neighborhoods, and that seems to be a very specific choice. Can you talk a little bit about that? Because I think that says a lot about your investment philosophy.

Moses Kagan (00:55:56): Yeah. So I mean, the first thing to say is that... I mean, obviously, I would do deals on the moon if I could make the numbers make sense. We're constantly looking all over LA, so one thing to say, okay, if you're making small, intricate deals, you need to be geographically reasonably constrained. I mean, we just could not manage one of these projects in San Diego or San Francisco or something, so it's going to have to be reasonably geographically constrained. And then, in addition to that, we're constantly running this unlevered yield calculation, right? And it's like the cost of renovating a building and the OpEx once you're fully leased up, don't change depending on the neighborhoods, right? Chris Rising (00:56:39): Yes.

Moses Kagan (00:56:39): So the variables that matter most are the acquisition price, and the rents you can get, okay? The acquisition price, obviously, you see deals, you know what the price is going to be. So what's really important is having really good rent estimates. And in our business, you can fool yourself. If you say rents are going to be $300 higher than what they're actually going to be, you make yourself do dumb deals. And if you think that they are $300 less than you can actually get, you pass on deals you should have done. And so we have a portfolio of 700 units that we manage that are in these seven neighborhoods, and so we have an extraordinary informational advantage, because as I said before, I set the rent for our existing portfolio, and I see how fast things are leasing. And we feed that information back, and information of the OpEx, back into the acquisition process.

Moses Kagan (00:57:37): And so when a new building comes up in a neighborhood where we already own or manage 10 other buildings, I'm not guessing what we're going to get for a two bedroom renovated the way we do it. I know that we leased three of them in the last month and this [inaudible 00:57:50], and we feed that information back. So it's not that we won't do deals in other neighborhoods, we do. I mean, that's how we ended up in five or six, we started out at one or two. I mean, what happens is, because I'm less confident about the rents in a new neighborhood, I will typically wait until I find a particularly good deal, one where the yield is really good, such that if I'm... The pro forma yields are really good. Such that if I'm off on the rents a little bit, it's still okay. We will do that deal, then as we get comfortable with operating in that neighborhood, then it's, oh, okay, now we're confident about what you can get for two bedrooms here. Now, there probably are some other deals in this neighborhood that we'll do. So it's kind of like a land and expand type thing. Now, like I said, we'll go to other neighborhoods, it's just that we require that the deals be extra good.

Chris Rising (00:58:46): So you do the management on everything you own. You do any third-party management?

Moses Kagan (00:58:51): Yeah, we do. So-

Chris Rising (00:58:53): It would seem like what you just told me, doing third-party would be a great driver before your acquisition.

Moses Kagan (00:58:59): Absolutely. Yep, no question. I mean, we just started managing in a new neighborhood for a third-party owner I'm already like, "Oh, actually, you can get these rents in this neighborhood." Yeah, that's absolutely the case. So we do third-party management. In the beginning, that was the vast majority of our management portfolio. Now, I think our owned buildings represent more than 50% of the total unit count. And we'll only manage on behalf of a specific owner buildings. We want really nice buildings with owners who want to maintain them and keep their tenants happy and charge high rents. We don't want to be like the slumlord business, we're not trying to... So when we have owners who have the same philosophy as we do about making nice buildings and keeping them nice and treating tenants pretty well, then we're happy to manage for them.

Chris Rising (00:59:56): Well, I mean, this has been great. I don't want to finish just yet, we've got a bit of time, but one of the things that brought us together on this was the idea of mentorship and things like that. So one of the things I saw you go through recently on Twitter was trying to give kind of a... I don't know, a one-on-one course on the GP business and the LP business. If a young person comes to you today and says, "Hey, I really don't have a whole lot of money, maybe can scrap together a few bucks. I'd love to be in the apartment business." What's your advice, besides [inaudible 01:00:28]?

Moses Kagan (01:00:31): I mean, God, listen plenty of people do compete with me, and God [inaudible 01:00:34], right now in particular, it's not an easy business. There's a number of ways in. I think that the easiest way in, because it requires really no permission at all from anyone else, is to go be a broker. But I think what's interesting is, the advice that you'll get if you're trying to grow a brokerage career, is to focus on representing sellers, okay? And it's very easy to understand why. The listing broker always gets a commission and the guys representing the buyers, maybe they get a commission, maybe they don't and someone else's buyer is chosen, right?

Moses Kagan (01:01:14): So a brokerage firm will be like, "Don't waste your time repping buyers, rep sellers." But if your goal is to be a GP, repping buyers is actually really, really good, because the same skill set that allows you to look through a ton of deals and spot the one that's got the most opportunity, convince a buyer that that's the one they should offer on, and then shepherd them through the acquisition process, helping them with the diligence, and helping them arrange the financing and all that stuff, is actually incredibly good preparation for being a GP. And when we were getting started at Adaptive and didn't have access to a lot of capital, and as you said before, the asset management fees were tiny, we need to live and eke, we actually set up a brokerage, and we had... Initially it was me. I was getting people from my blog asking you to help them buy apartment buildings.

Moses Kagan (01:02:22): And then we got so many inquiries that way that I ended up hiring and training three or four other agents to help those people. And we were almost exclusively on the buy side, and for a few years there we were banging out like 50 deals a year, just helping people buy fourplexes and duplexes and whatever. And it was amazing training, and actually, a couple of those people have gone on to do their own deals and compete with me, which is kind of annoying. [inaudible 01:02:52]. But yeah, so go into brokerage, which again, doesn't really require permission, because a brokerage firm generally will... If you can walk and chew gum, and you're reasonably personable, whatever, you'd probably get hired on as a broker. And a brokerage doesn't use salaries. And you go rep a bunch of buyers and see a lot of deals, and that's probably the way to learn.

Chris Rising (01:03:18): Well, this has been such a great conversation. I think probably got to wrap it up. I'd love to bring you back in a little bit, I think we missed some subjects that probably going to be... We'll figure it out here in the next few months about the eviction moratorium and what that's going to do. So Moses, I really appreciate this. We didn't get as much into... You had asked me for some stories, so I'm going to hold you on that, we may have to have a beer when the [crosstalk 01:03:42] open back up.

Moses Kagan (01:03:44): Yeah, that would be awesome. Yeah. No, I mean, you guys have done... I've followed your career via the media at least, and you guys have done some amazing things. And so I'd be really excited to hear [crosstalk 01:03:54]-

Chris Rising (01:03:54): I appreciate it. I think what we've discussed, we're in this middle of this rebirth for us, because we've been creative office-focused, and now we're doing industrial and multifamily. And one thing I say to people is, don't believe anyone's hype. Everybody's a person, and if they're not humble, they're killing you, because this business humbles you. It really does. I still love it. I mean, I love it because we're in the middle with an architect one day and a lawyer another day and [inaudible 01:04:19], but it's a humbling business, though.

Moses Kagan (01:04:21): It is.

Chris Rising (01:04:22): I appreciate it, and look forward to meeting you in person.

Moses Kagan (01:04:26): Likewise, Chris. Thanks so much for having me on.

Chris Rising (01:04:28): And please don't forget to follow us. We'd really appreciate if you subscribe to the podcast. You can do that on Apple iTunes, or any of the other podcasting services. It's The Real Market with Chris Rising. And follow us on Twitter, @chrisrising or @risingrp, and please follow our blog, chrisrising.com or risingrp.com. Thanks so much.