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YCombinator for Real Estate: ReSeed and the Accelerator Model
Real estate veterans are bringing the next generation of GPs to market with a new kind of accelerator program
Thesis Driven dives deep into emerging themes and real estate operating models by featuring a handful of operators executing on each theme. This week’s letter explores the potential of real estate accelerator programs like ReSeed, which hopes to give real estate entrepreneurs a boost while helping large investors access sub-institutional deals.
Since YCombinator was launched in Cambridge, Massachusetts in 2005 by Paul Graham and Jessica Livingston, aspiring tech entrepreneurs have benefitted from the proliferation of programs aiming to make it easier to start new technology companies. Hundreds of incubators, accelerators, venture studios, pre-seed funds, and more all provide some combination of capital, mentorship, connectivity, and shared services to entrepreneurs looking to build the next Google or Uber.
Budding real estate GPs, on the other hand, have found a much sparser support network, with few models analogous to the accelerators and incubators of the tech ecosystem. Instead, the paths to becoming a real estate entrepreneur have historically led either through luck—for example, having a wealthy family—or decades of work at a larger real estate firm while attempting to save up enough capital to strike out on one’s own.
But a new group of innovators are attempting to change that by creating a new path for aspiring real estate entrepreneurs to get a head start on building their businesses. ReSeed Partners is the brainchild of real estate veteran Rhett Bennett alongside Adaptive RE founder and Twitter personality Moses Kagan, and it plans to bring the venture accelerator concept to the real estate industry.
“YCombinator for Real Estate” is not a new idea, but ReSeed is overcoming some of the model’s challenges by creating a compelling offering not just for aspiring operators, but institutional investors and LPs as well. I had the pleasure of chatting with ReSeed’s Rhett Bennett the other day, and in today’s letter we’ll cover:
The challenges of bringing the accelerator model to real estate;
ReSeed’s model and why it’s different from previous attempts;
What ReSeed is looking for in real estate operators;
How ReSeed structures their partnerships with operators;
“Decentralized Greystar,” what ReSeed is really building, and why it matters.
The Challenges of ‘YCombinator for Real Estate’ and ReSeed’s Innovation
Over the past five years, I’ve been approached by a half dozen entrepreneurs as they weighed developing a “YCombinator for real estate” business. In all cases, they left the idea on the cutting room floor and opted to go in a different direction. The challenges they saw in the model generally fell into a few categories:
Capitalizing deals: would the accelerator have more luck raising capital for deals than the GPs would have on their own?
Structuring the program’s “investment”: tech accelerators’ equity model doesn’t have a perfect analogy in real estate.
Guaranteeing loans: how would construction loan guarantees work?
While ReSeed’s eventual success remains to be seen, we’ll discuss how they’re addressing each of these challenges–and others–later in the letter. But I believe there’s a more fundamental difference between those earlier attempts than ReSeed’s vision. Each of those entrepreneurs I mentioned was simply looking to solve the problems of aspiring real estate GPs: of learning, of networking, of capitalizing, of growing. But ReSeed is looking to solve another problem, too: helping big real estate allocators access sub-institutional assets in a tax-advantaged way.
In a sense, ReSeed is another business tackling the small multifamily investment category we profiled in a two-part Thesis Driven letter earlier this month. But they’re approaching it in a unique manner: rather than attempting to buy sub-scale assets themselves by using technology to speed underwriting and diligence, they’re incubating a small army of GPs to go out and do it for them. It’s brilliant not for the problem it solves for GPs but for the problem it solves for large investors struggling to deploy capital at scale.
So What Is ReSeed?
ReSeed’s founders don’t shy away from the accelerator analogy. “It’s like YCombinator for real estate,” said Kagan on a recent episode of the Fort podcast. In their initial cohort kicking off this summer, ReSeed plans to identify “5 to 7 entrepreneurs” looking to build real estate businesses by acquiring multifamily assets across a variety of markets. While ReSeed plans to expand to other categories of real estate in the future—Bennett mentioned that their second cohort will likely be open to entrepreneurs buying industrial assets—their pilot cohort is scoped to multifamily given their co-founders’ significant experience in that sector.
Once accepted to the ReSeed program, entrepreneurs will attend a week-long in-person kickoff at ReSeed’s headquarters in Boulder, Colorado. But after that, it’s back to work in their respective markets. “That’s one place the YCombinator analogy falls apart,” says Bennett. “[Entrepreneurs] have to spend time in their markets, they can’t be all in one place.”
Beyond the week-long kickoff, entrepreneurs taking part in ReSeed receive a few benefits from the program:
Compensation and co-GP Investment
“There’s just a money problem people have getting into the business,” says Kagan. “We want [entrepreneurs] to bet their careers on this, but we don’t want them to starve.” So ReSeed is providing market-adjusted salaries to real estate entrepreneurs during their first year in business, which they hope will bridge them to a point where various GP fees—acquisition fees, construction administration fees, and asset management fees, for example—are sufficient to pay for the entrepreneur to live. ReSeed also provides GPs with co-investment capital which would otherwise come out of the entrepreneur's pocket.
Services and Mentorship
ReSeed’s team has substantial multifamily experience; Kagan manages over 1,000 apartment units in Los Angeles, and Bennett has had a decades-long career as an allocator. But ReSeed can also provide shared services to its GPs that would be difficult for them to obtain on their own: deal analysis and underwriting, capex and opex modeling, and diligence assistance are all part of the package. “In the early days, we’ll be riding shotgun with our GPs,” says Bennett. ReSeed will also be participating in weekly calls as well as market visits and site tours “driven by live deals.”
Some of these services are at least as important for ReSeed and its investors as they are for the GPs themselves. “We don’t want every operator sending back different reports” about asset performance, notes Kagan. “We want to make these digestible to an institutional investor.”
Access to LP Capital
Perhaps ReSeed’s biggest value to real estate entrepreneurs comes from its network of real estate LP investors, primarily high net worth individuals and family offices. For those LPs, ReSeed is providing access to sub-institutional assets across a variety of markets through pre-vetted GPs loosely managed by ReSeed. For entrepreneurs, ReSeed dramatically accelerates the pace at which they could raise outside capital for deals.
Since the announcement of the first ReSeed cohort in April, the program has received over 650 applications. Bennett says that the applicants have generally fallen into four main categories:
Analysts and associates at real estate private equity firms;
Commercial real estate brokers;
General contractors and architects;
Existing real estate operators who have done a few deals but are looking to scale.
Bennett and Kagan make a point to note that they are prioritizing applicants’ market knowledge and passion for building a business over specific credentials or the length of an applicant’s CV. “What are indications that this is someone who really wants to do this for the long term? How much have they thought about what they want to do?” says Kagan. “Specificity is good. It’s not ‘I like apartments,’ it’s ‘I like class B apartments in this market at this price.’”
(Kagan also hints that ReSeed has received a number of applications from people in the technology industry looking to change careers. We discussed real estate entrepreneurs choosing programs like ReSeed over venture investment in our letter on alternative financing models the other week.)
Structuring the Partnership
While YCombinator may be a good comparison point for the support ReSeed provides its entrepreneurs, tech accelerator programs offer a poor template for structuring the partnerships between ReSeed and its incubated GPs. Unlike tech companies, real estate GPs rarely have an “exit”; rather, they produce cash flow over time from a variety of activities while accumulating minority ownership stakes in real estate assets. And while a startup founder may leave and be replaced by an outside CEO, real estate GP businesses are more commonly tied to a specific individual or team’s work.
To solve this, Bennett and Kagan are taking a “royalty” equivalent to 10% of all revenue generated by their GPs in perpetuity. This royalty includes any asset management fees, development fees, acquisition fees, and promotes paid to the GP from their limited partners. Furthermore, ReSeed receives a right of first refusal on funding the LP investment of any deal their GPs source.
Beyond that, ReSeed’s GPs have wide latitude to pursue their businesses. While ReSeed may decline to fund a deal that they view as outside their mandate, they won’t prohibit a GP from doing it and raising capital from outside the ReSeed network. That said, ReSeed is asking entrepreneurs to focus on deals that match ReSeed’s model—and their investors’ appetites—for at least their first year. “We hope they cook us up what we want to eat,” says Kagan.
Stepping back, it’s difficult to evaluate the “fairness” of ReSeed’s offer to GPs as few analogous models exist to compare it against. But entrepreneurs vote with their feet, and the hundreds of applicants seeking to participate in ReSeed’s inaugural cohort clearly view it as sufficiently fair. In a way, ReSeed’s offer is more analogous to an income share agreement from a program like BloomTech than YCombinator’s seed investment. After all, very few people in tech judge an entrepreneur when he or she walks away and hands back whatever cash is left after an idea fails; that’s just part of venture investing. On the other hand, real estate development is much more tied to the individual doing the developing; there’s no clear path to “walk away” from the partnership with ReSeed outside of leaving the industry entirely.
Seeding Long-Term Thinking
Among all the criteria Kagan and Bennett are considering when evaluating applicants, the most important is perhaps the GP’s passion for making long-term investments. ReSeed’s long-term investment horizon isn’t just a slogan; it’s a critical part of the incubator’s value proposition to its investors and differentiation from other models. “IRR-driven models aren’t great for taxpaying investors,” notes Kagan. Specifically, real estate GPs working in a traditional GP/LP model—in which a GP is primarily compensated through a promote tied to IRR above a preferred hurdle—are incentivized to take short-term actions that maximize IRR to drive a higher promote.
But for investors, these quick flips can generate substantial tax liability. And many LP investors—particularly high net worth individuals and family offices—also prefer to take a longer, multi-generational view to their investments. This leads to misalignment between GPs and LPs; while many LPs would prefer to hold properties for longer, doing so would cause a GP’s compensation (the promote) to be wiped away by the investor’s compounding pref.
ReSeed addresses this through a creative structure called “promote crystallization.” At a specific milestone—perhaps immediately after lease-up and stabilization—the GP’s work is considered “done”, and a valuation is applied, with asset ownership determined by a waterfall as if the asset were sold at that point. That way, the GP can participate in the property’s ongoing cash flow as a co-owner in perpetuity without artificial pressure to sell.
The program’s commitment to paying GPs a salary is also designed to encourage long-term thinking. “We want to disincentivize short-term behavior like quick flips to earn a promote,” says Kagan.
Access to a wide variety of investable markets is an important part of ReSeed’s value proposition to its limited partners. At any given point, says Kagan, “some markets will have opportunities and others won’t.” Therefore, they’re looking to back real estate entrepreneurs with a keen ear to the ground in each of their individual markets, giving ReSeed in the aggregate a portfolio of GPs with deep knowledge across a diversity of markets.
So when ReSeed selects operators to join their cohorts, they are effectively picking their markets of interest. A GP is unlikely to be a fit if they’re playing in a market with poor growth and unlimited supply of new apartments regardless of that GP’s individual experience and track record. ReSeed is most interested in cities with constrained housing supply, diversified economies, and sufficient scale to build a large real estate business. Kagan’s own market of East and Central LA would be a good example of an area meeting those criteria; however, that particular city is off-limits as the program isn’t looking to back GPs that compete with their existing operators—including Kagan himself.
And as discussed earlier, ReSeed is specifically focused on “sub-institutional” scale assets—particularly those in the $5 to $20 million range. “It’s about deal size, but it’s also about how competitive, how fragmented, and how likely we are to come across assets that are grossly mismanaged,” says Bennett. “It’s rare to find $50 million deals that are mismanaged, but it’s not uncommon among $5 to $10 million deals. There’s a long tail of those assets.”
Notably, ReSeed is not initially planning to put multiple operators into a single market. “Maybe we’ll add a second operator [to a market] in the future,” said Bennett on the FORT podcast. With ReSeed aiming for “5 to 10 operators” per cohort and two cohorts per year, this would imply a ReSeed presence in 30 to 60 markets within three years and 50 to 100 markets within five years, each with a captive GP operating with standardized underwriting, standardized reporting, and a ROFR agreement requiring they show all their deals to ReSeed.
That kind of scale is unique and puts ReSeed in an excellent position to manage and deploy a significant amount of capital. Through that lens, ReSeed’s eventual competitors won’t necessarily be other co-GP funds or incubators but rather any firm looking to offer institutional investors a programmatic way to invest across markets and deploy significant capital into smaller deals at scale. Groma, Constellation Homes, and even Two Sigma are in their path; those companies are betting on technology to enable them to scale while ReSeed places its chips on a small army of highly-incentivized local GPs.
Putting ReSeed in Context
ReSeed, of course, is not the first real estate company to build a wide geographic footprint to serve institutional investors by building a network of local GPs. Greystar, one of the largest developers in the United States, follows a somewhat similar model; they provide a set of centralized services and capital relationships to a network of largely-autonomous local operators. Like ReSeed’s GPs, Each Greystar operator has de facto market exclusivity within the Greystar network as well as wide latitude to pursue specific deals and make operating decisions. (Greystar is not alone in this, Hines and many other large developers operate similarly.)
Of course, it’s not obvious that this is the case from the outside, as each Greystar GP exclusively operates under the Greystar brand, works in a shiny Greystar office, and has a greystar.com email address. ReSeed doesn’t appear to be headed in this direction; if they back an operator in Minneapolis, that operator’s firm isn’t now called “ReSeed Minneapolis”.
But this seems to be a matter of degree rather than a cut-and-dry distinction. If an operator from ReSeed Cohort 1 has been operating exclusively of behalf of ReSeed in Minneapolis for years, using ReSeed’s model, producing reports in ReSeed’s format, and raising capital from ReSeed’s investors–and ReSeed tacitly agrees to not place another operator in Minneapolis–are they not simply ReSeed’s Minneapolis division?
This isn’t a criticism of ReSeed at all; in fact, it speaks to the model’s eventual power. Developers like Greystar are effective because they are decentralized; they empower local, on-the-ground entrepreneurs to build their business by leveraging their local knowledge and expertise. ReSeed takes that decentralization a step further: they allow operators to retain their own development brands and entrepreneurial identities, something they could never have if they took a job at Greystar or Hines. ReSeed is retaining the parts of Greystar that are essential for deploying LP capital across a large network—standardized reporting, consistent process, clear deal parameters—while letting operators retain their identities as real estate entrepreneurs.
“YCombinator for Real Estate” is useful framing for ReSeed because it emphasizes that their GPs are entrepreneurs, an identity they’d lose if they took (higher-paying) roles at a big development firm. But “Decentralized Greystar” is a more accurate way of describing where ReSeed is headed and the impact they could very well have on the real estate industry.
The dance between centralization and standardization on one hand and decentralization and empowerment on the other is one that any operator who has scaled a business beyond a certain size knows well. Centralization creates a consistent product and experience and enables an organization to get specific things done. Decentralization fosters creativity and—critically for real estate—unlocks local knowledge and expertise. While some data-driven real estate investors are trying, no one has yet figured out how to use technology to fully replace the benefits of an operator’s on-the-ground market knowledge to make good real estate investments. ReSeed is betting on that market knowledge as the key to unlocking sub-institutional assets for large investors.
The real estate industry needs innovation, and ReSeed is borrowing concepts from other industries and models to create something new. Surely lessons will be learned over the coming cohorts and the model will be honed, whether by ReSeed or some later generation of real estate incubators. The current tech accelerator models didn’t pop up overnight; they’re the output of years of iteration. For example, the venture ecosystem has had to grapple with questions such as the signaling risk posed by early investors capable of writing larger checks when they choose not to do so; ReSeed’s permanent ROFR may present similar obstacles to their GPs.
Regardless, this kind of innovation is a good thing for emerging operators and institutional investors alike, unlocking entrepreneurs’ expertise and creativity while giving them the tools they need. And it just might turn into an entirely new kind of real estate company too.
– Brad Hargreaves