Ari Rastegar: Institutional Real Estate for Serious Capital

...that I had to do a separate introduction. So, Ari Rastegar based in Texas is one of the most renowned real estate developers there. He has led several large and significant developments including planning to build the world's largest living wall and launching a development at 1899 McKinley in Dallas. You know, a pretty significant multif family property. Ari has a vertically integrated real estate company. from real estate development to everything in between, frankly, and we're going to get into it. So, Ari, it's amazing to have you on the show.

Nice to meet you, too, bro.

Fantastic. So, so Ari, so you have your hand in in in several ponds here and um and as you said, you know, you run uh multiple uh similar and billion-dollar uh companies here. So, can you just walk the audience through uh you know, what you have going on?

Sure. I mean, well, We on its face, you know, we run a real estate private equity business that I started with a $3,500 loan. Let's start with that. Um I'm an attorney by trade. I was a corporate litigator. Um I ran a series of um entertainment companies and I started off flipping burgers at Johnny Rockets and delivering pizzas, putting myself through um two community colleges before college, before law school. So this has been quite the journey. Okay. You know, my dad raised me um as a single father. He was in Iranian immigrant and through a path of a lot of different failures, a lot of different screw-ups, a lot of different uh turns and detours, I wrote a book about it actually. And the book is actually called The Gift of Failure. And the first line of the book is, I hope you fail. I hope you fail a lot. And that was basically been my life journey with health, with life, with something I screwed up massively. And I went back and tried to figure out, you know, what went wrong and um and tried to move it in the direction. I was born and raised um here in Austin, Texas. And Austin, as people have seen over the past few years, has been just an explosion of growth. I mean, Tesla's global headquarters is here now. Um you know, Oracle, you know, move their headquarters. Dell, um the TeraFab, which would be the largest semiconductor manufacturing plant on planet Earth, you know, Elon is planning putting here putting here in Austin. Um so there's a lot going on here, right? And so basically Over the past 11 years, we started out as a fund to fund, you know, and being an attorney, I structured the LLC's. Um, I pooled certain pieces of capital together and then we started to invest with other with other operators. And as those deals started to make money, we set up institutional risk controls with um, you know, with going through um, a thirdparty fund administrator, getting audited financials, auditing um, our track record. So, that lawyer in me really set up the the vehicle and the ability to raise institutional capital even before we didn't have the ability to. So having those risk controls at the outset was a massive competitive advantage because other groups that might want institutional capital um or something like that if they don't have they're not good custodians of capital they might not get it. So someone might be hitting 5x returns and that's awesome but the manner in which they handle money um the biggest institutions of the world need to understand that in a way so they can check boxes. So, if there was one thing that I felt like we did way ahead of the curve, it was that simple, the structure of how we run money. And then through that, um, we started, we got a bunch of capital, we started to buy land, and our advantage started to come around entitlements and zoning. So, we've invested in 38 cities, 13 states, seven different asset classes. And it's because we looked at the land through a different vantage point of saying, "Oh, this piece of land was here and it's zoned for commercial. Well, as the area and these markets that are turning, they might need residential, they might need uh office, they might need some other things." So, we went through these comprehensive zoning processes to see where the market was going. And so, we ended up building, you know, uh industrial facilities, huge master plan communities, houses, offices, not because that was initially what we looked to do, but that was the highest and best use of what that particular spot was actually needing of like what was the actual need of the markets.

So, what I got and what I what I'm really um want to double click on here is essentially you're able to get the institutions to underwrite you pretty pretty smoothly here because that's the inst that's sort of like your your core competence as a lawyer and and dealing with this you know early on an institution is able to underwrite you really smoothly because something that we've seen is it's important to have the structure in,

it's all the structure this all real estate is a contract business. Okay, it's about contracts and structure is how and for example structure people come to real estate and we have hundreds and hundreds of high net worth investors as well that we allow to co-invest next to the institutions which is really strategic because a lot of guys have been able to raise a bunch of money. You see people doing syndications and things like that and that's great bring people into deals but the due diligence that a major institution a firefighter pension a police pension a teachers union that they're able to do. Not that it guarantees you're going to make money. There's no guarantees you get hit by a bus. It does guarantee very smart people, you know, can look at the deal and sharpen their pencils and poke holes in things. And so what I found with my high net worth group, institutional projects, like institutional debt, the minimum is 50 million. If you go to Starwood Capital, you know, to get some sort of alternate financing, 50 billion is the minimum. So you see these smaller projects that end up having, you know, higher debt. Um your paying, you know, you're paying lower compressed cap rates, you're dealing more with brokers, and there's places to do all that. There's levels to how this works. But if you can bring in guys that are accredited or qualified that might only have 250 grand or are rolling over their IRA in a self-directed IRA for 200 grand, I'm just saying if you pull those guys together to be three or four million bucks and you put them next to a $40 million institutional investor and then you borrow at 60% LTV, you just did a $100 million deal with the with the most accretive financing you can find. Super smart equity that's double-checking your work, institutional grade property managers. And so your risk profile ends up being in in a in a place where you have more risk adjusted return because the more institutional you become, the bigger the deals become. You stop thinking as much about how much money you're going to make and more about how you could lose money. And the more that you think about the downside, risk protection and finding that safe buffer of good risk adjusted returns um is when the the real money really starts to flow. And like I said, I started with pooling 50 grand from certain people into getting pieces of deals with other great operators into one development we're working on right now on 318 acres is a thousand single family houses, a million square feet of commercial, and 1,400 apartments. and a new elementary school. I mean, so you you know, there there's ways that this iterates, but um when you learn how to understand the tax advantages, how depreciation works, um how to offer your customers way that they can use tax advantage systems, um you know, you start to attract um you know, different pools of capital and there's a place for all sorts of capital. You know, if you have great deals, great projects, great structure, um great reporting, that's where it all starts. And and when you put that stuff together and you create the right container, inevitably good money is going to find you because look, money in this world. And I know we weren't raised this way. I came from a, you know, family that, you know, we were garage salailing on the weekends and I was, you know, working at McDonald's at some point. Like I I'm very blessed to be in America. I'm very blessed, you know, to have those opportunities. Um, but going from there to, you know, doing, you know, three bill working on three billion dollar deals and one project, you know, I've seen this trajectory, I've seen both sides of it. And ultimately, money is chasing deals. And at the beginning, you chase money. At the beginning, you're like, man, if I could get some investors to come and do a deal. But then over time, you see that there's a hundred billion dollars chasing $1 billion worth of deals. Money is unlimited. Deals are not. And so when you start focusing on those types of projects, u money tends to show up when you start pay making people great returns. Oh,

absolutely. And um and when it comes to to you know sourcing good capital, I completely I've experienced it when you know things are presented in an institutional way how it attracts the right eyes. Now when you build relationships with institutions, let's say set for example sets of million dollar family offices and beyond um like is it through like events because I find that the online thing you know reaches certain bottlenecks when it comes,

look let's put it this way. You got to know your audience, okay? And so the average age of the board of directors on a pension fund is about 65 years old. They're usually retired individuals from the things. So if you think so, you look at one of our firefighter pensions that we work with, and we work with numerous ones over the years, but you take one of the firefighter associations. The board is typically comprised of 30-year firefighters that have retired that now sit on a board to represent the constituents of the firefighters for that city. You have to think of who you're talking with. So if you're talking to, you know, a a 65year-old, uh let's just take some archetype. You say in Texas, in East Texas, a 65year-old white male in a certain thing, you think of how were they raised, where do they go to school, what do they like to do, what restaurants do they go to, and you be a human being. So do are you going to send them a DM on Instagram? No. Like that's not that's not their modality. And not nothing wrong with that. There's plenty of people you can DM on Instagram and maybe get a lead. And I'm sure there's something for that. But for these indiv, you got to be there with your audience and be a human being because building buildings is great, but until you build a relationship, you have not earned the privilege to build a building. And so when you learn to meet your customers in the way that they need to be presented with the etiquette, with the clothing, with the attire, with the presentation, with the forms that they need to be filled out, if it's an RFP, and it's so customizable, just like when you have a book of high net worth investors, the way you talk to one of your doctors who's in so and so or where they're from or where they live, what's their background. You have to really have um a incredible amount of emotional intelligence in a world that is so overrun by technology and have a level of empathy and a level of human interaction and yeah, can you go to events in some regard? Sure. But these types of institutional relationships are not transactional. Just getting in the room like I'll give you one example. You know, one of the financial advisers that I've worked with for years now, I it took five years of us meeting and me speaking at certain conferences that they were at, getting to meet him, his family, some of the customers, some of his friends before he put $1 with us. And mind you, when when they did, it's millions and millions of dollars and they're basically going to be permanent customers, you know, for the way we've, you know, worked together. But that's how institutions operate, their speed, their timeline. Because a person that it wants to put in 250 grand, you can maybe get back kind of money quicker and that's great. We have tons of those investors. We work with them all the time. Um but the timeline of a pension fund is a hundred years literally like they're looking for keeping pensions and retirements for tens of thousands if not hundreds of thousands of people for decades and decades and decades. So it takes you know two years, five years to get comfortable with them, get to know them to get what would ultimately become permanent capital if you do it right. So you need a shorter pool of capital that might be quicker that you can lock up deals with. You can, you know, get some at least your earnest money out. You might need a co-invest piece. You might have some liquidity requirements in your fund. And then you might want to work with a broker dealer in some regard, but you're going to have a cost of capital maybe paying a five, seven% commission, so you're not getting the full million bucks. You're only getting 93 that you have to overcome a hurdle. And then you might have a family office that can put in $10 million checks. And then over time, you know, if you're lucky enough, as we've been, you get an institution that can give you a billion in one meeting, but to get to that one meeting, it takes 10 years. So, there's a place where pools of capital operate and there's a place for them in the capital stack um when you start doing very very very large deals over decades and decades.

I can definitely see that and and one thing that I've seen I'll be super curious to get your view is, you know, a lot of co GPS um or rather a lot of institutions, they they try to come in as at least on our side like they try to pushed to coming in as a cogp rather than an LP and you know maybe some people they're not they don't buy into somebody's you know fund and they want to control everything and they they just want to control a lot when it comes to the institutions as opposed to you know the doctors the lawyers the you know some of the I guess the the more um high net worth individuals.

well let's talk about this there's a there's a clear point here someone wanting control for control is different than somebody in somebody that's coming in that's taking some sort of control because they have a level of expertise and a level of capital. Okay, we've had cogps we've worked with, we have massive institutions that come in as LPs, but there's times when in time and again this is not a one size all fits box. If I have a cogp um that are a bunch of non-real estate professionals, let's put it that way. Non-real estate professionals, they have money, whatever demographic they come from, they're high net worth, they're a family office, but they've typically done oil and gas. They have money, but they're not real estate professionals. Them as a co-GP with risk controls can hurt a deal.

Yeah.

But if you have a cogp that is a professional real estate investor that might know more than you, we have a we're working with a COGP on a we're building the tallest building ever built in uptown Dallas, Texas. Okay. Across from the stock exchange, 400 foot super tall. Think about that for a second. Across from Bank of America's headquarters, Goldman Sachs's second largest office in the world. It'll be the preeminent five-star hotel in the state of Texas when we're done. It's a close to half a billion dollar project fully capitalized. Well, I've never built a 400 foot super tall. 400 foot super tall on a halfacre site in the middle of an urban core has a lot of risk. So, in that instance, even though we're putting up, you know, probably 20% of the equity ourselves and we entitled it and we zoned it and we're co-GPing and we're signing on the debt in that instance, We want, you know, a, you know, a a seasoned developer, seasoned contractor who, yes, will put skin in the game and will take an element of control because they lower execution risk. They're bringing a level of execution and a level of expertise where you want to be able to surround yourself with the smartest people in the world to do something, but control for the sake of control without execution is reckless. So, there's there's a time that that actually operates just like some of high net worth folks that aren't, you know, real estate professionals. They're trusting you with their money as LPs. They're not saying like if I'm if I talk to a doctor and I cut my arm, I don't tell them how to stitch it.

Yeah.

I walk in and say, "I'm hurt. I'm bleeding." And you know, say, "Well, where did you go to medical school?" No, no. I need to help you stitch my arm. No, no. Let me No, no. Let me teach me the history of sutures. No, stitch my f****** arm. Take my insurance. I'll pay you stitch arm. And this is the same eb and flow of why people trust us when level of expertise the same way we would trust them in that instance. So we have to weigh those differences because at the end of the day this is about making money for our customers. That is what this business is about. That's how we get paid. That's how we you know we are making impact for communities and we are creating shareholder value or making money for our investors and whatever way we can do that by minimizing risk and maximizing return is the way that it should be done.

Yeah. And you know if you you focus on the right things you know and that's that that really reassures like um like these are the things that people and institutions like to hear when it comes to risk reversal. So, but when it comes to the future um you know we're seeing hey you know Ken at the chair of the Fed we're seeing Gary Gensler went out a few months ago you know we're seeing a lot of things happen in the markets you know we know that red states um you know are more tenant are more against the tenants and so we're more comfortable multif family so what does the future look like you know when it comes to like when it comes to the risk disclosures when it comes to you know some of your offerings here and,

well I do look the future is extremely exciting you know anytime you go into a time when you have the convergence of many different cycles we're nearing the end of a big of one big debt cycle where we had a seven once in a 75 year global pandemic we had a once in a generation economic tightening and when rates went up 500 basis points we have the fourth industrial revolution with AI which is equivalent to electricity but the point is all these things have happened all in in history Mark Twain used to say history doesn't repeat itself but it sure does rhyme. So you can't really look at the market you can't predict the markets in the short term but they're very predictable in the long term and so when you zoom out and you look at all of this and you look at the minutia what's this Fed chair going to do that you know all that kind of stuff I don't know someone maybe smarter than me can figure that out but what I can tell you is at times of massive disruption times of new of new um technologies being introduced there is a profound amount of opportunity um if you go with it. But the risk is do you want to be Blockbuster Video or do you want to be Netflix? So you have to take a big inventory of yourself and be very honest with you, yourself, your team, your business model and say, "Look, is this the type of model that lasts 10 years? Is there things the way that we're doing stuff like are we still using pen and paper? Are we're using Excel? Are using a computer? Are you using a cell phone or sending courier pigeons?" And there's so many things that we're doing as companies, as business people running huge organiz small organizations even in our daily life where we need to become adaptable to the way that things are changing because this is not just a wave. This is a whole new world that we need to use this this this you know artificial intelligence for lack of a better term. It's just a tool. People keep demonizing and it's this it's that. It's not a thing. It's a tool. And just like a gun, can you point a gun at someone and murder somebody? Yeah. You can also take it to hunt and feed your family. I mean it's it the thing is not the thing. It's the utilization of how it's going to create impact. And I think we should all be taking inventory of ourselves in the present moment to what the future could hold and being evolving enough and having the humility enough to know we don't know. Take a little course, learn about AI a little bit, figure out what it just as an example and rethink our business models. Go back to the drawing board, talk to our investors, look at our projects, see if there's ways that of strategies we used to get here that were success. successful but may not be the strategies that'll get us to the next step to be successful. So this is a moment of introspection. This is a moment of thought. This is a moment of of recognizing our own vulnerabilities so that we can find strength in that vulnerability. We can become resilient. We can learn new tools and we can take advantage and capitalize for our investors on the greatest wealth creation engine in the history of mankind. I mean if you get on the right side of this and you start using robotics 3D printing and using sophisticated models for population migration trends and spotting land sites and doing all and utilizing this in your arsenal. Um the amount of money you'll make for your investors is unfathomable.

I I completely agree. And um and just making sure um looks like a little lag. I completely agree. Okay. Okay. I'm good on my side. Yeah, on my side. I'm good. Is it on Is it back?

You're back. You're a little bit choppy, but you're here and it's,

Well, you can edit it. You can edit this in post, I assume. Right.

Yeah, I'll edit and then I'll I'll send you the stems and everything. Yeah, we're good.

So, um so so that being said, what do you think is the the probably we have a lot of COGPs listening to this and um a lot of them will be really curious. What is the number one I guess piece of advice or uh if you were to advise uh COGP this is lagging really this is lagging really really bad um I don't know if it's on my end or your end is your um,

can you see me?

yeah I can see you but you're in slow motion.

oh really interesting.

am I can you see me okay?

yeah you're perfect for me yeah.

um I don't know what to do.

Is it Did it catch back up?

He's running super slow.

Yeah, now now you're good for me. Yeah, I have three bars in Wi-Fi. So, Wi-Fi 100%.

I'm at 100%, too. It shows it's,

saying it's full.

You need to plug in the computer. It's about to die. Oh, maybe that's why.

Maybe that's why. Go get the plug from upstairs. It's upstairs, I think. Cavian, give us one second. We'll Let's finish up that last question, right?

It's charging.

Yeah, you're good. Yeah.

Mhm. It's plugged in.

Okay, let's try to Okay, so ask that question again. Looks like it cleared up.

Cool. Yeah. So, so Ari, yeah. So, so talking talking about um you know, the future, I'm a lot of our COGPS are listening to this and they'll be super curious. What is the number one piece of advice uh that you would give to a COGP uh or or frankly anybody who's looking to cross in into the institutional world, you know, who would want to do deals potentially with your firm. Um you know, what is the number one piece of advice?

Well, I think the number one piece of advice is really focusing on,

it's lagging super bad.

If it's coming through, if I if I just If I just answer the question straight, are you getting it enough for me? Because I can't see you and I can't hear you.

Okay, interesting.

For me, you're perfect.

Okay, good. Then I'm just going to answer the question like I'm going to just say to answer your question and then you can edit it. Um, yeah, look to to answer your question about cogps and what they should do whether to work with us or work with other groups and they're looking for projects. It sounds very simple, but real estate is ultimately about people, you know, and you need to be they're seeing the people that are doing these types of deals and understanding actually how to get to them. And that's the most important thing more more than anything. But when you talk to a COGP and you talk to people, it's about your underwriting. It's about the story of the project. It's about really understanding not is what's just happening in your deal, but what's happening in the in the area, what's happening in the city, and what's the narrative. A COGP, you've been looking at your deal for two years, five years, six years. They don't understand understand all the nuances. So before you talk to a COGP or a COGB talks with you, you have to have the brand story so you could explain how you got there, why you got there, what were the pitfalls, what did you learn from, what did you reszone so they can truly understand what is the asset for that community that you're creating and why. And that's not just numbers on a spreadsheet that comes later. They have sharp pencils. They're going to figure out the cap rate, the rents, whatever. But you being able to really explain why this project you're developing, why this project you're buying, why now, why here, why for the city, why for the state, why for the country, so they can really be able to envision how this is going to serve that community, how it's going to serve the investors, how you got there, and that will open the opportunity to actually go look at the numbers because everyone has sharp pencils and they can figure that out.

Yeah, that's amazing. And ultimately, where should somebody go if they they want to work with you and they're super curious.

Sure. They they can they can go to rastegarcapital.com to our site. They can fill out a form. They can find us on LinkedIn. You can Google my name, go to Rastegar. It's been very public what we what we've done and we're very proud for the amount of people that we've helped um you know over the years like I said from individuals, family offices, pensions, investment companies, you name it. Um but going to the site or going to one of the social media handles We have a great team that monitors those things and reaches back out and reach out. We'll have a call and if we can help you, we'll tell you and if we can't, we'll tell you that, too.

Fantastic. This has been Ari everybody. You know, thank you so much for coming on and um and head to his sites and see what he has in store for you regarding deals. Okay. Cheers.

You got it, buddy.