In 2011, Comstock almost became one of them: His bank-
ers told him to get lost, right as he was putting together two
projects with more than 600 units. But after a six-month
search to fnd replacement fnancing, Comstock landed RCS.
“Marcel and I partnered up on fnishing of two projects,
which turned out to be a grand slam,” recalls Comstock, who
now has 14 active projects with RCS. “And then we became
friends,” he adds. “We’re both a little bit odd, but he sees
FLUSH WI TH CASH BY 2011, RCS began to
expand its portfolio again, but there was
a major obstacle: Where was it going to fnd
the builders who were good enough
to execute its plans? Some developers had run
into roadblocks with fnancing, but many others
were just bad at running a business.
Arsenault and Wells had had several unhappy experiences. For example, in Spain: Not knowing local contract law
or building codes, RCS had expected to make some mistakes
that would cost it along the way. It did. Spanish banks, for
instance, did some real estate development themselves.
(Imagine asking for a construction loan from a competitor.)
The Americans also discovered that “everybody still wants a
‘commission,’” says Wells. Their initial investment in a local
builder went south when the frm turned out to be taking
kickbacks from contractors.
“The deals go wrong around the people,” says Arsenault.
“So the idea is to try to handicap the partner.” He set out to
develop a formula for a model entrepreneur, just as you might
for a model home. It starts with transparency: RCS designed
a disclosure form that’s somewhere between a job application
and an FBI security clearance. (See “How This Real Estate
Company Demands Radical Transparency,” page 70.)
Besides demanding transparency, RCS looks for signs of
weakness. For example, it avoids investing in those who come
to the table with cheap capital. That could invite amateurs
or dabblers. It also shuns those who are too diversifed to pay
attention to the project.
On the other hand, the company takes calculated risks on
undervalued entrepreneurs. In the case of a luxury condo
project in Dallas–Fort Worth, RCS decided to work with
Realty Capital, an established local builder that couldn’t fnd
a lender for its ambitious project. “They couldn’t get a 40 or
50 million–dollar loan,” says Wells. “But we were impressed
by several things, including the number of presales.”
Realty Capital also had no experience in building condos,
and the suburban location was a red fag. “We were turned
down by dozens of people for fnancing,” says Richard
Myers, a managing director of Realty. “RCS was able to get
beyond the conventional thinking to ‘maybe there’s a market
here.’” RCS fgured that Realty met 60 percent of its require-
ments—but what Myers’s company lacked, RCS could supply.
“There’s just so much that goes into a condo building,
whether it’s design or working with homeowners associa-
tions, that they just haven’t done,” says Wells. “We’re able to
Arsenault asserts that every entrepreneur in a partnership
has a distorted reality feld, including him. One of the biggest
distortions is optimism, which to an entrepreneur can be the
same as breathing. Learning to hold your breath is a key to
success, he says: “In real estate, ‘go’ will get you into trouble
if you’re going at the wrong time. You gotta have ‘stop’ and
‘reverse’ and ‘get the hell out.’” Or as Wells puts it, “We
always look at the downside on every deal. We look at that
10 times more diligently than the upside.”
This may mean passing up some potentially lucrative
opportunities. Even as RCS and its partners plunge ever more
money into single-family housing, Arsenault’s macromodeling
is telling him that the cycle is becoming less favorable for
apartments, especially in his home market of Denver. So he’s
taking a pass locally for now.
Arsenault and Wells are too experienced to think there
won’t be any hiccups in the real estate market over the next
decade. Arsenault’s best guess is for a mild recession in 2019
as growth slackens. Ironically, the fact that a Republican real
estate developer is now president doesn’t necessarily bode
well for the industry: Mortgage rates are already rising, and
the Fed has signaled its intention to raise interest rates again
this year. But there’s less risk of another meltdown, because
subprime buyers are unable to get mortgages. Barring that,
if Arsenault’s early-warning system remains tuned, they’d be
among the frst to exit.
Ever the contrarian, Arsenault is now snifng around the
beaten-down oil patch. In places like Houston, Calgary, Alberta,
and Oklahoma City, where ofce vacancy rates approach 30
percent, “we’ll be looking for partners to buy residential and
ofce.” He’s even considering directly investing in oil and gas
properties, because his macro analysis sees a cycle change that
will push oil up to near $60 a barrel within a couple of years.
“As you grow, things change. Your environment changes,
the scale changes, your problems change, and each time they
change, you have a new learning curve,” says Arsenault.
“That’s one of the reasons why I love the business.”
Then again, once you learn how to ride a business cycle,
you never forget.
BILL SAPORI TO is an Inc. editor-at-large.
MONEY 72 - INC. - FEBRUAR Y 2017