Chapter 10
Proof on Demand
On the second Wednesday in October, Andy met Arturo on the stairs. Andy was coming up from the back lot with his coffee, and Arturo was going down with a binder under his arm: the building values for the third quarter, one tab for every property, each tab holding the manager’s report the value rested on, tied to its ledger and its bank statement. Arturo stepped back onto the landing to let him by.
“Nine o’clock?” Andy said.
“Nine,” Arturo said, and went on down.
Andy went up and sat at his desk and did not follow him. He had read the draft three times in September, at the round table with a pencil, and had sent it back to Anika with two questions in the margin and nothing crossed out. He knew who would be in the conference room at nine. Maggie would take the chair at the end by the window, with Anika and Tom on either side of her. Arturo would sit at the far end with the binder open, answer for each building as they came to it, and have no vote.
At twenty to twelve Maggie’s email came up the stairs ahead of her. It had two attachments, the minutes and the policy, and one line. Committee formed. Policy adopted. Third-quarter marks approved as attached.
The policy ran to six pages. Most of it described what the firm had done every quarter since Fund I, and some of it the firm had never done at all. Each quarter the asset managers would value every building on its last twelve months of earnings, tied to the ledger and the bank. They would use a cap rate from sales the committee could look up, and test the result against the cash the building should bring in over the years ahead. Any building whose value moved by more than a set amount from one quarter to the next came to the committee with a written reason beside it. From the first of January an outside appraiser would value a quarter of the buildings every quarter, so that every building carried an outside value once a year. When the appraiser and the firm disagreed, the committee would choose a number and write down why. Every meeting would have minutes, and the policy would go to each fund’s advisory committee before the end of the month.
On the last page were three signatures, with the date beside each: Margaret Holt, Anika Reeves, Thomas Langford. Andy’s own name appeared once in the six pages, near the end, in the list of people who would receive a copy of the minutes.
He printed it and walked it down the floor to Beth Ann. She was on the phone. She read the title without putting the call on hold, then reached for the blue folder she kept for the pension and slid the pages in at the front, ahead of everything already in it.
The managers’ September reports had all come in by the second Monday of the month. Tom tied each one to its ledger and its bank statement, the way he had every month since August, and the reporting system Beth Ann had loaded in July turned the numbers into every investor’s own version of the quarter: by fund for most of them, by asset for the families who had asked for it, and a version of Fund III by asset, in the pension’s format, for its head of real estate. Beth Ann read every report before it went. The last one went out that Friday, after the committee had signed the marks. The year before, the same step had taken seventeen days.
Maggie timed the data room as well. Bringing it current through the end of September took Beth Ann and Tom a day and a half. Building a real one from nothing had been a month’s work. She wrote both figures in her weekly log and said nothing about either.
The next week, one evening at seven, Andy came downstairs to find a cup he had left in the kitchen, and found Beth Ann at the long table instead.
She had her folders out, the ones with the colored tabs, stacked in three piles by fund. Her laptop was open in front of her to the reporting system, and on the screen was a page with a family’s name across the top. She was typing from a folder into the page, a few lines at a time. When she finished a folder she pulled its tabs off one by one and dropped them on a small pile by her elbow, red and green and yellow, and set the folder on the floor beside her chair.
“How far are you?” he said.
“Through Fund III,” she said, without looking up. “The syndication families are next, and they’re the hard ones. Half of them came to us through somebody who’s since retired, and the only place that’s written down is here.” She put a hand flat on the folders still in front of her.
He pulled out a chair and sat across from her. She turned the laptop so he could read the page on the screen.
It was the Houston family office that had been with the firm since Fund I. Beside each fund was what they had committed to it, whether they had come back for the next one and on what terms, and in one line why they had come in smaller in Fund II and larger again in Fund III. Their investment committee met in the second week of each quarter, and a note under that said that a capital call arriving in the first week read to them as a surprise. They wanted the quarterly report by email on the day it went out and a phone call only when something had gone wrong. They had elected the most-favored-nation terms in Fund III and taken one of them. Near the bottom it said that the founder’s grandson read the reports now, and that he should get them first.
“I didn’t know about the grandson,” Andy said.
“He started in March.” Beth Ann turned the laptop back. “It’s in the folder.”
She typed for a while, and he watched her pull the tabs off the next folder.
“The one thing I haven’t written down anywhere,” she said, “is how we bring a new one in.”
“How long does that take?”
“Three weeks. The subscription papers, the forms the bank and the tax people need, the side letter if there is one. And before any money moves, somebody calls them on a number we already had and confirms the wire instructions by voice.” She took a clean sheet from under the laptop. “I do the calling. I always have.”
She wrote the steps down the left side of the sheet in order, with a blank beside each one, and when she had finished she set it face up at the corner of the table, where the next person to sit there would see it. Then she pulled the last tab off the folder in front of her, dropped it on the pile.
On the second Wednesday in November the email from Munich was waiting in Beth Ann’s inbox when she got in. She forwarded it to Anika before eight, and by half past Anika was at Andy’s door with it printed out.
It was from the compliance officer of a family office that had been in Fund III from the start and had come into Fund IV at its first close. She wrote in careful, formal English. New rules on artificial intelligence would begin to apply in Europe from the beginning of December, and her office had to be able to describe the systems at work in everything it owned.16 She had three questions. Did the firm, or anyone acting for it, use any automated system to screen or score people: applicants for apartments, applicants for jobs, investors? What records did the firm keep of what such systems did, and for how long? And who could stop one?
“Does it apply to us?” Andy said.
“Barely. Most of it falls on firms that build those systems or use them over there.” Anika set the page on his desk. “She still has to show her own board what she’s invested in, and we’re in it. I’d like to answer her today.”
“Can you?”
“All but one part.”
Owen brought the record over from his desk a few minutes later. It ran to two pages: every agent the firm ran, what each one read, what it was allowed to do, the date Anika had signed each step up in its access, and where its log was kept. The deal inbox reader. The two agents that built and argued against each acquisition package. The agents that had read the portfolio over the summer, from copies in one folder. Owen’s monthly check of turnover cost against move-outs, at every building. At the bottom, the payables vendor’s tool that coded invoices for Tom, under terms Anika had read in January. Andy went down the column headed Reads. Broker emails, offering memoranda, rent rolls, title reports, operating statements, ledgers, contracts.
“Nothing in here reads anything a person sends us to rent an apartment,” he said. “Or to get a job.”
“No,” Owen said.
“What about the buildings?”
“We don’t run anything at the buildings.”
“The managers do,” Anika said. “Every applicant at every one of our properties is screened by the manager’s leasing system. I can’t tell her what those systems do with a person’s information, because nobody here has ever asked.”
“Ask.”
Dana had a letter out to each of the three managers before lunch, asking which screening service each used on the firm’s buildings, what it looked at and what it kept. Anika’s answer to Munich went out at ten past four over her own name. It listed every agent from Owen’s record and what each one could touch, and it said where the firm kept every log. It said that applicants at the properties were screened by the property managers’ own systems, that the firm had asked each manager in writing what those systems did, and that she would send the answers on when they came.
Beth Ann read the reply before it went, at Anika’s desk, standing. Then she went back to her own desk, where her draft was still open on the screen.
At five Maggie came to Andy’s door and asked whether he had ten minutes, and he followed her along the landing to her office. Beth Ann was already in it, in the chair by the window with her laptop shut on her knees. Maggie closed the door and sat down behind her desk, where Beth Ann’s year-end letter to the firm’s investors lay in front of her, printed, with a pencil across it.
“Read the second paragraph,” Maggie said.
Andy read it. This year Service Capital put artificial intelligence to work across every part of our business, from underwriting each acquisition to the ongoing monitoring of every property we own.
Maggie had drawn a single line through it.
“That’s the third one,” she said. “I took one like it out of the second-quarter letter in August, and another out of the third-quarter letter last month. Each time it came back with different words in it.”
“Every LP I sat with this fall asked what we’re doing with AI,” Beth Ann said. “Every one. I want them to know we’re doing something.”
“We are doing something. Anika wrote down today exactly what, for Munich. It’s one page.” Maggie turned the letter around so it faced Beth Ann. “Every person who gets this letter can ask us to show them the sentence. Munich asked first. If the next one asks, we’d be showing them Anika’s page. It lists one monthly check, on turnover cost. It doesn’t list the monitoring of every property we own.”
“No,” Beth Ann said.
“And the underwriter priced our coverage on four pages that say what those agents are allowed to do,” Maggie said. “I’d like our letters to say the same thing those pages say.”
She took a single typed sheet from the top drawer and laid it beside the letter. Andy knew most of it at a glance: the list from Owen’s record, in plain sentences, the same ones Anika had sent to Munich that afternoon. At the top it said How we use software agents, and under that a date, and under that a line in Anika’s hand: Every letter, presentation and questionnaire answer that describes our use of AI uses these words or comes to me first. At the foot of the page Maggie had typed one more sentence. This page changes on the day Anika signs a change to any agent’s access, and on no other day.
“It goes in the compliance file tonight,” Maggie said. “Anika’s signed it. The next time I’d have struck that sentence, you’ll have this to start from.”
Beth Ann read it through. “It’s very plain.”
“It’s what we do.”
Beth Ann nodded slowly and held out her hand for the letter. Maggie did not give it to her yet. She had turned to the third page, and her pencil was resting under a sentence near the top.
Fund IV’s investments are underwritten to fifteen percent.
“Whose fifteen?” Maggie said.
“Wyatt’s,” Beth Ann said. “It’s in his box.”
Maggie reached past the letter for her phone. “Wyatt, would you come to my office for two minutes?”
He came in with a pen still in his hand and stayed standing just inside the door, as he did when he expected to be asked something. Maggie read him the sentence.
“That’s the deal,” Wyatt said. “Fifteen at the property, gross. Before the management fee, the fund’s own costs and our carry. I screen the building, and the fee isn’t in the building’s numbers.”
“What does a Fund IV investor get out of a deal that does fifteen?” Maggie said.
Wyatt looked at the ceiling for a second. “Eleven, or near it.”
“About eleven, net to the LPs,” Maggie said. “About four hundred basis points go between the building and them.” She moved the pencil up the page, to the paragraph above, and laid it under the words Fund III is tracking mid-teens net. “That fifteen is theirs, after everything. To get there, Fund III’s deals have run about nineteen and a half gross. Put the two paragraphs side by side and an investor reads Fund IV as another Fund III.”
Nobody said anything for a moment. Then Wyatt said, “I wrote it for the building. I never wrote it for a letter.”
“I know,” Maggie said. “And now it’s in a letter.”
Andy picked up the page and read both paragraphs again, the way an investment officer at a family office would read them on a Sunday afternoon. He had said fifteen percent to more than one investor himself this year, across more than one table, and he could not have told anybody which fifteen he had meant on each occasion.
Andy handed the page back across the desk. Maggie took her pencil and wrote at the bottom of Anika’s page, under her own sentence, for Anika to type. Any return we show an investor carries gross and net side by side, labeled. Then she handed Beth Ann the letter. Wyatt went back to his desk. Beth Ann did not get up. She uncapped her own pen, drew a line through the sentence about fifteen percent and began writing the paragraph again in the margin, slowly, with both numbers in it.
Russ Whitlow called on the Monday after Thanksgiving, a little before eleven, on Andy’s cell. Andy saw the Colorado number and let it ring twice while he closed the door of his office.
“Russ.”
“Lorraine told me in May you’d call when you had something to show me,” Russ said. “It’s nearly December. Walt asked me last week whether you’d called yet, and I told him no. He said that was the first good sign he’d had from your firm in a year.”
Andy smiled at the glass. “How is Walt?”
“Splitting wood, which nobody has asked him to do.” Then Russ’s voice changed. “Travis would like a second look. The first quarter. He’ll give you short notice, and that’s on purpose. If a room has to be built for him, he wants to see it being built.”
“Tell him to pick the day.”
“I will,” Russ said. “Travis will call Beth Ann.”
When the call ended Andy wrote two words on the legal pad, Travis, Q1, and the date under them. Then he went down the floor to Beth Ann’s desk. She was typing into another family’s page, and the folders beside her chair were fewer than they had been.
“Travis is coming back in the first quarter,” he said. “On short notice.”
“How short?”
“He didn’t say.”
Beth Ann brought the data room up on her second screen and turned it so he could see the index. Every folder carried the date it had last been brought current, and every date was later than the close of the third quarter. She let him look.
The pension’s manager-review team came back on the seventh of December for a single day, eight days before the board meeting where the account would be decided. It was the same woman as in August, with a different analyst, and they took the conference room at nine.
She did not ask for the deal memos this time. She asked for the valuation policy, the minutes of the committee’s meetings, the appraiser’s signed letter for January and the list of which buildings it would value first, the compliance lead’s calendar with its year of testing, the Fund III report she had been receiving by asset every quarter since the summer, and the managers’ three written answers on what their screening systems kept. Beth Ann had them on the table before the analyst had his laptop open. Andy took the chair at the far end, by the door, where he could see the room and stay out of it.
She read the policy first, all six pages, with a pen she did not use. Then she turned to the third-quarter marks and read down the signature block, the three names and their dates, and turned back to the minutes.
“Who is the appraiser’s letter addressed to?” she said.
“The committee,” Maggie said.
“Which buildings go first?”
“The ones whose values have moved the most since we bought them. Arturo drew up the list, and the committee checked it against the marks.”
She wrote that down. She spent most of the afternoon with the compliance lead’s calendar and the analyst, going month by month through what had already been tested since July and what the firm had found. At four she asked Beth Ann for the data room as it stood that day, and the analyst downloaded the index and the last two quarters’ reports. Neither of them asked to see anything twice.
At half past four she packed her own bag and thanked Maggie for the day, and Anika walked them out to the back lot. Andy sat on by the door a while after they had gone.
On the fifteenth of December, Anika brought the agreement to the round table a little after eleven, the execution version, flagged in four places. Maggie came in behind her and took the other chair.
Andy read the fee page first. Eighty-five basis points a year on the equity the pension had invested, and half a percent of the price on each acquisition. Two hundred fifty million, to be put to work over about three years.
“When it’s all invested,” Maggie said, “about two point one million a year. Until then, whatever we’ve put to work.”
“Over about three years.”
“If we find the buildings.” She turned to the second flag. “And every one of them goes to her first.”
It was the consent clause from the term sheet. Andy read it again, the way he had read it in August, and turned to the third flag, where Anika had set out the account’s reporting schedule, and then to the fourth, the signature page. He left the pen where it was.
“She said she’d call at four,” Anika said.
The pension’s head of real estate called Beth Ann’s line at two minutes past four, and Beth Ann carried her phone to Andy’s office and set it on the round table with the speaker on.
“The board approved it this morning,” the head of real estate said. “I signed at two. Anika has my pages.”
“Thank you,” Andy said.
“I’ll tell you what they asked me. They asked who outside your firm signs the values on your buildings. I read them the appraiser’s name and the date it starts, and the three names on the committee it reports to.” She paused. “Then they asked why a manager your size, and I told them what my people saw in your conference room in August and again last week. Our people will be back next December. They’ll want the appraisals by then.”
“They’ll have them,” Maggie said.
“Good. Beth Ann, I’ll see your first one when Wyatt finds it.”
When the line was quiet Andy picked up the pen and signed the page above Service Capital, where Anika’s flag pointed, and wrote the date beneath his name. Anika gathered the pages without a word and took them to her office to send. Maggie sat a moment longer, looking at the closed agreement, and then went back along the landing to her own office and left the door open.
Beth Ann took her phone back to her desk. Andy came out onto the floor a few minutes later and found her with a new page open in the reporting system, a blank one, with only the pension’s name typed across the top. She went down the fields she had built in October one at a time. Under Funds she typed Separate account. Under Committee meets she typed the month. Under Reporting she typed By asset, her format, quarterly. At the bottom she added a field none of the other pages had, typed Next review: December 2028 into it and saved the page.