Multi-Family Foundation | Developing and Delivering Superior Yield with Scott Choppin

Scott is the founder of Urban Pacific Group of Companies, a Long Beach, California based real estate development company founded in 2000, that focuses exclusively on urban and infill affordable housing communities throughout California and the Western US. Over the last 18 years, the company has developed nearly 1700 units of unique to market urban housing communities throughout the Western United States. And presently, Urban Pacific has created a new housing innovation called UTH, which provides middle income multi-generational housing to urban families by producing market superior yields on invested equity. Historically, Urban Pacific’s UTH projects delivered, and get this, 29% IRR yields on equity. Wow Scott, this is awesome. And so, we got a lot to dive in here for, but talk to us about, 2000. So, a lot happening, especially out there in California at that time.

“The core focus always has been and is now that we want to be building new assets in urban locations. So in other words, we’re not going to go out in the far perimeter of, the LA basin into, Riverside County go build, Greenfield sites, right? Like, never developed sites. We want to find neighborhoods that are close to transit, jobs, social networks. So think of your family, have kids in school and your family’s close by, those kinds of things. And we’ve never left that, that stance or that call, that ethic, the standard of how we operate in the marketplace. ” – Scott Choppin

Jason:                   This is Multi-family Foundation, your show for buying apartment buildings. Now your host, Jason and Pili.

Jason:                   Are you ready to take your multi-family game to the next level? Well you need to join us, October 12th, Saturday, October 12th, for our one day multi-family foundation workshop. We’re going to bring it to you live. We’ve got a list of 15 speakers. They’re going to go through the process of everything it takes to get your mind right, get the deal right, learn the terms, understand the markets, learn how to find the deals and learn how to underwrite the deals. Learn how to put your team together, everything from property management to brokers, to insurance companies, and what’s the proper way to raise funds for a deal and how to close a deal and what to do after you take over a deal. So it’s going to be a huge event. It’s going to be awesome for you to join us. Got a great space.

Jason:                   It’s going to be here in New Jersey, and Springfield, New Jersey, of course. It’s going to be a one day event but we’ve got everything packed in from 8:00 AM to 7:00 PM. Right now, if you put in the code workshop, you’re going to get a special discount and again, that code is workshop. You need to go to multifamilyfoundationworkshop.com. Again, www.multifamilyfoundationworkshop.com and go fast because we’ve sold a ton of tickets for this. Actually was able to get a bigger room but that’s filling up quickly as well. So again, www.multifamilyfoundationworkshop.com, put in the code, workshop. There we go. Got that down and look forward to seeing you so we can all take massive action together.

Jason:                   Well, hello again, and welcome to another edition of the real estate of foundation. Thanks for checking back in with us. Happy to be here with you today and super excited about today’s show.

Jason:                   Of course, if you like what you hear, please give us a five star rating review or any review. We just want to hear from you. We want to know what you guys have to say, what you like, what you don’t like, give us better feedback so we can make this show great for you. But you are in luck, today’s show is awesome. We’re going to talk about stuff that we haven’t covered before with after almost 400 episodes, is a tall tale. So that is why we’re super excited to have Scott Choppin on the show. Hey Scott, how are you?

Scott:                    I’m doing good Jason. Good to meet you.

Jason:                   Good to meet you as well. And Scott is the founder of Urban Pacific Group of Companies, a Long Beach, California based real estate development company founded in 2000, that focuses exclusively on urban and infill affordable housing communities throughout California and the Western US.

Jason:                   Over the last 18 years, the company has developed nearly 1700 units of unique to market urban housing communities throughout the Western United States. And presently, Urban Pacific has created a new housing innovation called UTH, which provides middle income multi-generational housing to urban families by producing market superior yields on invested equity. Historically, Urban Pacific’s UTH projects delivered, and get this, 29% IRR yields on equity. Wow Scott, this is awesome. And so, we got a lot to dive in here for, but talk to us about, 2000. So, a lot happening, especially out there in California at that time. What drew you to real estate and what was the first step you got into here to form Urban Pacific Group?

Scott:                    I appreciate that. Great question. So I actually have a family background in real estate development. My uncle Mike and my dad, Carrie were both in the business, each ran their own companies. One in commercial real estate development and then my dad was almost exclusively an apartment development company. And so I got the unique advantage of growing up in the business of real estate development, which is a little obscure. It’s not your mainstream career choice. So I basically built over the early years of my career, both in my choice of school major and then going into my early career choices of really intending to build my knowledge of how to be a real estate developer. So I went out and worked for other companies for a little over five years.

Scott:                    And then in 2000, what happened, the company I was with at the time had done some research using a company called Robert Charles Lester and Company, pretty well known national market study firm. And a guy there at the time, Bob Gardner, was very bullish on urban infill, basically building new construction, apartment assets in the city center or city fabric. Think of, not necessarily pure downtown, but anywhere that was already urbanized and we would find sites and infill apartments into those neighborhoods. And the company I was with at the time, the principals are very sophisticated, great developers, but this just wasn’t their flavor, let’s put it this way. And I was like, man, at the time my age, I was thinking this is the thing, like we need to go pursue this. And so that was really the Genesis of the idea of pursuing on my own urban infill apartment we have done for sale. But really, we’re an apartment development company and that’s been our stance, up to today, which is we want to be in, you know, urban locations, developing apartment assets.

Jason:                   Sure. And so, before we jump into the development, I have to talk about the family dynamic, right? So lots of times when, when people are growing up, the kids run as far as they can from everything that their parents are doing. But you dived all in, what was it that really stood out to you about development? What was it that drew you to it?

Scott:                    Actually, the way you spoke it is right on the money. In fact, I think this is probably true of all kids. You want to do whatever is the opposite of what your parents did, run the other way as you put it. And so for a period of time, that was just not something that I was interested in, but really two things brought forth for me how real estate development can be a career. So first was that out of high school, I wasn’t tending to go to college immediately or at least I didn’t have a good plan. So I went and worked in the trades. I was an electrician for a couple of years and what I noticed at the time, and we were living in long beach, in fact. There were a lot of apartment new constructions which was in the mid-eighties. Just booming apartments and I remember just working on the job sites and electricians are actually probably some of the cleanest trades, you’re not getting overly dirty, it takes most knowledge.

Scott:                    But the developers would show up on the job site, Jason. And I would watch them, in between working and because I had the background in it and watch what they were doing. I was like, I want to be that guy. I want to, for a lack of a better way to put it, drive a nice car, show up, look at a project under construction, point some stuff out, make some decisions. That’s how I interpreted it, at least at the time, I was18 and 19 years old, mind you. And then, interestingly enough I happened to…, I’m a voracious reader and at the time, in fact, still around, I think it’s still being published, but there’s a book called, “How to make $1 Million Investing in Real Estate on the Weekends”.

Scott:                    You’ve probably even seen it, right? It’s one of those age old books. And I read through that and it really finally dawned on me. I go, okay, I see what my dad, him and my uncle are doing. I saw these guys in the field, seen how they are and what they did. And then the financial mechanisms were really shown to me in this book. Now that book was about investing in existing apartment assets and not in construction or development, but I could see the parallels. And so from that point on, which I think I was 18 years old as I recall everything I did from that point on, it was intended to build my knowledge of how to be a real estate developer. School major, school choice, early career choices were all aligned to do that with the end result. I knew I would be going out on my own as an entrepreneur.

Jason:                   And so, you dive into your career path, and you start working for that company speaking about their urban infill and the company wasn’t best aligned for it, but you saw it. What was it that jumped out to you that you said, well, this is it. This is, the niche.

Scott:                    When I left [inaudible], I was 32, I’m a gen X. To me it appeared as a highly advantageous living environment to be in a urban location close to where you worked. You didn’t get on the freeway and combine that with some really cool housing choices. Think old building, brick lofts, really cool, industrial, new industrial, loft space in downtown LA or downtown Long Beach. And to me I was like, I would live there now. At the time I happened to be newly married and first, my oldest son was born so we weren’t going to necessarily make that choice. But I could see how other people like me and my generation who didn’t necessarily have family and were maybe more mobile and could live that lifestyle, it would be highly appealing. So it was a real personal, almost gut level, visceral reaction. One, the spaces are super cool. I mean, it’s sandblast red brick and wood trusses in the roof, ultra, just cool stuff. And that just absolutely appealed to me and I recognize that other people in my generation at the time who were still young enough to live in that environment would be attracted to that.

Jason:                   Do you remember what that first project entailed? What drew you to the first project that you did, when you first started Urban Pacific?

Scott:                    Great question. So at the time, when we’d formed the company in 2000 in downtown LA, an ordinance had been passed recently called the adaptive reuse ordinance. And that ordinance basically was, city of LA is a big bureaucracy, but this is a very entrepreneurial cutting edge ordinance that basically said if you had a historic building or a pre-1973 permitted building, you could convert almost any building that was in these, geographic areas into residential housing. So old industrial buildings, all the high rise office buildings that had been empty, like literally empty buildings in downtown LA for decades. The city said, if these buildings qualify and are these geographic locations, then we will give you not quite a carte blanche on the zoning, the building code, but a huge amount of relief related to zoning, density, parking particularly stuff about fire egress, that’s, fire life safety for the fire department and seismic.

Scott:                    You know, you still had to do seismic, but it was to a FEMA code and not to the actual California building code, which would have made the buildings infeasible to build in that or retrofit that way because it would have been too expensive. And so we basically ended up doing, four of those projects, all hundred to 200,000 square foot office buildings built in, between 1895 and say1920. Gray architecture, Beaux arts, beautiful exterior, really high quality, marble exteriors and statues and stuff that you just couldn’t build anymore. And that fit in that, that ethic of we want the cool building. And the cool space that happened to be in downtown LA, which was, semi rough at the time, but it was very early in that new era of urban living. And we were certainly a few years ahead of it, so this was 2000, 2001 by the time 2004 rolled around, the market had taken off, and there’s all kinds of people. It was that fast that everybody picked up or at least developers got the idea to do that.

Jason:                   Wait and going forward to today, how does the strategy change? What is the core focus today?

Scott:                    So the core focus always has been and is now that we want to be building new assets in urban locations. So in other words, we’re not going to go out in the far perimeter of, the LA basin into, Riverside County go build, Greenfield sites, right? Like, never developed sites. We want to find neighborhoods that are close to transit, jobs, social networks. So think of your family, have kids in school and your family’s close by, those kinds of things. And we’ve never left that, that stance or that call, that ethic, the standard of how we operate in the marketplace. And if anything, were early and the market came to us in 2004, 2005, recession came, everything stopped cold and then, picking back up in 2010, 2011. Now by that point, post-recession, now we have millennials and gen Z coming into their life cycle where they rent and move out of the house or want to move to an urban location for a job. Maybe they work tech and they want to move into downtown San Francisco. Now those generations, those demographics were even more bullish on the urban lifestyle. I mean, gen X sort of had its time, then grew out of that life cycle, got kids, needed a house and driveway and all the normal stuff that you have when you have family. And gen Z millennial has just taken that mantle and run with it. In fact, they’re more purely wanting urban living than you know, any generations we’ve ever seen.

Jason:                   So for development, it’s part art, right? Along with, of course, making a project that’s going to sustain and be beneficial. So, talk to us about some of the steps to underwrite a project of this magnitude, where you’re just basically looking at a canvas and being able to find the highest and best use.

Scott:                    That’s a great question. And the thinking of it as a canvas is perfectly right. So the way I think of it differentiating between, a value-add investor, value-add sponsor, and then those investors or sponsors and new development, really in three buckets as a way, I think of adjacent. So the first bucket is just your standard multi-family underwriting. The same as you guys do when you acquire existing assets. We do on new construction. So we have to assess what our market rents, what’s the purchase price or is it, coherent with the marketplace. We’ve got to underwrite operating expenses, we’ve got to boost the NOI as much as we can underwrite our construction loan, underwrite our permanent loan. So all those are very similar in how the value-add guys do it.

Scott:                    So that’s bucket number one. Bucket number two is the development space. And I’ll just say this and I’ll come back to it. And then the third one, is also what you guys do in value-add or anybody does, which is that we’re intending to improve an asset so that it can be more valuable at the end of the day, at the end of the investment cycle or whatever period of time that you’ve agreed with your investors to invest. And then we want to maximize the sale value. We want to sell at a profit. So bucket one and bucket two are the exact same for you guys as it is for us. Now it’s the middle bucket that is the differentiator, right? And where the real contrast is. And so in bucket two you have things such as, how to buy land.

Scott:                    How to underwrite and assess zoning, how to design a building from scratch, right? Because with value-add, you go assess a site at a community and it’s got a mix of one, twos and threes. They have trailing 12 historical records of rents. You know what operating expenses are. We still have to make those same assessments except now we’re creating more from full fabric, right? Like canvas as you put it. And then we’re adding additional variables that you don’t deal with, at least in the same way. So now we have to have a whole team of architects, civil engineers, mechanical, electrical, plumbing engineers. Those kind of guys that design the whole building from nothing. Then you have to, figure out how to build it cost effectively. And then, that’s sort of the end of it for the most part.

Scott:                    And then you get back into the normal underwriting upfront and underwriting the sale. So those are the high level stuff and we can certainly get into the details of any of those, as you want. I would say that the, probably the two biggest or the highest differentiated items in that second bucket are the zoning and the design and then the bill. So the bill costs now in value-add, obviously you’re, changing, paying carpet, countertops, cabinets, you try not to get into systems. If you can help it maybe a little bit, you certainly try to never touch structural and with a value add asset you don’t want to unless you know what you’re doing in that structural domain. So, we’re much more intensive in the build cycle and we need higher performing subcontractors, GCs, if you use that.

Scott:                    And then on the design side, you basically, the way of thinking of it is, when we look for a site, we start first with the neighborhoods that we want to be in. So we’ve identified let’s say 20 or 25 neighborhoods around Southern California that would be LA County and Orange County is our predominant focus right now. And then we’re looking for certain size, site, piece of land. And then we have to look at it and we go, okay, how many units can we fit there? What is it going to cost to build, what are the rents, where are the operating expenses? And then we produce a proforma that says, yes, this thing’s viable. It produces sufficient return to attract capital may be market superior to other investments, how we want to structure it. But inside of that work, picking the unit mix, we’re picking the unit tight.

Scott:                    And that’s from an assessment of the market and more in the context of identifying gaps. So when you go buy 200 units in Dallas, that’s existing, you’re assessing it in the marketplace, but you can’t change it. I mean maybe you could combine two ones and two a two bedroom, but that’s unusual, right? That would be rare. So you’re sort of operating from the already given unit mix and trying to assess is this a good investment in the context of the market and then make your choice based on that and other variables. For us, we can actually go into a marketplace and create that mix. We actually produce a unit mix that we prefer that says we’re meeting a gap on the marketplace. We’ve identified a space that’s not competed for. So as an example, the UTH model that you described earlier in your intro is a three story townhouse rental unit.

Scott:                    It’s got a garage on the ground floor, two car direct access garage, and three levels for living. But here’s the key. It’s a five bedroom, four bath apartment unit. And we do that purposely because we’ve identified in the marketplace that middle income working families in Southern California do not have a new construction model that fits their lifestyle. So if you’re a family that lives multi-generationally or culturally, you come from a place where families stay together in family groups and you go into the marketplace. In Southern California, what you’re going to find is a predominance of ones, twos, and threes with really the highest level being twos. And if you have a family of six or eight or 10 people, well now your only choice is to go rent a house, which is fine. I mean, that’s the fact. We say that’s our main competition, but that’s generally going to be much more expensive.

Scott:                    I always say, Jason, our families would always prefer to rent a house if they could. Who doesn’t want a backyard and a driveway and a front yard, right? That’s the American dream. But then we get into affordability questions when that house is 5,000 a month to rent, and then we can supply a virtually similar house that’s maybe a little smaller still as the bedroom still as the garage and serve that at 3250. We can be very much below the comparable rental home marketplace with zero competition and the apartment marketplace. Like actual, projects were built on purpose to rent. And so that would be an example of a niche or an uncommon offer into a gap or a space in the marketplace that’s really not being contested or competed for. Those are the kind of places we want to be.

Jason:                   And so when you’re looking at this, and you talked about finding the land, at what point does the zoning of the land use come in or are you just trying to find sites where you have, the use in place or some comparable use or is that always built in the time and the money to go there and convert for use?

Scott:                    It goes both ways, but I’ll give it a little bit of refinement to that. So you can either find a site that’s already gotten zoning in place that works for our product. We’re like 25 to the acre. That’s our density. We look for sites that fit that at what we call it by right zoning. In other words, we don’t have to change the zoning. There’s no site plan review, nothing to do at the political level, city council, which is very common for developers. We do that in the UTH program. But historically, if you look at our track record, we’ve actually tied up and it’s what we call entitled land, which is mean we rezoned, we designed a site plan, site plan review, maybe we do a California general plan amendment. So you know, major entitlement, you know, changes to zoning and planning that take a lot of time. So the first one is UTH by right, and we do that because we can operate and move through the projects quickly. And we also virtually eliminate the risk of discretionary going to city council. And they say no, right? Which happens in the business, particularly California.

Scott:                    The other side of it is that you find a piece of ground and you do want to change the zoning. You do want to re-entitle it. In that case, we would always buy the land in a long-term escrow that gives sufficient time for us to move through that political process comfortably. Or we just don’t close. And so if a seller says to me, it needs a zone change and you’ve got 60 days to close, I’m like, no thanks. It’s just not a risk we’re willing to take. And most savvy, sophisticated developers don’t take that risk. Some do when they really know the city, they really know the politics. Maybe they know the market, maybe they, have high identity locally, politically. There’s always those stories.

Scott:                    But that’s, one off or rare. Versus, if we went up to Northern California and wanted to rezone a site and you pick any city in the Bay Area, San Francisco, you’re looking at a really tough long road. Actually, San Francisco is a great example. On average, projects are taking between, five and eight years turned title. Wow. You either have to buy the land and sit on it for five years or you get five year escrow period, which does happen. It’s not particularly common. But those are the kinds of stories where we just go, hey UTH, we want it to be simple, low cost land. Simple like no zoning, by right. We have a simple build model. So at multiple points in our business plan for UTH we have moved to simplify the things that we choose to do. Like we don’t do entitlements, we only do by right. And what that all adds up to, one of the ways we can produce that [inaudible] return is that we’re shortening the time periods of our investments from acquisition of land, closing on equity and your construction loan, to the time that we rent and sell it is compacted, it’s made more efficient and that’s a key part of why UTH works.

Jason:                   What is an ideal timeline for our project, parameter wise? Just for concept, just so people can understand from, of course, finding the land, closing on the land, getting basically plans in place. Shoveling ground, putting this up, stabilizing with rent and selling it.

Scott:                    It would depend on the size. But for a small project, let’s say up to 30 units, you could probably get that done in two to three years. If you’re a hundred, 200, 300 units, you’re probably talking three to five years.

Jason:                   And when you’re doing this what is the structure that you do this bringing in outside investment? What is it? How do you structure this with investors so they understand this model? What kind of investors are interested in this kind of model?

Scott:                    Well, I think it’s the exact same investors that you guys see in the value-add space. High net worth individuals, small and mid-sized family offices. On bigger deals you’d have institutional capital sources, the Prudential’s of the world and the Goldman Sachs and that colony parkers and the warehouse or different names like that. So it’s the same menu choice of potential investors. And then our structures are very much similar to what you guys see as well. So typically how we underwrite deals, we’ll say, for the construction period, we’ll look at 75% of the capital stack. Meaning the cost to build is a debt, constructional loan, 25% equity. And then in the equity you’re going to typically see your same co-invest structure with LPGP. So, 90/10 on the co-invest, 95/5 if it’s an aggressive investor or really, really good market.

Scott:                    And then you know, the return characteristics I think lease, as I am talking to people more recently on value-add deals that could actually make sense. Most investors are looking for mid to high teens on an IRR basis for a value-add deal, development deals should produce a higher IRR because there is a higher risk. We have to build a new building that does not have any tenants and then we have to speculatively build it and find tenants and lease it up and get it stabilized. So there’s the additional time risk and it’s longer period. And then you’re starting from zero as far as any income. That’s why we see a lot of investors that go, it’s too expensive to buy in certain markets for value-add. Like what we talked about at the beginning of our conversation today.

Scott:                    And so they start looking around for development deals because they go, wow, I could get a 22, 25, 30%, IRR. That’s great. And then you sit down and you talk to them about their risk profile. And the one that always gets me is they go, okay, so you mean I have to have an empty piece of land or an empty building for two or three years until I get some tenants? And I go, “yep,” that’s development. And I don’t mean to be casual or punishing about my comment. But that’s a reality of development versus, buying value-add and you can at least have that trailing 12, I know what the steel looks like, maybe it’s worst case if you’re buying a stress asset. And then I think it was an easier pathway to underwriting rent increases or savings on operating expenses, even when to increase NOI. And so it’s a simpler, maybe less risky story or narrative about how I go from here to the end of the deal and make money. And so that’s why you see more investors in that space and no editorial about that choice. That’s the choice you need to make as an investor. You need to make the right choice for you. I just say from our standpoint of why we would tell investors there’s advantages to do construction multi-family, is that you’re able to differentiate versus value-add on a long-term basis. So as an example, when you invest equity in a new development deal, you end up the day, if you’re a long-term holder, the brand new asset, right? Perfectly brand new and it’s got all the new bells and whistles. So you got air conditioning, you got parking, you got a dishwasher that’s already built into that, the design and your investment from day one.

Scott:                    Two is that we see location choice as an option, right? When you go buy, let’s say, you got to buy a 200 plus unit deal in the Dallas Metroplex, there’s only going to be so many deals that are available at any one time that fit that. And then you sort of have to assess the neighborhoods from, say there’s five deals that are like that and you go, okay, I don’t like it in the neighborhoods. Well then you know, you may choose not to do a deal. We go the other way around, which is like we have our identified neighborhoods, for us Northern Urban Orange County is a great space for us. Blue collar neighborhoods, very highly sought after market, good brand recognition for the most part, good schools. And then we can go in there. We don’t always find land in those markets but more often than not we are able to over time to find land and that’s the size and price that we need to make sense to be in that location.

Scott:                    And then the last one is just like what I described earlier, is you build that unit mix and the unit style that you choose that’s identifying and addressing a gap on the marketplace versus value-add. If you know the buildings, all two bedrooms and it’s in the right neighborhood and the right price while you’re stuck in essence with the two bedrooms, unless you do something radical and change the unit mix, which does happen occasionally. So those are the advantages that we see sort of contrasting value-add with new construction.

Jason:                   So [inaudible] indication, being able to make your own style and of course ending up with a new asset are awesome, awesome hedges to risk. How do you prepare for, you have a two to five year horizon where it’s just a multitude of things can change. How do you, how do you hedge your risk over that horizon and timeline?

Scott:                    Great question. In fact, on my weekly email, I wrote a fairly lengthy article about, as an investor, how to prepare for recession. So it’s going to come out three parts. In this instance we’re, so we’re doing a couple things. We’re changing our strategy of how we raise capital. So in the last, let’s say, from since 2011, 2012 we’ve really raised capital to merchant build projects, which means we build it, we rent it, and then we sell it and then we produce our profits, pay back our investors, pay back the loan, and then we’re out. Now, what we’re doing is we’re saying, look, we are anticipating a recession at some period of time is it 18 months, 24 months? Could it be three or four years? We know what’s out there, right?

Scott:                    We’re at the longest expansion of economic activity in US history. Yield curve as inverted, there’s different signals, there’s a lot of noise. So it’s not clear, clear that there’s a recession coming, but we’re due. And so we just say, look, we’re vigilant about it. We’re not in a bad mood. We’re not going to just get out of the market. But what we do is be prudent and prepare and be vigilant. So how that shows up for us is that we’re now raising long-term hold equity, think seven to 10 years, and then we still choose the right locations and the right product type, which this UTH model is serving multi-generational, blue collar, working families in blue collar neighborhoods throughout the urbanized area of say, Southern California. What we like about that tenant base, why we see it as a hedge against the recession, is that these families are very sticky.

Scott:                    So if you’ve got your millennial and gen Z, which is the predominance of all the new apartments being developed, all the big guys are doing this studio, a one bedroom product, urban infill, maybe mid to high density and the appropriate choice given. That’s a huge demographic. Gen Z, millennials combined are the largest cohort demographically in US history. Kids, baby boomers, they’re at the right life cycle to come out of the house, and rent, maybe early jobs after college. But what we assess about those, that demographic, and there’s nothing wrong with this, this is just us assessing how people will act for themselves normally and appropriately. And in a recession, a millennial correctly will say, hey look, I just got a job in Austin. I’m out. Right? And I joke internally with my staff, I go, look, millennials and gen Z perfectly, appropriately can be gone to Austin tomorrow.

Scott:                    And so if you look at the entirety or the majority of the development marketplace, they’re serving that demographic. And I go, okay, right now it’s good. It’s still rents are going up in Southern California, but eventually we’re going to hit the recession. And then the dynamic changes. And I see mobility and millennial and gen Z, again, perfectly appropriate as a factor for how those buildings do in the long run. And I think there’s going to be pain there, right? If you’re the last one or two projects into a marketplace and you’re renting, right? When the recession hits, you know you’re going to have to drop your rents. That’s just normal strategy, maybe increase recessions and then everybody else is going to do the same. So now everybody’s just bashing each other to race to the bottom.

Scott:                    And what I say is all the big guys that travel crows, the Holland partners, the amylase of the world, those guys can sustain a lot of lower rents for long period of time. It’s corporate money. They’re not individual entrepreneurial developers or investors. And they’re going to eat everybody’s lunch. They can drop rents more than everybody else. We created UTH, in fact, because we made the assessment when we sold the last group of buildings that were in that unit mix for millennial, gen Z, that we said, everybody’s piling into that marketplace again, appropriately. Cause that’s where the demographic growth is. But we also are just styled. We said we don’t want to be there. We want to be contrarian, whereas, everybody else is not. And where is everybody else not that has the correct demand characteristics. And that’s why we landed on this blue collar, working class, multi-generational family. And when we started to look at it, we said, man, there’s nobody serving those, those families with new construction products.

Jason:                   What is the number one reason why developments fail?

Scott:                    So back to the crate, the things I talked about before. So failure would be the entitlement process is not successful. So let’s say you bought land and you made a bet that the political process would go in your way. And not against you. And people lose because politicians are politicians and they’re not, I don’t want to say they’re not logical people. This is not to insult particular individuals, but the political process is fraught with peril. It is that way. Second is the build process that I mentioned before, particularly people who are new in the business don’t have great GC or subcontractor networks, costs go against them and costs increase. Now all of a sudden the deal doesn’t work anymore.

Scott:                    And then the third big one is just the value and rents when the project’s done and renting up and getting ready to sell. And so this is why we change our strategy on equity because we say, hey, if we’ve got a 10 year hold, I can be relatively comfortable that procession between two and five years from today and 10 years, I’m going to have gone through the recession and come out the other end. Now, we’re not Bulletproof in the recession. I’m not sitting here saying, look, we’re, we’re never worried about it. But what I say is our UTH model, these blue collar families are very stable. They stick around, in fact, I call them sticky because they have social networks. Kids at school, their churches close by, their families live adjacent, maybe they’re from there. And then their job is close by. They’re not super commuters. Generally, these particular demographics that we serve. And so opposite of the millennial, they’re going to stay and they’re going to basically admit that, kids may come home and live with them.

Scott:                    Maybe grandma moves in with them to share costs and share income amongst the family group. And we see that as a very stable demographic. And then we’re serving them with the right unit type. That keeps them feeling good about it. And plus there’s an economic sharing model. It’s more bedrooms, more people in a family group, could live and share income and costs. And so we see that as a stable income generated through recession. Cause you’re sticky. They stay close, their jobs are close by. They don’t leave town. We underwrite, at the market, but we’re not trending rents and our model out two, three years, we had a right to today’s rents and then we’re an uncommon offer. So we don’t have a lot of other people competing to build five bedroom units next door to us.

Scott:                    So it’s rare. And then the main thing in that case is, that we have to worry about, so we raise capital we rent the units or build it, we rent the units up, we’re holding it, and then we, the main thing we have to worry about, if we assume incomes and rents are stable or let’s say rents are stable, then we worry about the value decrease in a recession. Maybe interest go up, values go down. Although we’re in an incredibly low interest rate environment right now, but let’s just say values draw. We don’t have to sell. This is the beauty of it, and we’re not forced to sell because equity says, hey, I want to be out three years and then the recessions in three years. Oh boy, now I’ve got to sell this asset at the worst possible time.

Scott:                    And so we say of course as anybody would, we prefer not to do that. So let’s have a 10 year time period on it. And then we just need to adjust how we had right from loans and that value shift time during the recession. But otherwise our incomes are and our [inaudible] rates are stable.

Jason:                   So Scott, this has been awesome. Let’s jump over to the snap section question. What’s the best piece of advice you’ve ever been given?

Scott:                    I study with a group called the [inaudible] network up in the Bay Area and they are big proponents of acquisition of strategic knowledge. And so it would be continuous, aggressive, competitive, learning. It’s the most important thing I do and the networks I have around me and what I would advise anyone and everyone to do. Think about it today, we’re in the most highly ,technologically advanced, most competitive, global marketplace in human history.

Scott:                    We need to orient our learning around, computer based learning with powerful networks to acquire strategic knowledge so we can compete effectively in this new era of technology.

Jason:                   What’s your real estate superpower?

Scott:                    Real estate, super power. So the best part of what I do is in that early acquisition, think of it creating the deal. So I see a piece of land I go, what goes there, what problems, so I anticipate. And I have a background, I’m not professional, but I’ve always been a musician my entire life. And I’ve just made my own music. I don’t call myself as songwriter or anything like that, but the creation process to me is almost exactly a mirror of what I do in the early parts of the real estate development deal. I’m looking at all the different pieces and I put them together in unique ways to create value.

Scott:                    And so that creation in the real estate development space, is, how I’d answer that question.

Jason:                   What is a lesson learned on a project that’s regardless of if it was a hard lesson, has definitely propelled you forward?

Scott:                    Great question. So what happens to people who are early in their real estate investment or development careers is they always assume the most positive case for a deal. Like everything’s going to go right, costs won’t go up, rents won’t go down. Operating expenses are going to stay stable. And so the lessons I always bring toward deals right now is we just underwrite the reality. There’s no point in sort of pretending that things aren’t going to be different than what we might judge or make the assessment. My joke is when I was young in my career, every deal was possible.

Scott:                    Jason, there’s no deal that I saw that couldn’t be done. And now I’m the opposite. I’m like, most deals won’t make it and I’m just fine with that. And then occasionally one sort of rises out of the soup and meets all the tests and that stuff I’d throw out to break it. And when that deal comes along, you go, that’s the right deal.

Jason:                   That’s awesome. What’s your greatest tip for success?

Scott:                    Not to repeat myself, but I think that that’s continuous, competitive learning. I think that’s so applicable to any place. And real estate development is a very obscure business with zoning and putting the deals together so it’s not mainstream. So if you were to somebody who wanted to start a career on that, that learning process would be highly valuable, but then it doesn’t stop. You’ve got to keep going. You’ve got to see what’s new, how you can use new tools, new technologies to remain competitive. And I mean, let’s admit the real estate business is not the most forward, looking at use of technology. We’re sort of like old school, ancient technology still are fairly common place. So I’m a big proponent of the learning and then using new technologies to advance and to be more competitive than everybody around us who we of course compete with day in, day out.

Jason:                   Well, Scott, I’ve really enjoyed this. I’ve learned a ton. This has been great chatting, for listeners, what’s the best way to find out more about you? Find out more about Urban Pacific Group and connect?

Scott:                    I appreciate that. So I would encourage everybody just to go to our website, which is www.urbanpacific.com and take a look there. We’ve got a lot of investor education articles, blog posts about investing in new construction deals and just being a good investor. There’s deals that we’re raising capital on now there. And then obviously, you know, a lot of background about us, but most particularly I would encourage people to go look at our blog. I write a weekly email blast that we also post on our blog with, which just basically is a collection, curation of all the articles I read. Which I’m reading daily as probably you are. So, I curate those and I’ll look for new trends, new ideas, market shifts, market draft what’s the latest market assessment about, multi-family. And I share that out into internet domain. And then also put it out on our social media channels. So we’re on Twitter, Instagram, Facebook and LinkedIn. If you just search for my name, Scott Choppin, you’ll find me pretty much in all those places and you’ll see the consistency of the curated information that we put out about being an effective real estate operator and investor.

Jason:                   Oh, that’s awesome. Well, Scott, thanks so much for coming on the show today. Really appreciate your time.

Scott:                    Yeah, thanks Jason. Enjoyed it, appreciate it.

Jason:                   Awesome. And to you all listeners out there, again, thank you for checking out the show. Talk to you shortly.

Subscribe to our regular newsletter and get exclusive access to our next investment opportunity.

[convertkit form=1175140]

Recent Posts