Developing Profitable Affordable Housing with Scott Choppin with host John Casmon
Urban Infill Housing: Find sites that are vacant or underutilized in cities and develop apartments
What is Workforce Housing: Pairs private capital with moderate income multi-generational rental housing
How to find Urban Infill opportunities: One very surprising resource!
The real estate market for the rest of 2020 and how it is going to shift
The impact on rental markets in 2020 and how it affects investors in the future
The difference between workforce housing and affordable housing
How to work with cities to develop affordable or workforce housing
The benefit to investors in developing workforce and affordable housing
Government subsidies
Understanding The UTH Model: The intersection of lowest density, lowest cost build, with maximum capability to generate rental income
Why Scott’s UTH model works without subsidies
Working within urban real estate markets (Focus: Los Angeles real estate market)
How UTH Homes compare profit-wise to value add multifamily projects or new construction developments
Duration: 52:00
Two Speakers
Host: John Casmon
Guest: Scott Choppin
Scott Choppin: The main driver of our project is the private capital with the moderating income, and that we don’t rely solely on the subsidy. Because in affordable housing, if you don’t have subsidy to fulfill your subsidy gap or your soft financing gap, then your project doesn’t work. You can’t move forward to it until you resolve or fill that gap with the subsidy that you need for it. Our projects don’t depend on that subsidy. In fact, if you look at a pure UTH deal, it requires no subsidy and in fact was designed that way purposely.
[Music 00:34]Infomercial: Welcome to ‘Target Market Insights, Multifamily and Marketing Podcast’. Each week, John Casmon interviews multifamily and marketing experts to teach you how to find the best places to invest, attract investors and grow your portfolio. You are listening to “Target Market Insights’ with your host, John Casmon.
John Casmon: Welcome to ‘Target Market Insights’, the multifamily and marketing show. I’m your host, Casmon and I want to thank you for joining us for another great episode. Now look, if you’re enjoying this show, I need you to do me one quick favor. Just take a minute and leave us a five star rating and review and if you haven’t already, make sure you hit the subscribe button so you don’t miss an episode. Now today we’ve got a special guest, Mr. Scott Choppin. Are you committed to being a multifamily investor but not quite confident in your abilities to select the right deals or the right markets or maybe you have doubts on deal structures and attracting investors? If so, I’d love to see if you are a fit for the Capital Impact Club. A select number of club members will receive a strong multifamily foundation for finding, analyzing, and managing deals as well as a marketing playbook for engaging investors and attracting capital.
John Casmon: Now I’ve taken the best of my experiences in multifamily investing coupled that with over 15 years of marketing experience for major brands and influencers and I’ve sprinkled in the best advice and strategies from over 150 episodes of this podcast. Now we have a few slots open for committed investors ready to take their game to the next level. To learn more about joining the club. Just go to capitalimpactclub.com again, that’s capitalimpactclub.com. Scott Choppin is the founder of the Urban Pacific Group of Companies, a Long Beach, California based real estate development company founded back in 2000. Now they focus exclusively on urban infill and 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. With that said, let’s welcome to the show Scott Choppin.Scott Choppin: Hey John, great to meet you man. Good to be here.
John Casmon: Scott. Great to meet you as well. I’m going to call my own self out there. I should have asked for clarity and a hundred percent certainty. Am I pronouncing your last name right
Scott Choppin: No. It is pronounced ‘Choppin’.
John Casmon: ‘Choppin’. Alright, well I’ll redo that later.
Scott Choppin: Just like it sounds right.
John Casmon: Yeah, ‘Choppin’. I want to be real fancy Choppin.Scott Choppin: Yes.
John Casmon: ‘Choppin’. Got it.
Scott Choppin: Yes. Musical expertise.
John Casmon: There you go. So, Scott, I kind of went through your bio, but take a minute and maybe explain who you are in your own words.
Scott Choppin: Yes, thank you. Appreciate it. So, as the bio spoke about, we’re a real estate development company. I’m the founder of the company. I’ve been in the real estate development business in various forms or almost the entirety of my professional career. I have a family background in real estate development, my dad, Carrie and my uncle Mike were both in the real estate development business in different forms. So I grew up in a family of real estate developers and in fact, for a time it was, the thing I didn’t want to do. But what it did for me doing was when I was 18 I started, you know, as you get ready for your career, I started to think about, ‘hey, what the heck am I going to do?’ And real estate wasn’t necessarily my first choice, but I ended up reading one of those books that we’ve all seen, “How to Make a Million Dollars in Real Estate Investing on The Weekends.”
Right. In fact, I think it’s, a fairly famous book. And what that did for me, John was his sort of paired up the idea of entrepreneurship of deal making with what I observed my uncle and my dad doing. Right? Like for me it didn’t quite come together at 18 I read that book, a light bulb went off and I was like, okay, now I see what I want to do. Basically being an entrepreneur and real estate to be creative and innovative in that space. And basically from that day on I sort of oriented my college career, my early professional career and ultimately my transition into forming a civic overlaps now 20 years into that. So we specialize in urban infill housing. Urban infill means, we find sites that are vacant or underutilized in cities to put it in a plain manner. And we basically develop new construction apartment projects in that domain. And then in the last couple years we’ve transitioned exclusively into what we call workforce housing, which is a type of rental housing that pair’s private capital with a moderate income, multigenerational family housing type.
John Casmon: No, I love it. Scott, your story is one kind of, that sounds like a second generation investor, right? Coming into it didn’t really want to do real estate, but as you educated yourself more, reading that book, “on the weekend”. Realized, ‘hey, this is actually the path that makes the most sense for you’. You gave us a couple of phrases. You said urban infill. I really appreciate your explanation of what that means because it’s a term that gets thrown around a lot. I think people assume that everyone knows what urban infill means, but the way you explained it I think is very helpful. How do you come across the land for these urban infill opportunities? Is this something where it was just vacant land and you buy it or is it buying existing property and demoing it or how exactly do you come across these urban infill opportunities?
Scott Choppin: Yes, great question. So I mean like any real estate developer, we have our practices, the named actions were in defined land. What I mean is we’ll search the databases that I think everybody’s familiar with, like a CoStar, LoopNet. We have brokers that we have relationships with. It know our style of housing and the neighborhoods, regions that we want to be developing in. We also use other strategies. One that people might be surprised. I actually find Zillow to be an interesting source of land deal. Now. It’s not a land deal platform. It’s single family has, everybody knows, but you can find apartment projects in there. You can find small land assets and I liked that because basically if you’re looking to do midsize projects, midsize land deals, a lot of times the brokers won’t be so sophisticated to put it on a CoStar.
Maybe they don’t even have a CoStar account, although luminous for free. So, I find just sort of a extra layer of deals inside of Zillow. You could use Redfin I suppose. Although we’d go to Zillow and then we just look for any other strategy that is effective, so we’ll call cities directly. In California, we used to have redevelopment agencies, which were city entities that had subsidy and bought land to develop projects. Although that’s those land assets are mostly gone. But sometimes cities, know, I’ll call a city and say, ‘Hey, we’re interested in coming to develop workforce housing in your city’. Do you have any land that’s available? You know, something that’s on the marketplace. And a lot of times the city planners have a little bit of feel for what’s out there in the marketplace and working our networks fundamentally it’s people that we know. I tell everybody, all of our vendors are Geo-tech architects, civil engineers, title people. Hey, we’re looking for deals, give them the parameters, send it our way and help them look finder fee if they bring it to us.
John Casmon: Got it. Makes a lot of sense there. So you’re really working the angles, what’s out there to find these urban infill opportunities? And you started talking a little bit about workforce housing as well. I know when we start thinking about the opportunities and workforce housing, before we go deep, I want to make sure that we’re all kind of playing from the same playbook here. Can you kind of just define what workforce housing is?
Scott Choppin: It’s a great question. Workforce housing has a lot of definitions. I think in the mainstream conversation today, workforce housing is most often thought of an existing value out apartment asset, where an investor or sponsor will buy the asset. Improve it like you would in a value-add, but hold the rents similar to what they bought into to try to maintain the families that are renting in that asset. And a lot of times those families would be working families. They make good decent income, not enough necessarily to afford the new housing that would be in a marketplace, but they make too much to be in what I call true affordable housing, which would be government subsidized, low income housing tax credit type projects. So these folks exist in the middle between those two spaces, between true affordable and brand new luxury housing. And so they’re left with just certain choices of housing that’s maybe not preferable or coherent with their lifestyle.
And so for us, workforce housing means basically a new construction, rental housing asset that’s meant to be occupied by families that are living multi-generationally, meaning they have two or three related generations working together. Right? And then more often than not, there’ll be in the moderate income category, which would be often 80 to 120% of medium income. Every County across United States has a different medium account. So we would be coherent for whatever the local counties. So for us to be Los Angeles or Orange County as an example, and then we basically serve that marketplace with a new construction rental housing offer, which really doesn’t exist otherwise. No one’s really doing this at scale.
John Casmon: Got it. Makes a lot of sense there. So, as you look at the market today, we started talking about what exists and where the opportunity lies. As we’re recording this right now, we’re still kind of hunker down in our respective homes during Covid-19 so as you look at the current landscape, how did you see it kind of, I guess for most of 2020 and how do you see it pivoting? As you look forward and beyond for the rest of the year.
Scott Choppin: When you say it, pivoting meaning workforce housing or the marketgenerally?
John Casmon: Let’s say the real estate market, and obviously more specifically workforce housing and how do you see that landscape shifting as we go throughout the rest of the year?
Scott Choppin: So, I’m like you, I’m doing tons of reading. I’ve been on more webinars, market updates. I’m more busy now with this stuff than I was when the market is at its peak for all the same reasons that everybody is trying to find out most recent updated information. So I’ll share a few sort of anecdotal reads on the marketplace, but I’m listening to guys like CVRE Capital Markets, Walker and Dunlop, Robert Charles Lester, RCL Co, as they call themselves now. Just looking for people that are expert in space that don’t have a particular agenda. They’re not an economist that wrote a book and just trying to sell books and scare people, whatever that happens these days. And so related to workforce housing. Well, let’s back up a little bit. Let’s talk about the rental markets generally. Rental markets will be impacted, I don’t think there’s any doubt in anybody’s mind.
If you track any of the multifamily reads, they’re fluctuating evaluations. There’s somewhere between 20 and 30% down in publicly traded reach space, which you can argue as an indication of the market’s assessment of the net asset value or nav of those reads, right? Which is the total value of their portfolios right now. Just because the net asset value goes down because the market is going down doesn’t mean the underlying assets gone down in value. And this is one of the advantages of illiquid rental assets is that they are not immediately impacted. But if we then move to the next step, which is what is the renter population, how are they being affected by Coronavirus, with this lockdown, obviously the service economy, the service sector is being highly impacted. So your waiters and waitresses, your delivery people that arguably, companies like Amazon are increasing that to some degree.
So, we see a general impact in the work force, right? And in fact in the people that we serve, these low income families. But here’s the interesting thing about that and why reading. It’s anticipated that the major change and the rental market for that will be in studios and one bedroom units. In other words, single occupant or maybe a couple of a single earner, right? That will be more impacted. And then one of the articles I read talked about the logic of people starting to move then into roommate situations or they’re moving home with their families. And so several people have argued, which we are a believer of this as well, is that units that are two, three bedrooms or more actually will be benefited for this because it’s the opposite of new family formation. So in new housing we look for new population growth, new job growth, and new formation of families.So you know, an adult child moves out of the house and rents their own apartment. That
would be counted as a new family information. So now we’re on the opposite of that, which is family is now combining back together or people now getting into heavier roommate situations. And our prototype urban townhouse (UTH), we actually build specifically and only a five bedroom, four bath townhouse rental unit with a two car garage or the ground floor. It’s exceptionally different contrarian, but it serves this demographic combination of families of roommates into what we call the economic sharing model. So it’s combining multiple wagers in a household to then share incomes and expenses across a broader group of people to keep costs down. So utilities and rent share between multiple people is beneficial in economics, troubled times or recession. So we knew this going into like, we started this program three, three and a half years ago. Speaker 1:
We always anticipated that this would be the case and now that we’re in it, although we’re early, we can argue several weeks into it, we continue to see leasing volumes and leasing rates. Like the rest we’re getting, all these units actually are maintaining. We don’t expect any acceleration in rents or volumes. In fact, maybe some deceleration of marketing in the lockdown. But sort of the assessment by economists and people in the real estate industry that, families will now combine to share across a larger group. Economic sharing is actually coming to be true and this is like exactly where our UTH workforce housing model already existed. We just happened to be the right place at the right time. John Casmon:
Yeah, I mean, listen, when you think about it, it makes a ton of sense, right? You don’t have to be an economist to understand as someone loses their job or money gets tight, they only have a handful of options. I mean, if you’re living by yourself, maybe you could get a roommate or you go back home for a little bit. You have a few options that most people would take. So it does make sense that you will see a bit of a contraction of new family households, and it’s probably priceless ideally or I guess you would imagine more people would be trying to save money as much as they can. So they’re probably not looking to expand their families, although that may or may not happen, but it makes sense fundamentally. I think at a high level it makes sense that families would be contracting instead of expanding, but you are not necessarily trying to time the market or doing anything like that. Speaker 3:
You just saw an opportunity to create a product with these UTH homes, these urban townhomes that could really allow people to live together, families to live together. They kind of either save money through living under one roof, but really make it more streamlined with the sharing of different bills. One thing that we hear often is it is not profitable to build affordable housing, and I know that I’m saying affordable housing and there’s some nuances and differences between affordable and workforce, but two things. One, can you just talk about how that’s profitable? Your model, given the high construction costs that are out there right now. And then two, would you be able to just delineate the difference between workforce housing and affordable housing? Scott Choppin:
Sure. Let me answer the second question first. So we call affordable housing as most people call. I call it true affordable housing in our internal conversations to should differentiate that. True fordable housing generally the marketplaces, government subsidized new construction or sometimes rehabilitated apartment units. And usually has some sort of government subsidy and programs, like the low income housing tax credit, Section 42 Lytec program combined together to facilitate the capital stack to develop a project. Usually all those programs have an income limit out or below 60% of medium income. So remember before we, I talked about the 80 to one 20 as being moderate. True affordable housing is 60 and below has government subsidy is developed under these very rigorous complex programs that require developers to compete for these subsidies. But what I say about that space is the subsidy from the government is a finite source of capital.
Okay? And so that means there will only ever be a finite source of capital to develop projects. So there will always be a finite source of projects, right? And that the demand for those far outstrips supply of it. So it’s always going to be oversubscribed. Meaning many, many more tenants that need the housing then actually has developed and then they can move into that, so that’s the bucket of affordable housing. So for us, workforce housing, again we talked about earlier has different definitions, but for us, workforce housing, the way we define it as pairing a moderate income housing offer, that 80 to one 20 that we talked about before with private capital. And that’s really are, you know, if I were going to state our innovation in a really simple way, will be the pairing of this private capital with moderate income, multigenerational housing.
Why that’s important is because before I said, ‘Hey’, subsidy is finite right, there’s only ever enough to develop so many projects and we’d hope it rises as government attributes more money to those programs. But it’s always oversubscribed. Our innovation ‘UTH’, basically has extensively the unlimited source of private capital. And I qualify that capital is never unlimited, but at least when it’s feasible and we can produce returns on it, we will be able to attract capital at some level. But there is no program that says, ‘Oh, you can only ever have this amount of money and that’s the cap on it.’ And then we’ll get whatever projects we can. Now we say, Hey, we can go to the capital markets like a market rate project, standard multifamily, new construction, raise as much capital as we can’t feasibly and produce housing that’s coherent. Now with the demand care that’s fixed in that space.
By the way, nobody’s doing this. We’re not here to pat ourselves on the back on that. Innovation is one flavor, if you will. And that space of multigenerational moderate income families needs lots and lots of housing offers. So we’re actually encouraging of the marketplace to develop further to have a basically market-based solution to these moderate income families, housing underserved presence.
John Casmon: So one thing I did not hear you say in describing your model with workforce housing was any connection to government subsidies or any public funding. So everything you’re doing just with private capital?
Scott Choppin: Well, yes with the qualification, right? So the main part of the offer is this pairing private capital with workforce housing. On occasion and, happen in fact more regularly is that we may go to a city and they may say, ‘Hey’, we would be interested if you could facilitate it, have 10% of your units be true affordable say low or very low.
And we would then in some cases develop an inclusionary component of our project and still predominantly this private capital with moderate income structure. But we might carve out 10% of the units under an affordable housing agreement with subsidy to in fact then further lower the rents for those particular units. And we’re actually open to that. And in California, and then some other States you actually will get like zoning benefits. So lower setbacks or a lower parking ratio when you supply housing at these levels. And then, you know, in many cases we’ll ask for the subsidy. So we’re actually very open to conversations with cities about these inclusionary apartments. And in fact we can facilitate projects more readily because the main driver of our project is the private capital with the modern income and that we don’t rely solely on the subsidy. Because in affordable housing, if you don’t have subsidy to fulfill your subsidy gap or your soft financing gap, then your project doesn’t work. You can’t move forward to it until you resolve or fill that gap with the subsidy that you need for it. Our projects don’t depend on that subsidy. In fact, if you look at our pure UTH deal, it requires no subsidy and in fact was designed that way purposely.
John Casmon: Yeah, I think it’s really interesting because you have developed a product that clearly has a need, but it hasn’t been built where government subsidies are necessary. And the next question I have is, I’m trying to understand, and don’t get me wrong, I understand that there’s a few good component to providing housing that people can actually afford a new development and things like that. But I want to make sure I understand from an investor’s perspective, where’s the benefit? Why not just create higher end, luxury town homes as opposed to creating affordable, especially if you are trying to keep rents capped throughout the same market levels. I’m not seeing where the benefit is for an investor.
Scott Choppin: Yes, great question and the sort of alludes back to the question earlier, how do we make these deals work? So I’ll sort of roll those two questions together. So because of my background in both affordable housing and market rate housing, I had like the common background of those two worlds always being separately, right? Like you alluded to like, Hey look, if you lower your rents enough, you can’t make a yield for your investors. And so that requires government subsidy. On the other end of the spectrum is the classics statement, which is developers and market rate projects or just regular market projects have to maximize rent because that’s the only way they’d be feasible given high land prices and hypo costs. And generally that’s true, right? But because of the combination of things that we’ve combined in this UTH model, we’re actually able to not only produce generally market standard yield, but in many cases we’ve been able to exceed it, even beat the market.
And we do that basically through several mechanisms that we’ve designed into the UTH model. And there’s no specific words today, it’s like give me the broad basket of what these things are. So a couple of things. So one is we build a specific unit type and earlier I described that we build these as a townhouse. It’s a three storey townhouse important for this conversation. Because if you look at the market rate domain, predominantly you’re going to see middle and higher density Codian projects. So, parking structure below grade three or four or five levels of units stack on top of that called, the podium project for short. And that’s your middle density. So anywhere from 50 -150 to the acre depending on the unit size, and that’s usually what people will build in an urban environment because land costs and they have to maximize the density on that piece grounds of being at work.
Well the trade for that is you have a much higher build costs per square foot or per unit depending on how you do the mathematics. You also have a higher rent figure, right? Because you have maybe smaller units, you’re in the city so you can charge more rents. Okay. So that’s one end of the spectrum from the other end of the spectrum would be your single family house that’s super low density and maybe you rent it. Maybe it’s like a single family rental, right? Very, very inexpensive to build cause it’s one or two storeys, except the drag on that, is that basically you can’t charge enough on a per square foot or whole dollar basis to really maximize revenue. So you have a lower bill costs, we have a lower rent generation capacity. So ‘UTH’ is a three storey townhouse model of a slab on grade type five construction, which is your standard wood-frame, sort of old school balloon frame.
And in our both opinion and research and now proved from the model, from the projects we’ve completed. And so we are at the intersection of the lowest density, lowest cost build. So it’s a three storey model with the maximum capability to generate income as far as rental income to the unit. And we need to maintain coherence with this middle income model that we have because that’s really our asset. So three stories is at this intersection of maximum regeneration will low spill costs, right? So we keep it very simple. We don’t do podiums, we don’t go underground, we don’t do concrete structures or taller structures that require heavier duty structural components. Really at every level we work and we continue to work to remove complexity from the process of building it. So you can think of it in the same terms on a production home builder.
Think of your KB Home or your Toll, or Bezier’s or Lennor’s and their home building model, your starter home or your sort of middle market home. They’re always going to be looking to simplify the design as much as possible so that when they build it, that maximum efficiency, and that’s what we’re doing. So we keep the complexity of the construction low. Plus we do the same unit over and over again. We do the same footprint for this five bedroom, four bathroom townhouse, so we got production and build efficiency. Okay, so that’s bucket number one. Bucket number two is because of the demographic of the tenant base that we serve, which is predominantly working class, we would call or large families in urban environments. We’re actually buying land and neighborhoods, it’s really not in consideration for your normal home builder or apartment developers. So think low income communities, maybe lower middle income communities, but these would be blue collar neighborhoods that have been passed over because the incomes weren’t sufficient to build.
Scott Choppin: Because the incomes weren’t sufficient to build for sale or higher end luxury rental products. And so we can go into those marketplaces and capture land opportunities that are going to be more cost effective because it’s not competed for. So that’s bucket number two. Bucket number three is right now for the most part, we’re only buying sites that are zoned for our projects without any other zoning process. So what we call Bi-Rite, which means that we can go in and basically capture the land opportunity in some sort of an escrow structure, and basically go immediately into CE or construction drive production. And we eliminate that entitlement process or zone change or general plan amendment or site plan whatever you have, these are California terms. And so we shorten the time period. So now we’re more efficient time. And then the last part of it really to me is the most important part is the uniqueness of the size of our unit.
And the bedroom count really produces maximum whole dollar rents relative to the underwriting while minimizing costs. So your least expensive build costs in a residential unit is going to be your bedrooms, your hallways, or living rooms, your none kitchen, none bathroom spaces. So think about it. We have five bedrooms, four bathrooms, and one kitchen. Now we do have more bathrooms, so there is a cost there. Then that’s actually benefit for our tenants to have multiple bathrooms for large circumstances. In the context we’re doing 1,750 square foot unit, one kitchen, and our kitchens are probably the same as you would have in a unit that’s a thousand square feet, or maybe even an 1800 square feet. These are decent sized kitchens that we do pair them up with the family room. So you got a big space, kitchen, kitchen Island, larger family room. So we put those together on purpose to make it more livable.
But our bill cost is very efficient and we were producing a lot of whole dollar rents. Our rents with average are between three and 4,000 a month, depending on the market we’re in, you know, micro market. And so we’re able to generate a lot of whole dollar rack relative to the cost that it costs to build. In the apartment game, that’s what you want to do generally. Fundamentally, you want to maximize your rental revenue while keeping your costs low. So, I mean, that’s true for, for sale housing also pass over that. But any one of those things, if you took it away, the model might not work or it might work less, meaning returns are lower. But when we start to combine all these things together, now the story is acquired. Story for producing a project that serves this social impact, moderate income demographic multigenerational, while also producing market per yields.
John Casmon: Now, I appreciate you walking through those advantages because I think it helps to illustrate why the model works without the subsidies. Because I think that was the thing I was struggling with, is everyone I have ever talked to when you start talking affordable and workforce. The first thing they talk about when they get into the benefits or some of those subsidies, whether that is the opportunity zones, whether it’s the Lytec grants or different subsidies that are available. Or different grants loans that are available to make the deal work and you didn’t bring up any of that. So I wanted to make sure I wasn’t missing something. And I think the way you laid it out makes sense. The one thing that I will probably add is you obviously need to be in a market where building a five bedroom, four bathroom town home can command premium rents, like 3000, $4,000. We try to do that in some of the Midwest towns, where you probably lose your shirt, but doing that in the West Coast definitely has that ability. Because again, to your point, you have markets where it’s unaffordable for many people. I was just reading something about, I think, in the Bay area. How the affordability issue is really starting to make politicians reconsider how they structure some of the laws, and things like that, because it’s just really becoming an issue for many of the residents who have been there for years, if not decades.
Scott Choppin: That was where I got the business for the UTH program. I mean, this is like the way I describe it. John is this California story right now you can make it more generic and say, this was an Urban story. Urban coastal, but we’ve underwritten, obviously we’re active in our hallmark LA and Orange Counties. But we’ve underwritten deals in San Diego, the Bay area, Portland, Seattle, Denver, and basically there’s a need for this housing type and there’s feasibility. Like we found a piece of land explored the build cost, explored the rent so that we could get the operating expenses that we would need to pay, to operate the apartment units. And so the story really is an urban story. Fundamentally, you can say urban coastal, like I said before, and you’re right, as soon as you go outside of an urban I’s market. In Southern California, we have a certain place called the inland empire, which is Riverside San Bernardino.
As soon as you go far enough away from the LA Orange County Metro area, a few things happen. But one is land costs and bill costs start to drop the job centers you’re farther away. So people are willing to take less or make less even in the marketplace and so you start to see much cheaper real estate. You can rent a house for the same price that we would need to charge 3000, 4,000, by the way, sounds high. But relative than our active markets, compared to what you could find, that’s available at a five bedroom, four bath apartment. One, you don’t have any of those apartments. They don’t exist. Literally we’re the only guys doing it at scale. And then usually it’d be your rental house. That would be a competition for that. And a lot of the markets we’re easily well above this three and 4,000 a month for a five bedroom for comparable house to what our unit.
So, yeah, we’re definitely a story urban marketplace, for sure. But I think it’s, we’re finding as we explore new markets just more applicable broadly. So, as an example, right before Coronavirus hit, we’re doing deep research on the Dallas Fort worth market place. We think there’s a story, some sort of story in Texas. We’re not fully resolved on that yet, but it’ll cost land costs are generally less expensive, much simpler to execute on deals. But then you can drive 15 minutes from downtown Dallas, and find a decent rental house for probably what we would need to charge. We’re looking for niches. I mean, we’ve always been exploiter of niches, contrary and uncommon offer. And so we may just try and find that in other markets, but the reality is in our home market of California, there’s so much demand given the limited supply that I don’t ever see us running out of opportunities of demand and bargain and places.
And in fact, right now, even given this humble we’re in an economically, we’re actually, we continue to see opportunities to continue to develop a story that we’re in. And even accelerate it both because we have these families that are now combining together more actively, but even before that middle income families were being pushed out of that market place. And there was that demand characteristics. So now we’re putting those two together. I mean, they’re sort of the same story and overlap, but we see tremendous opportunity going forward. So at least the next decade, 10, 15, 20 years, we’ll be in a catch up story in California, meeting catching up supply to demand, given political constraint on development activities. I expect to spend the rest of my career running this company, just doing this workforce housing.
John Casmon: No, I appreciate that. And love the way you explain how the market really dictates where the opportunity is. And there’s obviously plenty in California, but as you look at Seattle and Dallas and some of these other markets and just kind of weighing whether or not there’s an opportunity there. It makes a ton of sense, the lens you’re taking to look at it. You know I want to ask a question from an investors point of view. So as I’m listening to you and thinking about the development side here, I’m interested to know what you’re doing with the UTH homes. How does that compare to say value-add multifamily investments as well as new construction or new developments?
Scott Choppin: Yeah. So like a comparison between those two domains?
John Casmon: Well from an investors standpoint. I think most investors, they love to understand what the risks are, but then also the profit. So what are the profit potential? And then what additional risk are there that maybe are not there in regards to a value-add play or some new development place?
Scott Choppin: Absolutely. Now great question. So the way I like to approach this, I think of value-add and new construction, if you think about them on a residential apartment ownership and investment domain, I really think of them in three buckets. The first bucket is how do we underwrite apartments and make assessments of the marketplace for deal and a value-add deal, you will go in and find out the unit mix. You’ll assess the market for rents. We do the same in new construction. The second bucket is the new construction zoning bucket, which is predominantly related to new deals, and existing asset, worry about the zoning rights and existing asset. You don’t have to care about the zoning. It exists and you can move forward without worrying about that. And then the third bucket is the value bucket, which is the same again for new construction and value-add, which is what we care about as, or investors in our assets is what valued we produce at the back end of a deal that is greater than what we bought it for.
So in a value-add, it would be the sum of your purchase price. Plus your upgrade costs and soft costs, and is your rent increase and your value increase enough to have it be profitable. Like you’re on the money and a new construction, in fact, I call new construction is just a more radical form of value-add. We’re taking a raw piece of land and building a brand new building. So that’s the ultimate value-add, but it still has the same metric. We have to produce more valuation and the value of the rented asset, when it’s completed and rented than what it costs us to know that, right. So I use those three buckets, because that’s a framework that investors that are familiar with bucket one bucket, two, some sort of tying them together with the new construction. So it’s really in the second bucket that the biggest differences are, and those are both the place of advantage and the place of risk.
Okay. So a couple of things, one, when you build a new building, you have a brand new asset. You’re not even in a value-add project. You would still have underlying structure. You have older systems, depending on what systems you want to upgrade and mechanical electrical plumbing. Our building is always going to be brand new. So when you own and invest in that asset, you can look forward to longer lifespan and newer technology’s better plumbing fixtures. And some of that stuff you can upgrade. But we’re on a full scale, a hundred percent, we’re all new. So that’s advantage number one. Advantage number two is we can design a product type that’s unit mix. That’s the size of the deal. That’s the program of the apartment project to meet the market as it is today. Whereas in a value add asset, you’re always going to be buying what exists, right?
That’s the advantage, right? I get to buy an existing asset, arguably affluent to some degree, depending on the occupancy rate. But if you buy a buliding that has all studios, well guess what? Unless you combine units, you’re always going to be producing rental offers in the marketplace for studio renters. And if the market is moving away from studio, maybe the market wants to have more two bedrooms, and I’m just making this up. Every market’s different. You don’t have two bedrooma. So for us, at any point in time that we go into a new market. Let’s say we go to Dallas. We go, ”Hey, maybe it makes more sense to do a three bedroom townhouse. We can serve a very specific part of the market place. That’s underserved, right? We’ll do the research. We’ll determine the opportunity. And then we looked at make good assessments around that opportunity to make sure that we can mitigate the risk.
And that there’s enough research to say, ‘Hey, this is an appropriate idea’. We still have to be cautious. We sought to be risk mitigating all the time, removing complexity. But we’re always going to be having the newest, the most up to date, program and unit mix compared to any other asset. So I think those to me would be the two main advantages, right? So, some disadvantages, one, you have a raw piece of land or maybe an old house or structures that you take down. So you have to build the entire building and that’s a risk, you have a heavier lift on construction. Were value-add, you’re buying an existing asset. I know lots of investors that I know that like value-add because I go, ‘Hey, I get to go see the site’. It’s got some cash flow. It’s not an empty piece of land.
I have to create a new building on. You know, the other part of it is lease up risk on a new construction asset, you are leasing from zero occupancy or generally some value of most value. I would argue, people are anticipating that there’s some underline occupancy. You can look at trailing 12 and now it’s 80% occupancy. Although you will adjust the rents upward and expect some reduction, occupants rates. You’re not zero. The other thing is in a new construction asset, you are all money out. Meaning equity and debt are going out to pay, to build the asset for probably a period of between one and three years, right? That’s the time to acquire the land, get you through plan, check. So the project and absorb it, but the entire time you’re not generating any revenue. And that’s unusual. In fact, that’s usually the biggest comparison between value-add and new construction that I find is highlighted for investors.
They go, ‘Oh you… So I got a two year period where I have no income’. And that is a big difference. I think the key to think about just in the point is it’s really comes down to your sponsor. If your sponsor is a value-add person thinking about moving to new construction, today’s economic environment. I think that’s probably the lesson to some degree. You have to be making good assessments as an investor about who your sponsor is. And so you want somebody who’s competent and expert in that space. And to me, even though I’ve been a developer and I continue to own assets that we’ve developed, I don’t consider myself to be a real estate investor per se. I am a real estate developer with all the special attributes that go with that. Like we create new projects from whole cloth and that’s all we’ve ever done.
I’m now in my 35th year of my career for the totality of the time that I’ve been working in various forms in the industry, and we’ve only ever done new construction. That’s like our expertise and that’s all we’ll ever do. And I’m like, I won’t say proud of that, but we’ve honed our expertise in that space. And so as an investor, you need to make good, clear grounded assessments about who is the person bringing you this deal and if they are value add. And they have always done that, that is your expertise. That’s great. And then new construction units should look for the same thing. And there are people that do both don’t get me wrong, i mean they’re not rocket science either of them. I just find that’s vastly different execution between the two and that zoning new construction, new design standpoint to me is the biggest differentiator between the two.
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Scott Choppin: Yes. So one of the ones I talk about quite often internally, and I share with people externally is being a developer. I started this company 2000 and so we had a good about a six, six and a half year run before we ran into the teeth of the 2008 recession. And one of the things that really taught me, that really changed the way we did business and still shows up fundamentally is the way we execute construction. And what I mean by that, is we’re building these projects, we don’t go out hire a third party general contractor. What we have done since 2005, we brought all of our construction activities in house.
So all of our superintendents or project managers, all the project coordination and the draws, the contracting invoicing all happens in house with our own team, the team that we built to functionally manage these. And we did that because ultimately when you have a general contractor, people argue that you shift the risk as a developer from yourself or your companies and developer over to the GC. I don’t subscribe to that because ultimately you are picking the GC and they’re a third party and they’re aligned for their own success, which may or may not be aligned with the developer, right? And ultimately at the end of the day, if there’s a breakdown and there’s some problem to be resolved, that’s structural related as the developer, particularly as a person, as the principal and the company giving a personal guarantee, the construction lender, I can’t shift all or most of the risks to the GC.
In fact, I sort of hand off the ability to control things to my detriment as the guarantor. What I learned in 2005 is that we had one general contractor that was managing two really major projects of ours. And they basically fell apart like on a very broad basis. And so we ended up basically going in and taking over the construction of those projects, and it was very difficult, right? This was 2005, 2006 into parts of 2007. And we got the project finished and I’m very thankful and grateful to our teams, but we learned a lesson that ultimately no matter who the general contractor is as the developer, you don’t ever really shift the risk of guarantees and completion of the project to a third party. You may hand off obligations and management capacity to that third party, but you still own the risk. And so for me, I always liked to control the team that executes on the project.
We have some contractors, right? So we’re not employing framers to go frame our buildings. We have place of contractors, but we’re handpicking the subcontractors. We use the same subs over and over again. We have the same design that we built time again. We’ve simplified the plan. We have the same specs, we’re fully production oriented in this apartment domain, right? And that lessens complexity, again, you’ll hear this theme of reducing or eliminating complexity. Because what I say is complexity is the enemy of profits in the real estate development domain. So the more complex you have a project or the more complex you make the interrelation of people who execute on your team, basically you’re going to erode profits at some level. And so not everyone’s will subscribe to bringing construction in house. Some people will say, I don’t want to do that. And that’s fine.
I don’t say it’s wrong. It’s just a different interpretation, but I know that we can directly control the performance of these sub-contractors that we’re deeply coordinating with them. And we’ve been able to prove that model time and time again, proven right now today, if I, we still have some of the lowest execution costs our costs in the entire LA base on a cost per square foot basis and in the province most tumultuous time, it’s Coronavirus time, we’re actually accelerating our construction activities. Like we’re actually moving faster now because we have more supply of labor and we can directly drop that to the bottom line. If I had a third party general contractor, they would try to capture that profitability and that speed of execution increasing because they’re oriented around making their profit the most, not ours. So we reduce complexity, we increased speed of execution, both of which trough more dollars from the bottom line.
John Casmon: Give me the book you’ve gifted or recommended the most of the last year?
Scott Choppin: Great question. So here’s a book I always get to, I really like Grant Cardone and I like his ’10 Actual’. Now I know for people out in who will listen to this very polarized. There’s people that hate Grant Cardone or people that are rabid followers of it, I’m probably not at all a hater and I think some of the stuff that he does, I don’t necessarily agree with his style. I mean, you stuff, it comes from that sales background, but I really there’s a couple, I’ll just share this with you briefly. So in the domain of real estate development, you wouldn’t think of marketing necessarily as a really effective strategy, other than maybe marketing, it’s the least right. But Grant Cardone is book potential has this idea of getting out of obscurity, basically being on the present, where you’re on a marketing basis, you’re getting yourself out into all the social media channels, all the domains to benefit your business, whatever that is.
Gary Vaynerchuk basically says that all companies are now media companies. They have to be producing in the media space in order to be competitive. And for us where we’re active as we’re raising capital to produce our projects. And so we’re continuously growing our network of investors. And so we’re building a full digital marketing platform to produce many, many new opportunities. So Grant Cardone, if you look at him and apply it to the space that we’re in and this idea of getting out of obscurity, but people need to know you in order to transact with you, they need to know who you are in order to know that you have investments available. They have to know you, at least watch you over time to trust you, right, to say, ‘Hey, I’ve watched Scott Choppin, Urban Pacific for last two years. I’m getting their weekly newsletter. I’m reading their blog posts and looking at their YouTube channel.
And I’m watching them produce projects. So you are building trust constantly in that space and really omnipresence. I never thought of that, John, until I read that book. And I was like, man, as soon as I read it, I go, I’m doing that. I was already doing it a little bit, but not maximizing it. So I would encourage people to read that book and get a copy of that for yourself.
John Casmon: Give me a digital or mobile resource recommend for your business?
Scott Choppin: I’m going to answer it a couple of ways. So one, I would encourage people to go to our website, it’s www.urbanpacific.com. And we have a full investor education area there, video articles, blog posts, and we give a lot of background on underwriting, assessing investing, and understanding apartment projects. We are a new construction developer we’ve talked about before. We have an array of education shows. If somebody wants to go and learn how to deeply underwrite apartment assets, we offer that. I think for me, the one I liked a lot, John is ‘Bigger Pockets’. I think everybody’s familiar most will be familiar with ‘Bigger Pockets’. And I’d probably been less active there than I was maybe say a year or two ago, but I think it’s an environment that’s collaborative. You can go on there and find people that are very in your specific domain, if you’re wholesaling or your house hacking, or you’re buying longterm hold assets, you’re going to find somebody who who’s doing that they can compare notes to. And I think that’s really the underlying idea of that website. Plus others that are in the similar educational format really is encouraging. People are getting into the business to spend a lot of time educating themselves, read every post you can about the type of product and type of deals.
You read all the books, you can listen all the podcasts, huge asset, like your podcast for people out there on the domain. So I would say ‘Bigger Pockets’, would be a good digital format.
John Casmon: Awesome. Alright. You’re based on Long Beach, give me the best place to grab a bite.
Scott Choppin: There’s a local place called Joe Josts. JOSTS is the last, the second name, Joe Josts. It’s on Anaheim street, go to Joe Jost and get yourself a special, add a schooner of beer, which is this massive ice layer on the top beer, get yourself a special and get yourself a pickle bag. I mean, if you want to experience like classic old school, Long Beach, this is a place we’ll go there and be like, no place I’ve ever been to.
John Casmon: Joe Josts sounds like a great spot. Hey listen to Scott. This has been really informative. I appreciate you kind of walking us through what you’ve been working on with Urban Pacific. And how you’ve been able to find a niche that really works well for not just you and your business, but solves a need that so many people have, especially out there on the West coast with affordable housing and workforce housing, I should say. So thank you again for coming on ‘Target Market Insights’, and sharing so much of this knowledge for our listeners who want to get in touch with you. What is the best way to reach out?
Scott Choppin: Best way, John I appreciate that is go to our website www.urbanpacific.com. Again we talk about the education section, there is a contact section there, my email, my direct phone number on their. So, I encourage people to reach out, I’m generally resource in the real estate page generally, happy to collaborate with folks, feel free to reach out.
John Casmon: Sound good Scott. You take care man, its good talking to you and we will see you again soon.
Scott Choppin: Alright John and thank you so much.
John Casmon: Thank you for listening to this episode of “Target Market Insight” . Where we talk to the top experts in multifamily and marketing, to uncover the top insights and strategies you need for your business. Now if you are enjoying this show, leave us a five star rating in the review and do not forget to hit the subscribe button and don’t miss an episode. We look forward to bringing you more insight. So just chill until next episode.
End of Podcast Interview
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