Real Estate Investing Presents: Putting the Work into Workforce with Scott Choppin

 In this episode, Scott shares with us that visiting construction sites early on in his in life made him realize that the physical aspect behind building wasn’t exactly what he wanted, but it was the developer side that ultimately led him to where he is today. Scott also shares with us how growing up in a real estate family didn’t ultimately push him to get involved, but it was lessons along the way in his childhood that helped him realize that real estate development was his passion. Scott then gives us an inside look at how his firm looks at projects and what he truly looks for in a deal.

Intro: Welcome, this is Real Estate Investing Live from New York, with James Nelson, the principal, and head of Avison Young’s Tri-State Investment Sales Group. In this program, you’ll learn about the world of commercial real estate and find out why it is one of the largest investment opportunities in New York and around the world. Now here’s your host, James Nelson.

James Nelson: Welcome to Episode number 48 of Real Estate Investing Live from New York. This is your host, James Nelson. We’ve got another great show lined up for you today. We have with us Scott Choppin, who is the founder of the Urban Pacific Group of Companies. I found out about Scott because he’s been very active on the podcast network and he’s got a great story and he loves mentoring younger people looking to get into the business. And so I thought this would be a great interview. And not only because of that but also because of his experience in building workforce housing, which is a segment of the business that doesn’t get a lot of attention.

But he’s got an incredible platform and he’s delivered thousands of units on the West Coast. So I know you all will get a lot out of this episode. We are coming up on our 50th show. We’re getting so close to breaking a hundred thousand downloads. So thank you. Thank you. Thank you. Continue to tell your friends, continue to post your comments on iTunes, Spotify, wherever you get your podcasts. I really appreciate it and make sure if you ever have a question, find me on social media channels. It’s great to link in with you. You can find me at James Nelson NYC. I look forward to being in touch. We’re going to have a brief word from our sponsor, and we’ll be right back with that interview with Scott.

Sponsor: When it comes to business, you’ll find the experts here, Voice America Business Network. Hi, I’m Mark Rose Global CEO of Avison Young, the world’s fastest-growing real estate services firm and we are proud supporters of Voice America. With over 5,000 professionals in 120 offices in 20 countries, Avison Young delivers local expertise in partnership with global reach. Because we are principally owned Avison Young prioritizes client success over shareholder profits. Through our open architecture, our firms’ experts provide value-added client-centric investment sales, leasing, advisory management, and financing services to clients across the office, retail, industrial, multi-family and hospitality sectors. Our culture is the bedrock for collaboration that enables each assignment to benefit from the collective intelligence garnered from a company-wide database partnership performance. Learn how we deliver different at avisonyoung.com to learn more.

James: Now it’s time for our investor spotlighting and with us today is Scott Choppin, who is founder of the Urban Pacific Group of Companies and Scott oversees all the operations to that Urban Pacific family of companies, including business development, capital acquisition, strategic planning. Over the last 20 years, they’ve amassed a portfolio having developed over 3,400 units with the total capitalization exiting at close to a billion dollars. Prior to forming Urban Pacific, Scott was director of land acquisitions for the multifamily development division of Irvine based Sares Regis Group. Prior to that, he was with Kaufman and Broad Multi-Housing Group, where he spent time with the acquisition entitlement and syndication of 1900 affordable units. So I’ve had a chance to hear Scott several times on some podcasts. I know he’s a very active participant in the markets. So Scott, really appreciate you joining us today.

Scott Choppin: Yeah. Great to be here, James. Thank you for the invite.

James: So Scott, I know you’re out on the West coast. Is that where you grew up?

Scott: I did. Yeah, actually I live in and our company’s based in Long Beach, California, and that’s actually where I’m from, going in fact, my kids are fourth-generation based here in Long Beach.

James: Awesome. Yeah, we were talking before the show and I’ve told you, I’ve been to your airport a couple of times. My kids play water polo and it’s a…

Scott: It’s a good airport, right?

James: It’s a great spot out there.

Scott: Cooler airport.

James: A lot better than LAX, I will say.

Scott: Yeah.

James: So you grew up in a real estate family, right? So maybe talk about those early years while you were going to school, were you helping out around the office? What was that like?

Scott: Yeah, so I grew up around, so my uncle Mike Choppin founded a company called the IBM Corporation, which is predominately known in the commercial office development world though they did a lot of apartments. And then my dad Kerry had a development company and worked in a joint metric capacity for probably 30 plus years. And so I got between those two, you know, I saw a lot and you know, went on the job sites and picking up trash in the morning before going to high school and did that kind of stuff. Although, you know, there’s a lot of kids do for a period of time, it’s sort of like you don’t want to do what your parents did, right? Like you want to do something else. But a couple of like seminal events happen for me.

So out of high school, I worked actually in the construction trades for a couple of years doing electrical work on apartment buildings as a matter of fact. In fact, on some of our apartment buildings, just for something to do, wasn’t necessarily prepared to go to college. It didn’t have necessarily a good plan of action. I wasn’t seeking to be in the family business or be a real estate developer, but being on job sites taught me about construction. Like everything I would ever need to know really for the future. But what it did teach me is that I didn’t want to do that. Clearly working in construction and working in the trades is that, you know, it’s an honorable business, nothing wrong with it, but you know, your body wears out. And you’re never really going to make the sort of income to produce real wealth to take care of your family, right. If that’s one of your ambitions, that certainly is mine. So that sort of taught me what not to do. Also when I worked on job sites, I’d see the developer roll up to the job site, and one day I go, “Oh, I get it. I got it. I want to be that guy.” Right. It sort of dawned on me, I go, “Oh, this is, you know what my dad and my uncle Mike do.” Like meaningfully for me, right, like I could say, okay, I knew I didn’t want to do this and I wanted to do that.

And then the other event that really helped me was I read a series of books. That’s just like, I’m a heavy reader and I read one of those, you know, How to make Million Dollars Investing in Real Estate on the Weekends type books. I don’t even remember the name exactly or the author, but that book really enlightened me to deal-making. I go, “Oh, finally I see it.” You know, because for me being around my family, I sort of saw the back end of it and some public stuff. I knew about the projects, but you know, the inside workings of the deals, I didn’t necessarily have. Like I didn’t work literally in the financial part of the family operations. And so that book taught me like, what’s deal-making? You know, find a distressed asset. Find it undervalued, do something to improve the value, and sell it right at a profit.

And that was sort of those two things really sort of coalesced for me. I go, okay, now I see why my uncle Mike and my dad chose this business as a career. It can be very viable. It’s obviously got a lot of risks, right. Being a real estate developer is not for the faint of heart. So that got me to the point where I go, okay, now I got a plan. I figured out where I needed to go to college. You know, I started networking and meeting people in the business so I could like identify and acquire the right first job. In fact, that’s how I met Mike Costa, who ran Kaufman and Broad Multi-Housing Group was through those efforts and my family’s networks. So from that period of time, you know, 18, 19 years old, like I had the plan and the plan was to go get educated, work professionally for others, and ultimately go out on my own as a real estate developer, which I did, you know, now 20 years ago this year.

James: That’s awesome. I’m really glad that you spoke about understanding the underlying principles that deal-making and how excited that made you about the business and, you know, for our listeners if you haven’t heard go back to some of those early episodes that we did. And I think on show number, maybe even two and three, we had Doug Marshall who wrote a book on real estate investing. And he talked about what you said about, you know, finding those distressed opportunities and finding things off the market. And that’s what makes real estate exciting is that it’s not a liquid market where you can go to the Wall Street Journal and you can see where the price is that day. I mean, you can go in and you can find opportunities and you create opportunities. That’s really great.

Scott: That’s right.

James: Discovered that on your own. So, you know, this is a great question, especially for those who are already in a real estate family. And so, you know, interesting that you said, or that you knew that you wanted to go out and, you know, work for another shop. I mean, I’m sure it was discussed at the Thanksgiving dinner table, you know, “Hey Scott, why don’t you just come right out of school? You know, we got plenty of projects. We need help.” You know, sounds like that was a conscientious decision on your part to get some experience elsewhere.

Scott: You know, I think it can. It’s a great question that you’re the first to ask it that way. So I appreciate that. I think from my standpoint one, it was never an insistence that I’d be in that industry for my family. One, it wasn’t insistence that I like take over the operations. I don’t like to say that’s good or bad. That just was, you know, how my family particularly. You know, my family is historically from Britain and Ireland. So I think there’s a certain cultural narrative about we don’t talk about these kinds of things. It wasn’t really hardcore. Like I don’t want to make it sound freakish, but it was sort of expected that you would go make your own way. And I, because I think I grew up in that narrative, it wasn’t even like, I expected it. Like, “Oh, I’m going to have this.” So I was in this narrative about, I’ve got to go out and make my own way. I’ve got to learn how to do it.

Now I will say this now like I’m teaching my kids. So there are two extremes. You can be in a nepotism sort of structure where like, you’re actually going to get the thing and, you know, there’s no choice about it. And you know, you don’t have to necessarily go out and learn. And there’s the way I did it, which is, you know, thrown into the frying pan and go figure it out, right. I got some help and some networks and, you know, certainly lots of advice in my career, early career, but it wasn’t a given that this would be available for me. So for my kids, I’m like, you’ve got to go learn, you’ve got to get your knowledge. You’ve got to learn how to be a developer if that’s what you’re going to choose. But also let our family, let you know, my wife and myself help you kids like launch more successfully. Because I think I spent a lot of time, not ignoring what my family had accomplished, but not utilizing it in the powerful way that I now recognize that could have been. It was available. I mean, never said no, but like I was going to, you know, do it on my own. Like sort of a maverick, right. Lone wolf. And where I’m at in my career, I’m like all networks, people you know, people you can learn from, look at others’ mistakes. You know, don’t do what they did, you know, learn from that. You don’t have to get that education yourself. And I’ve had plenty of like my own education by the way in the business.

But I think that you know, there’s a balanced approach to it. So hopefully that answers your question. I think it’s just like every family’s going to be different, right. I don’t think there’s a right or wrong way, but I do say there’s a powerful way, like an effective and strategic way to build your career and learn, and why to recreate the lessons and all the education experience if you can advantage yourself from somebody else. Maybe it’s mentorship. Maybe it’s somebody you worked for in a company. Like, you know, I, when I worked at Kaufman and Broad, I worked for a guy named Mo Mohana, another guy named Tom Erickson and those poor guys, man, every question you can think of James, like, “Hey, why do you do this? Hey dude…” In fact, Mo and I carpooled back and forth from Long Beach to West LA. And if anybody knows that it’s like a super long commute hour and a half each way, and Mo was like, just inundated by me. In fact, we still laugh about it. He’s like, “Dude, you were like, there’s no question that was not asked.” And poor guy would fall asleep and I’m driving and he’d wake back up. And he goes, “Like the questions just ended when I fell asleep and started back up when I woke up.” But I think I would advise anybody to do that in your early career. I mean, use the, not use.

James: Benefit from those around you.

Scott: Right. Yeah. Benefit and educate and gain knowledge from those around you. That is way more valuable than the lessons you learn yourself. I mean, you need to do both, right. But you know, those lessons you learned from others are way less expensive and way less costly in time and energy. So my speech to my kids, it’s like, look, “You’re going to learn a lot of the same lessons I did. I have all this knowledge, let me give it to you.” To the extent that they want to accept it. But don’t take so long to learn lessons that I learned. I mean, I’m still learning lessons. I’ll turn 53 this year. I go learn all those when you’re 20 and 30 as much as you can and want to, of course. The person that, you know, kids are the people who are, you know, your teaching have to be motivated to accept the knowledge, but, you know, super valuable.

James: Yeah, I really appreciate your sharing that personal perspective. And I can say as a parent and my oldest is 15 and he’s already asking me. He’s saying, you know, “Hey dad, I’m going to be able to work with you when I grow up, right.” And he’s nervous and he wants to be successful. And I guess, you know, there’s that kind of notion where, okay, I got this safety net and you know, it’s going to be okay and I’ve got a spot. And I said, you know, first of all, Luke, you’ve got plenty of time. You know, don’t be thinking about what you’re doing in your career, focus on school and everything you’re doing. But also to instill in him that, you know, look, you can succeed on your own. Right. And you’re going to figure out something and you’ve got to do what makes you happy. So there is that interesting balance because he comes back and he says, “What do you mean, dad? You mean, I can’t come work for you.” So it’s like, you know, I appreciate what you’re saying talking about that time you spent with Mo in the car, thinking about how I began in the business 20 years ago and I learned by listening to those around me and you know, I started my career with Bob [inaudible 00:16:04] who’s to this day, still one of the top real estate brokers in New York. And just listening, you know, the privilege of being able to sit five feet from him in a cubicle and listen to what he had to say was better than an MBA.

Scott: Yeah. Right.

James: So you spent a lot of time. So I want to go back to you know, that time when you started off doing land acquisition because we have a big New York contingency listening, but we also get people who listen in from all over the world. And for those certainly on the West Coast, you’re thinking about land. I’ve been just from my own personal experience; I mean it’s a high-risk business to your point. You know, finding the right piece of land. If the zoning’s not as of right, how do you get entitled? So like what lessons did you learn by driving around, looking for sites. I mean, I’m sure you’ve got some stories about uncovering some pretty interesting opportunities.

Scott: Yeah.

James: In California, Colorado, Arizona.

Scott: Yeah. So lots. I’ll try to pick some good ones. So I did land act both for working for Mike Costa at Kaufman and Broad and then actually that became my sole focus when I worked at Seres Regis. But when I worked for Mike at Kaufman and Broad, Mike always had this great philosophy that project managers really manage their projects from the beginning to the end of the project, right. It’s cradle to grave, people might call it. And so we weren’t expected like it wasn’t incumbent upon us to generate deals, but if you wanted to do that, then it was welcomed and encouraged and they would work with me and other people who were ambitious to do that. And so the great thing I got in education working with Mike in that way, is I learned every facet of the entirety of the development process. You know, I didn’t know that going into that role that was going to be how, and I didn’t even know like that was a thing to think about. But if you look at some of the home building companies or some of the big developers, hey, your land act, your fore planning, you’re the construction guy, you’re the leasing agent and those are silos, man. Maybe you get the project handed off, but you know, the leasing agents never expected to think about land acquisition or vice versa, right, to give extremes on either end.

So lessons I learned were, one of them that I use today is that when I was a young project manager, there was no deal that I couldn’t do. The hairiest deal, the toughest entitlement issues whatever ever right. All the stuff that any seasoned listeners going, oh yeah. You know, I’ve got a leaking tank. I’ve got a tough entitlement process. I’ve got a difficult city council. You know, it’s a bad neighborhood versus a better neighborhood, whatever. And I really thought, you know, in the early days that all problems could be solved. I’m a great problem solver. I mean, you have to, to be good in the development business. But I think now the lesson is to dismiss or decline or quit all the toughest problems. I mean, you can’t eliminate all risk in development because if you did, then there would be no profitability, no profit to generate. But I’m all about the reduction of complexity.

In fact, my saying is complexity is the enemy of profits in real estate development. So if you choose to take on a really complex deal, you should understand what the profitability difference will be and underwrite accordingly. Right? So if you’re related and you’re taking on a big project in New York City and you know, Hudson yards, right? I’m going to deck over the train yards at Hudson Yard, like that’s a complicated undertaking, right? And so obviously those guys know what they’re doing. So maybe that’s not the greatest example, but that’s an example of complexity, that if you could find a site that you built directly on grade, then you could at least remove that additional complexity. And, you know, some people are good at taking on those complex deals and they make a lot of money or hopefully they make a lot of money, but you certainly increase the likelihood of some breakdown or series of breakdowns in the development process.

Particularly in our UTH Urban Townhouse Model, we’re really working to strip out all the extra complications. So as an example, we only buy sites that are zoned, or generally, we do, where we can skip the whole entitlement process. Rezone and general [inaudible 00: 20:47] we do it. We’ve done it historically. We’re doing a couple now that are good land buys that make sense. But we basically take on 80, 90% of our land acquisitions are already buy right zone, right? So we go, we know how to do that. We know it’s complex. We know it’s ripe for breakdown and, you know, friction, I call it. So let’s just not do that, right. And that I don’t want to oversimplify it. Right. But the reality is at every step of the process of land acquisition and design and the type of unit that we build and to serve specific under-supplied markets, we’re always looking to take out that extra step. Remove a sub, you know, if we can get one sub to do two trades, instead of two subs to do two trades we’ll do that. We’ll use the same spec over and over again in our plans. And our product is a production-oriented multifamily townhouse. So it has by its inherent nature, just simplicity to it versus, you know, in urban areas in LA or New York, you do your mid-rise building with underground parking or high rise, right. There’s a place and there are people to do that in New York and other major metros, there’s a logic to that. But we just say, we don’t do that. We do other stuff that’s simpler and really just get a production cycle going. So that would be one big lesson I would learn. And you can apply that to underwriting.

You know, when I was a young project manager making edgy underwriting decisions seemed logical, right. Like, well, just push rents a little bit more. Gosh, we think we can get 900 a month for a one-bedroom in the market, and I’m just using random numbers here. But man, it’s new. There’s nothing else competing. Maybe we give that a thousand dollars and maybe that’s logical and maybe it’s not. But I go, if you make that sort of edgy decision in the 50 or 100 variables in your per forma, that you need to make those decisions on, then at some point, those are going to go against you. And so I go, do the opposite. If 900 is the market, then let’s do 900, but do a better unit. And I’m still running for competitive prices. If construction is, you know, X dollars a square foot, and I can base it on historical and I’ll use those numbers. But I’m not going to say, Oh, I can get a little bit cheaper than the next guy. And so therefore my deal needs cheaper construction in the marketplace to survive, you know, as a viable deal.

Because at some point, you know, all those little acorns that you hide, little conservative underwriting pieces in a hundred places in your pro forma will start to get used up, you know, appropriately. But if you don’t have the acorns, if you don’t have the cushions, then you know, you get backed up against the wall and you’re underwriting at some point. So I think it would just be choosing less complex deals and underwriting more conservatively. As I say that, James, it sounds like, of course, like that’s the most logical thing in the world, but anybody who’s getting into the business and particularly people who are young and people who have entrepreneurial tendencies, they’re aggressive people who are risk-takers, self-select to be in businesses like this, right. And so their inherent tendency is to be aggressive and, you know, willing to take on risk and nothing wrong with that. I’m that way still, it’s just after a few years of doing that and getting punched in the face a few times and recessions or deals, you go, “Yeah, let’s not do that anymore.”

James: Yeah.

Scott: Let’s be simpler, less complexity, more conservative. And I’m enjoying that right now. I love when a project comes in our budget and I go, Oh, that’s great. You know, we move money around on the budgets. And, oh, cool. Nothing better than that feeling.

James: You know, you said, so many great things there, and I love how you started about kind of de-risking opportunities. And we’ve spent a lot of time on the show talking about risk. You know, Francis Greenburger actually wrote a book called Risk Game and talking about how he weighs that but you know, it’s interesting. Because we have an award and I’m sure, you know, a lot of it, you probably have the same kind of thing out in California, but the Real Estate Board of New York has the most ingenious deal of the year award. And it’s like celebrated the more complicated, the more creative, you know, the better. Sometimes it’s like, you know, we make these deals overly complicated just for the sake of, you know, I don’t know, maybe it’s the mental.

Scott: James, I have a saying, I go don’t want to win any awards in my deals. No architectural awards, no Real Estate Board of New York awards. Like, boring deals that some people are like, and they go, “Gosh, that’s boring.” I go, “Great, that makes money.”

James: I definitely…

Scott: Executes cleanly. It de-risk, I like the way you speak that.

James: I also think like, because and I want to talk about workforce housing because we haven’t talked about it on the show and there’s definitely the social good aspect to it, which, you know, this is, and I’m sure you’ll tell us, is a massive issue across our country, especially now during these challenging times. So if you are looking to do volume, you know, doing incredibly complicated deals, you know, they take time too, right. So if it’s more and I don’t want to call it cookie-cutter, but like, if you have kind of a program and it’s programmatic, I would imagine that you could develop a lot more housing. So talk about, you know, again, first of all, how do you define workforce housing? How great is the need and then how are you going about solving this?

Scott: Yeah, thank you for that. So you know workforce housing is a term that is being thrown around a lot in the marketplace. I mean, you read it and, you know, every magazine Globe Street, and all the major real estate magazines are writing articles about the workforce. Like, it’s the, you know, the subject is your…But if you ask anybody that definition of it, everybody’s going to have a different answer. So the way we define it is to call it moderate-income housing, workforce housing, but, you know, simplistically, we’re building housing for working people, for working families, right. First off, like high level. For us, in California, that means families that fall in the income category of 80 to 120. Now I know in New York that the middle-income programs get up in the one 140, 160 income categories. That’s like median, you know, what percentage of median earning income the family makes and the rent levels that go along with that. So middle income will adjust depending on the geographic area that you’re in.

And for us, you know, we developed a product called Urban Townhouse or UTH, and that’s a workforce rental housing product. And what’s unique about that is we built five-bedroom, four-bath, three-story townhouse rental units. So there’s a new trend called build to rent, which is basically a lower density or even detached houses that are built specifically to rent where those traditionally wouldn’t have been rented. So even your single-family subdivisions are starting to be rented, right as a practical business plan from day one. So that answers the question about, you know, what is workforce housing? Remind me of the other two questions. Sorry.

James: Yeah. So how great is the need? I mean, it’s interesting that you said five bedrooms because, you know, most developers, certainly if they’re going high rise, it’s a mix of studios, ones, twos, and maybe a three. But…

Scott: Yeah. That’s right.

James: You know, this five-bedroom I got to imagine, there’s not a lot of it that exists or, you know, maybe there are other developers who are trying to [inaudible 00:28:43].

Scott: Yeah. It’s almost completely uncontested marketplace and that’s by design for us. So when I work for Mike Costa in Kaufman and Broad, our product at that division of what was now KB Home, Public Home Builder, we developed affordable housing, like true affordable government-subsidized, affordable housing. And working in that world that really taught me that families were the biggest, they had the most demand for housing and they have the least supply, right. If you’re going to look at the highest imbalance between supply and demand, to me, it was in the large family housing space. And you think about it, even you mentioned it right, those mid-rise, podium, and high-rise projects in any urban area’s predominantly studio and one-bedrooms. And that’s appropriate because most of those today in new housing if you look at luxury, a product is going to go towards a younger population. Think Gen Z, millennial, somebody wants to live in a sort of super urban environment. Maybe New York would be different because New York is New York. But like, let’s say California, and I’m going to live in Downtown LA versus I’m going to live in some suburban part of Southern California, it’s still urbanized Los Angeles, right. But it’s not like a central business district type thing.

So what you find is there are these family groups that are working families, think of them, blue-collar working families. In fact, we described them as multi-earner households, right? So these are families of 4 to 10 people. They live an economic sharing lifestyle. So they’re sharing incomes and expenses across the family group and the earners and the family naturally, they live multi-generationally, right. So grandma lives with them. Adult kids tend to stay longer or remain with their families permanently. But what this says that brings those multi-earners together in one household and then all of a sudden with each person’s making 20 or 30 or $40,000 a year, which if you look at it, statistically is not enough to afford new housing. You know, you see those stats where, oh, it takes a $37 an hour wages to afford an average rental unit in Los Angeles County, right. Well, I go, that’s true if you’re a single earner. But if you have a wife and a husband and an adult child and a mother-in-law that all generate incomes, well, all of a sudden those families are making 120,000 a year, right. And, you know, for some people they go, “Gosh, 120,000 is not much, right. If specifically, or particularly if you have high rent.” But if you think about how these families are able to survive, this economic sharing is what produces their success. In fact, it allows them to afford better housing than they would otherwise. So we serve that family group. We serve that multi-earner family group and we serve them in a marketplace.

You know, the development industry is not serving family renters, right in any way at all. I mean, there are a few people like us in different markets that are building their capacity to deliver the sort of middle-income housing. But it’s a really undersupplied and in huge demand. And part of the reason it’s huge demand is that these are middle-income families that if they have the choice, they would upgrade in housing if they had it available. But if you’re a family of six, you can’t find anything new. The new stuff is the studio in Downtown LA or Irvine, right. And of course, they don’t even think of it, right. It’s just not even a fit. In fact, usually what we do is we’re pulling families out of having two units. They may be living in one unit. Next door is the rest of the family, or they live in this unit and a block down the rest of the family lives in the other unit. They’re still economic sharing. They’re still sharing the incomes and expenses across the group, the family group. All we do is pull them out of those two units and we put them into this five-bedroom, four-bath townhouse unit. So it’s…

James: And are you getting government subsidy to build and are the tenants getting subsidy?

Scott: This is part of the uniqueness of UTH is that we’re building a middle income, moderate-income workforce housing model, and we only use private capital. So any normal equity, debt-equity structures that you would see in any market-rate deal, we’re using the same logic, the same capital stack, the same mix of debt and equity, and producing competitive returns to the equity investors. But we’re doing it in this middle-income space and we’re not using the subsidy. Now, the only caveat I’ll say is that in California, sometimes we’ll give away, you know, 10 or 15% of the units as inclusionary, right. We’ll make them a covenant affordable housing unit and we trade that for getting better zoning. So let’s say the setback is, you know, 30 feet in the front yard. We think we can get an extra unit if we can, you know, reduce that.

So we’ll go, “Hey, we’ll give you 10% of the units as affordable. Give me that smaller setback. Give me less parking requirements, give me less open space.” I mean, we still want to build a good product, but some cities have these really crazy parking standards. Particularly think about it for a five-bedroom unit, a lot of cities are like, yeah, you know, one per bedroom and plus two, and all enclosed. And, you know, some cities have these really aggressively high parking standards. So we can reduce that by giving this inclusionary. So, the deals are not incumbent upon that. We just do that as a move to make the deal better. We do accept Section 8 tenants in those affordable housing units. So that’s another move we can make that we can actually have the affordable unit and put a Section 8 tenant in there. So we actually sort of doing double duty. You know, we will, I think in the future probably have some projects, that will have a subsidy, but again, only for that inclusionary. So, hey, like we’ve got an 85-unit project [inaudible 00:34:49], they’re not requiring affordable, but if we were, we’d say, “Hey, we’ll give you 10%.” Let’s say we give you 9 or 10 units of affordable. We want these zoning standard reductions as we’d normally get, but I might approach the city and say, “Hey, look, you know, I’ll even more deeply restrict the rent, but I need money from you for these units specifically, but it’s only on that 9 or 10 units versus the whole 85, as an example.

James: So yeah, that all makes a lot of sense. I would imagine making these projects feasible that you also have to really be able to control construction costs. So have you, you know, I don’t know if you’re vertically integrated or how you’ve been able to deliver this type of construction at a certain cost. I mean, are you looking at, you know, that there’s a lot of momentum behind modular housing, and are you thinking about how to deliver more volume and [inaudible35:50].

Scott: Yeah. All the above. Yeah, so you’re exactly right. So remember before I described the reduction of complexity, right. Like if you look at complexity theory and look at things the way that you mitigate or reduce complexity. So the UTH program really benefits from feasibility and yield production through multiple different moves that we make. So one is we buy less expensive land because we’re going into working-class neighborhoods where land is less expensive and not highly competed for right. We’re eliminating the entitlement phase, so we can compress the timeline of the time it takes to get from my escrow to my permit issuance. I can shrink that time by, like, in some cases, years, right. We build a specific type of unit five-bedroom, four-bath with a garage on the ground floor. We do that unit over and over and over again. I mean, you said cookie cutter before. I don’t have any issue with that terminology. We call it production housing, but it’s like the home builders would, right. They got plans A, B, and C and that’s all they build. And I know today, sometimes people are doing mass customization, but in the old school home building model, it’s like, Hey, I got one plan, right. You know, Henry Ford you can have any color you want, as long as it’s black. You know, that kind of thinking. But also there are other things. So the five-bedroom, four-bath model itself produces a rent level that basically produces more income per unit than you would in a standard unit, but at a lower cost of delivery, right. If you think about bedroom space in construction and development, you know, your hallways and your bedrooms are your cheapest space to build, right? So we have five bedrooms, four baths with one kitchen, right. Yeah, we have four bathrooms, but, we make moves to reduce that. But we’re using the same spec over and over again. So there’s that.

We are vertically integrated. So we have all of our construction operations are in the house and we are structured like a home builder is. So homebuilders don’t use third-party GCs. Traditionally, they don’t at least the big public don’t. They’re going to go direct to the subcontract markets. They’re going to be there. You know, Kaufman and Broad or Beazer Toll or Lunar, you know, their superintendent, their project manager they’re directly contracting with the subs, right. So they go direct to the subcontract markets to buy. That’s exactly what we do. Of course not at that scale, but we cut out the middleman.

So we don’t have a GC that charges overhead and profit on our deals. You know, we do have costs built into our construction budgets to cover our field staff, right. Project managers and superintendents, but that’s just a cost or there’s no profit center there. But the biggest thing really is that we have such direct control and access with the subcontracts that we really are able to really squeeze out every possible efficiency in that contractual chain.

So we’re using the same spec over and over again, right. So there’s never any doubt on that framer or that foundation guy or the appliance installer or cabinet guy, right. It’s the same spec over and over again. You know, It’s a nice spec, it’s a good apartment grade spec, right. It’s certainly competitive with most of your newer, not luxury. But, you know, if you had an A-minus new product, we would be competitive with that as far as finishes are concerned. But it’s the practices and the systems inside that where we never have any doubt what mechanical system, where we spec in on all future projects. And it’s of course researched and the most effective for California codes, which, you know, California has crazy codes. You know, a lot of built-in costs into the systems that we have to install. But we work within that. So the bottom line answer is it’s all these things together, but I would really put the main thing is this rare production as a function of the unit size.

So our units on average rent between 3,500 and 3800 today, depending on what city you’re in. We’re basically able to do that at a very cost-effective rate, you know, on a per-unit or per square foot basis and that goes directly to the bottom line, right? So that flows into and we’re getting high whole dollar rents you know, on a per-unit basis. And the per unit basis of cost is less than you might have and the same. I mean, think about it, if you build a studio or one-bedroom, you got the same kitchen we do, and you’re generating maybe one-third of the rent, right. You know, that’s not the only factor inside that formula. But if you can think about the fact that so a colleague of mine, a guy named Richard Green, he’s an executive director of the USC Loss Center, he and I talked about this and he had an issue in observation. He goes, “You’re not doing density in units. You’re doing density in bedrooms. So you have less units on a dwelling unit per acre, but you’re getting a lot of bedrooms and therefore occupancy and rent generation inside of that unit.” And when he said that, I was like, that’s exactly right. That was actually really smart, you know, observation of his. So we’re densifying in a different way.

James: Amazing. So, Scott, this has been incredible. I mean, you really have locked into something with a tremendous need and you’ve figured out a way to really answer it and really perfected the business. So we really appreciate your sharing your story. We only have a couple of minutes left. For my parting question and I usually ask, what advice would you give to the aspiring investor? But I’ll tell you, I’ve been speaking to a lot of college students lately who are getting really nervous, especially the seniors. And, you know, look, it’s glitzy. Everyone wants to go to New York or LA and they want to work with one of the big firms and guess what most of them aren’t hiring. And so they’re saying, you know, James, what do I do? What advice? And so if you know, and you cover a lot of geography. So if I was a college student and a senior, and let’s say, you liked my resume what I’ve done. And I said you know what, Scott, I’m willing to come to your office. I’ve got a car. I’ll drive anywhere you want me to just go stake out sites. And I will work tirelessly around the clock to bring you opportunities. I just want to learn. I just want an opportunity. What would you say to that?

Scott: I would say yes. In fact, I do all the time and you know, not to be cute about it, but a couple of different answers. One is if people go to my LinkedIn profile. So just go to LinkedIn and look for Scott Choppin. There’s a series of articles that I wrote that are listed on my profile and one of them is Six Ways to Build Your Real Estate Development Career. I would encourage those people you just described, go look at that. And you know, there are several things inside there, but one of them is to get a mentor, learn from the people that you work with, right, which we talked about before. But basically, one of them is to create an internship. And I say get an internship but you are like saying it the right way, which is you have to create the opportunity. So, you know, I go, “Hey, even if you have to go get the internship and work for free, do it.” And I’ll give you a couple of examples that have like how this pays off.

So I’ve had two people that have worked for me in different internship capacities. One guy is a guy named Mike Lanza and he ended up being with me for about a year, unpaid. You know, when it came time for him to make his next career move, we didn’t have any openings that were fit for him. And so he went off and did a few other things. But he and I spoke about a month ago and he’s actually used what he learned with us to leverage himself into. He’s now in the master’s degree program for Urban Planning at USC at their Price School, which is where the Urban Planning and Real Estate Development live. And that he just got a job at a non-profit affordable housing developer and we talked about it. He said to me, he goes, “Scott, I didn’t know it at the time, that what all you taught me working for free.” Which was sort of a difficult proposition at the time for income generation. He goes, “It’s paid off so much.” In fact, he said, “Scott, I think you should go create a program to like teach people this as a side business.” And we may do that. But he said the value he got out of that was huge.

That’s not me to say pat myself on the back, but that’s to encourage people who would look at working for free as a very difficult prospect, right to undertake. And as long as you do the right research and make the right offer to the right person who has a willingness to transact, right for free time, and knowledge acquisition, it will pay off way more than you can ever know. And probably in ways that you can’t anticipate or know. When you’re doing it if you don’t know anything about the real estate development business, the stuff I would teach you, you go, oh good follow-up, you know, use our project management system, take good notes, follow up like crazy, like drive people, insane on follow-up. And then they go do it and they go, “Oh man, that was like so good. I didn’t even think to do that.” Right. It’s beyond real estate development as you know in real estate is something that’s very difficult. In fact, it’s practically impossible to learn in a classroom environment, to learn at a school. And, you know, there are lots of good schools. You know, I’m involved heavily with USC in their real estate development program. But it like true, you know, in the field learning and going through the hard stuff, where it’s like, man, that’s a pain in the butt. I got to call that guy an eighth time. Like that sucks, man. I go, yeah, it does.

But I believe me if you do it and you’re successfully driving that thing forward, one, I’m going to love you because I need that stuff done. But two, you’re going to learn what it really takes in the real world. Like I tell people when you go be a real estate developer on your own, these things that we’re teaching you may be, it won’t show up now, but you’re going to look back and you go, wow, that was great. That we were able to learn that. And I said I know this because people taught me. I learned it and I’m using it today. Right. You know, Mike Costa and those guys that I mentioned at KB. And then the other one is actually a guy named Francis Marino who came, you know, approach me through BiggerPockets, actually reached out to me through BiggerPockets, and made an offer. He actually had a deal that he had put together. Amazingly got a whole development deal done with no background of development, general plan amendment, rezone, heavy-lift entitlements. You know, found the money, knew nothing about real estate development. So he brought the deal to me and we’re now in a joint venture together. But also I said, hey, part of the joint venture is you can work with us on your own deal and other deals. And he’s basically, you know, working on a stipend. And he basically has worked his way into here very soon a full-time position with us. And also, you know, the ability to participate in deals that we put together that like not even deals that he found, but, you know, he’s like, “Hey, I raised a hundred K from other people. I want to put that money into this next deal.” I go great. You know, do that.

So, you know, a natural entrepreneur who is out executing on his own, had really no mentor. Then we were able to come together and I basically have been able to amplify what he knows and he’s not done. He’s got probably, you know, a handful of more years of project management to do. But, you know, even the last year, year and a half, that he’s been with us, he’s learned a ton. In fact, to the point where at the beginning of one of our jobs, he was meeting with the building inspector as part of his job to go out to the field and make sure that subs are doing their stuff and, you know, getting their inspections done. A year later that same inspector we’re finishing a deal and he commented to Francis. He goes, “Hey, dude, you’ve really learned a lot, right? You’re not the same guy who was the greenhorn at the very beginning of it.” And that showed up for Francis. That was noteworthy for me because the learning that you do in this, in real development and the field is so natural, but a pain in the ass by the way, too, that you don’t realize necessarily that you even carry that with you, that you embody that knowledge until like comes time to do something. Then you go, “Oh, now I know how to do it.” Like, I don’t have to ask Scott how to do this or ask the head project manager, you know to do that kind of stuff, or, you know, whoever that you might ask. So I would encourage people to do that. There’s a lot of learning you can do both for free.

But also like if you are willing to trade your time at no cost to the developer. I mean, I, even in the article, I go, “Hey, go search for real estate developers in your local town. You don’t have to go to the big city.” In fact, I had a guy who approached me. He was based in Ohio and he said, “Should I move to Cincinnati or Cleveland to go find the big development?” I go, “No, look for somebody in 10 miles around where you live and make them an offer.” I don’t think I ever heard back from that guy, but you don’t need to work for the biggest shop. In fact, I’ll say, I’ll end it with this. I think the smaller company you work for the better education you’re going to get because there are less hands, less layers, less bureaucracy. If you can work for the principal directly, like Mike and Francis have done with me, you want to be learning from the most seasoned guy on the team. You know, if you can make the right offer to them.

James: Scott, this was awesome. Incredible advice. And I really appreciate, especially those two specific examples. I mean, you got really specific, which is super helpful for our listeners. So thank you again so much for joining us today.

Scott: All right, James, thanks for the invite. Glad to be here.

James: Absolutely. This is James Nelson, your host of Real Estate Investing Live from New York.

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Outro: Thank you for tuning in this week to Real Estate Investing Live from New York. Please join your host James Nelson for another program next Tuesday at 7:00 PM in New York, 4:00 PM Pacific Time on the Voice America business channel. All shows are rebroadcast Wednesday mornings at 7:00 AM Eastern time, 4:00 PM Pacific time, as well as always on demand. We’ll talk again next week.

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