Accelerated Investor Podcast with Host Josh Cantwell | UTH Workforce Housing with Guest Scott Choppin
Scott Choppin is here today to give us an insight into how to build and run a growing real estate business. In this episode you’ll hear about what is going on in the development business, what he says, and what the future holds.
For full transcript click here Expand“Complexity is the enemy of profits in real estate development”
Scott Choppin: So from our experience of that, we knew that complexity always made it harder to execute cleanly. In fact, my saying is complexity is the enemy of profits and in real estate development.
Josh Cantwell: That’s right. That’s right.
Scott Choppin: To simplify. I think of like how the homebuilders do it right. Like any market that you’re in the homebuilders will always have plan ABC, maybe they don’t like describe it as simply as I am. But what they do is they want to build the same unit over and over again, so their subs know the product. They know how to price it, they know how to execute on it, they can strip out all the complexity that’s, that they can to really just get a very smooth production cycle.
[Introduction Music 0:40]
Infomercial: Welcome to the Accelerated Investor Podcast with Josh Cantwell. Josh Cantwell, if you love entrepreneurship and investing in real estate, then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss and his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals. He actually does them and so did his listeners and students now sit back, listen, learn and accelerate your business, your life, and your investing with “The Accelerated Investor Podcast.”
Josh Cantwell: So Hey, everybody, welcome back to Accelerated Investor. I am excited to be with you as always and share amazing content about raising money doing deals, both single-family, multifamily large apartments, and I hope you’re staying safe and healthy in the middle of this… Kind of uncertain economic times as far as business, I’m lucky and excited that I’ve been working from home for over 10 years, off and on. And so this is nothing new to me, so I find if you’re finding this on YouTube, and we’re hanging out in my home office, I’ve got two offices and today the wife is working upstairs in the other office. I’ve got the basement office, which is fine by me, but we’re having a good time. Also want to announce that we just closed 196 unit deal literally an hour ago before we’re about to get going with Scott in this interview. So, 20 million dollar deal Mobile Alabama deals are still happening. And that was a workforce housing deal. And today, I want to introduce you guys to a relatively new friend of mine. His name is Scott Choppin. Scott is the founder and CEO of an organization called the Urban Pacific Group of Companies. He is a developer, builder of workforce housing, specifically, the urban townhouse model and has developments going on has been in commercial real estate for over 20 years. So we’re going to talk about his business and the development opportunities before this virus. What’s going on today, what he’s experiencing and what he sees going into the future. So, Scott, we’re excited to learn more about you and your companies. Thanks for jumping on.
Scott Choppin: Yeah. Great to be here. Josh. By the way, congrats on closing that deal.
Josh Cantwell: Oh, thank you. Appreciate that.
Scott Choppin: Yeah.
Josh Cantwell: So Scott…
Scott Choppin: That’s good news. I like it.
Josh Cantwell: Yeah, you bet. Thank you. So Scott, tell us, tell our audience just right now, not virus stuff. But tell us about what you do, what were you doing a month ago, when things were quote-unquote, normal.
Scott Choppin: Right.
Josh Cantwell: What do you do? What do you develop? How does it work? How many units do you have? Do you develop for other people? Just help us give us some foundation about you and your company?
Scott Choppin: Yeah, help me remember all those questions, by the way, cause I’ll get into it. And I’ll go off the rails.
Josh Cantwell: That’s all good.
Scott Choppin: All good. Yeah. Hey, yeah, great to be here. So we’re a Real Estate Development Company. We do hold assets and now are starting to hold all the assets on a go-forward basis. But really a ground of new construction real estate development company I’ve been doing that. Personally, I’ve been in the business for 35 plus years, professionally since 1995. I have a family background in real estate development. So I grew up around my Uncle Mike and my dad Carrie building apartment projects. So I got a taste for it. And then, when I was 18, decided that it was something that I wanted to do as a career. I read a few great deal of how to invest in real estate books.
Josh Cantwell: Yes.
Scott Choppin: And that’s what got me excited about being an entrepreneur and I knew what that was in the real estate development business because that business is not necessarily mainstream. People know what that is, and that’s fine. So we really have specialized in urban infill meaning building inside the city perimeter of predominately in the West Coast and west United States, doing different product types over the year.So we’ve built podium buildings, middle density, high density, residential. But we’re really apartment guys like you’re going to look at our track record generally. And then in the last couple years, really about three years, we’ve been focused wholly on a workforce housing model we call urban townhouse, which you mentioned before UTH call it for short. And really what happened in 2016, is we finished up a couple of very significant apartment development assets, 453 units in Westminster, Colorado that we did in a joint venture with Lennar, a few podium assets in Southern California. But when we got done with those gave us we had a little gap in our production cycle. So it really gave me the chance to look around the marketplace in late 2016. We’re seeing some changes in the marketplace for capital availability, lending, and equity, and a lot of product coming online, right, a lot of supply and in the real estate development, new construction business. Oversupply is always an issue that we need to be tracking closely, and we don’t have that problem so much in California, because we’re generally undersupplied. But, certain micro markets would certainly produce oversupply potentially and we were seeing that. And so it gave us the opportunity to really start to look around and say, “what do we want to be doing that’s different”. We see a lot of great developers doing these studio one-bedroom units really hitting the Gen Z millennial demographic…
Josh Cantwell: Micro stuff. Yeah.
Scott Choppin: Yeah. Micro units, studios, ones really fitting that younger demographic and great demographic to serve, right, you know, Gen Z millennial largest demographic cohort in US history. But also a lot of competition and so we’re always looking to be an uncommon offer, be where people are serving markets that are undersupplied. So we, through our background and doing some affordable housing and a lot of market-rate apartment projects, knew both sides of the spectrum of that development. Those development businesses and recognize that there was a space in between those right. Really thinking middle income working families that were gainfully employed several incomes in a household usually, made too much money to qualify for true affordable, right.Overqualified, but didn’t necessarily want to afford a brand new luxury, downtown sexy studio unit, or they had a large family that didn’t make sense to live in that type of housing anyways.
Josh Cantwell: Yeah, I wanted at least a tiny yard.
Scott Choppin: Yeah, well, that, you know, need bedrooms, need bathrooms, need garages to park cars, right.
Josh Cantwell: Yeah.
Scott Choppin: So what we started to explore were some assets that we found some land deals that we bought very, very inexpensively, and gave us the capability to experiment in a small way without taking huge amounts of risk. And so one particular site sort of ended up evolving into what was UTH, meaning it was a product project rather than the zoning limited the unit count, but didn’t necessarily limit the size of the unit. And we wanted to maximize the development of this particular parcel was in downtown Long Beach where we are based.And we started to sort of design the idea of doing multiple bedrooms in a given unit right, unit count was restricted, but let’s maximize rental income, how do we do that, right. So, we start to increase the number of bedrooms, we start to increase bathroom count. And then we ended up with a garage, right, private garages for apartments is a rarity. So, we thought that might have some value in the rental marketplace. So, we did that project and they ended up underwriting 2650 for the rents and went out into the market and got 2950 like, a range from 2950/ 3250 for this unit that we had underwrite at 2650.
Josh Cantwell: Wow.
Scott Choppin: So, when that happened we knew, “Hey, this is there’s a story here, right?” So that ended up being the first UTH project and then we started to design to produce more projects scale the idea right. Scale meaning more projects, bigger projects, and then we refine the idea of UTH which now is a three-story townhouse. The original one was a two-story townhouse.
Josh Cantwell: Yeah. Okay.
Scott Choppin: Shrink the footprint, still keep the garage on the ground floor, get more units on a given piece of ground, right, up the density. But still, hold to what was that large family demographics. We ended up at a five-bedroom, four-bath, three-story townhouse unit.
Josh Cantwell: Wow.
Scott Choppin: Two car direct access garage on the ground floor, intended specifically to serve multi-generational middle income working families. We will, we have roommates that pair up or…Josh Cantwell: Yeah.
Scott Choppin: Get multiple roommates in a unit so we’re open to that too. And really started to expand the idea of UTH and it really fit a great niche Josh, which was in California in mini urban markets. You have these middle income working families that are basically being priced out of the marketplace.
Josh Cantwell: Sure. Sure.
Scott Choppin: They can meet the rent, but they want a unit that’s coherent with their lifestyle, meaning they have a family, right. That nobody was serving them in that market place. So we’ve basically expanded, fairly rapidly into that marketplace. Of course, always being cautious given the oversupply story and, downturn.
Josh Cantwell: Sure.
Scott Choppin: But when we came out. Let me stop you there.Josh Cantwell: Well, no, I was going to say, I love the idea that, and this is what I find with very, a lot of other successful entrepreneurs. Very few of us go into an idea with the intention of that exact idea. It’s just about getting going right.
Scott Choppin: Yeah.
Josh Cantwell: And seeing something and then it’s like, oh, I stumbled onto this idea. And then I stumbled upon that idea. So when you say, multi-generational, you’re talking about potentially grandma and grandpa, middle-aged parents with children. So that’s multi-generational frame, but it does intersect.
Scott Choppin: That’s right.
Josh Cantwell: And that’s what you think like how the heck can they fill up a five-bedroom. Well, that’s you talking about families. Talking about building up and down lots of space, but up and down with room.
Scott Choppin: Right.
Josh Cantwell: And a garage, to the point where $3,000 a month in that California market with those kind of incomes out there. It works, you probably didn’t roll into this thinking that’s exactly the product I want. The market just told you what the market wanted. In a good entrepreneur…
Scott Choppin: Right.
Josh Cantwell: What they do is they listen to the market and often it’s not the exact idea that the entrepreneur has at the beginning. It’s the marketing telling the entrepreneur, this is what the market wants, and you are smart enough to listen to that. So I just want my audience to hear that. And I say this over and over again, that it doesn’t matter what kind of real estate you’re doing could be a single-family, it could be rental. What is the product? What is the market want? What are they willing to pay for, whereas they’re undersupplied and a lot of demand.
Scott Choppin: Right.
Josh Cantwell: Don’t be married to a strategy.
Scott Choppin: That’s right.
Josh Cantwell: Get married to what the market needs. That’s all I wanted to add there Scott.
Scott Choppin: Absolutely, and you hit on one item which was undersupplied, right. That’s a real key for me, and this is true for whether you’re doing value add. But like you say, any real estate transaction investment development project. I’ll give you an example at a conversation, so we do some advisory for third-party companies that want to do real estate development. Usually, in the commercial sector, we have a team that handles all that. So we’re a real estate developer on behalf of others, like services, if you will. And I had a guy approached me and he says, “Hey, I want to do this project”.So I start asking him what you know, what’s your design? He goes, I’m doing you know, I can’t remember the size the project 50 units, he goes, I’m doing all two bedrooms. I go, “why are you doing that?” He goes, “well, that’s what I think you know, is needed” and I go, okay, you don’t want to offend the guy, but I go, did you what research did you and whether did that come up? Oh, no, I didn’t do that. And I said, “well, let me stop there”. What happens in Southern California, two-bedroom, apartment units are the most common, housing stock across the entire Southern California marketplace. And I’d said, look, why would you go in to compete in the most competitive part of the entire rental market, do something different. Now, for us to in five bedrooms, that’s a pretty radical departure that we knew where the concentration of housing stock was and we wanted to be on the outside of that or be in the space that’s undersupplied, still, be competitive, still, be undersupplied in a market that has demand. Because, sometimes if there are no units being developed of that type, maybe there’s no demand for that.
So that’s one of the stories that you could be in but there also could be that it’s so different or people don’t recognize a part of the market. So, that undersupply really go in a place you got what can I look for that’s undersupplied, that I have some confidence of execution, right. We still have to execute, but the build we start the market and finance and acquire land and all those things that we do. Can we do that competently? And for us the three-story in fact, arguably, Josh, the three-story build is the most, the simplest build we’ve ever done, right.
Josh Cantwell: Oh, really tell me about that why?
Scott Choppin: Well, our history was urban infill so a lot of podium buildings. Podium being an underground parking structure with the unit stack on top of it.
Josh Cantwell: Sure.
Scott Choppin: Right, going underground subgrade PT, post-tension, concrete decks very complicated a lot of coordination.
Josh Cantwell: Right.
Scott Choppin: Need a lot of high-level subs. And so from our experience of that, we knew that complexity always made it harder to execute cleanly. In fact, my saying is complexity is the enemy of profits and in Real Estate Development.
Josh Cantwell: That right. That’s right.
Scott Choppin: To simplify, think of like how the homebuilders do it, right. Like any market that you’re in the homebuilders will always have plan ABC, maybe they don’t like describe it as simply as I am. But what they do is they want to build the same unit over and over again, so their subs know the product. They know how to price it, they know how to execute on it, they can strip out all the complexity that’s that they can to really just get a very smooth production cycle. And so we’ve always right admired that always wanted to accomplish that. But, in our market of doing urban infill podium buildings, every building is different, right.
Josh Cantwell: Yeah.
Scott Choppin: Every building, it’s one-off design. So now with the UTH model, we basically use that same unit footprint, the five-bedroom, four-bath unit, and then we just lay it out on the site. Each site is configured differently when a square one is, whatever rectangular. But we’ll lay the units out with that same footprint.
Josh Cantwell: Yeah.
Scott Choppin: We just design it on a piece of ground that way, and then we have subs that do this, these units, these projects so for us over and over again. So same framers, same concrete guys doing the foundation flatwork and we just want to really wring out every little hitch or every little friction point in this along the cycle in the construction. We do that now for land acquisition entitlements which we can talk about but the model really is intended we’ve always designed it from the get-go that every step of the development cycle had simplicity as the overarching goal. I mean, we need to be profitable we need to execute well right, of course, we need to produce yields for our investors. But the way we do that is by stripping out the friction and the process…
Josh Cantwell: Keeping it as well as profit.
Scott Choppin: Yeah.
Josh Cantwell: Keeping it as simple as possible. And that’s what I find very successful entrepreneurs doesn’t matter what niche they’re in. I was sitting down with Matt Rodak for example, Matt is a young guy, probably 30 years old, founded a crowdfunding platform called “Fund That Flip”. Was, doing basically fix and flip loans at scale and 25 different states and a lot of Wall Street money that he recruited. And when we were sitting at his conference table, this is just about a month ago, he was telling us his number one goal was to get the money to market, as cheap and as fast as possible.
Scott Choppin: Yeah.
Josh Cantwell: And what I heard was, let’s make it as simple and repeatable and scalable as possible as the same, same thing you’re saying.
Scott Choppin: Right.
Josh Cantwell: When, with large infill buildings, which can be very complicated, very dense.
Scott Choppin: Yeah.
Josh Cantwell: A lot of development is not a simple business, right, as you thought.
Josh Cantwell: No. No, it’s not.
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Josh Cantwell: So…
Scott Choppin: Right.
Josh Cantwell: So Scott, what have you learned along the way? I’m curious to know about you the entrepreneur, right. I always like to talk in this podcast about deals and deal structure. But…
Scott Choppin: Sure.
Josh Cantwell: I always like to know, like, what’s going on behind the scenes of the actual entrepreneur, the CEO, the founder.
Scott Choppin: Yeah.
Josh Cantwell: So what have you learned along your journey? Like, what about this business is fulfilling your growth and progress needs? What is it about the business that excites you on a daily basis? What is the things that challenge you on a regular basis, running the show kind of being the guy pulling a lot of the levers?
Scott Choppin: Absolutely a great question. So, one of the all just… the complexity, right, stripping complexity, I was one of the things I learned, I mean, I learned that from a series of projects. I mean, we’ve done thousands of units at this point, and so you learn how to sort of wring the complexity out of these deals. But…
Josh Cantwell: Yeah.
Scott Choppin: Really, I think, where I go with it is in underwriting to answer your question about what have I learned along the way. So, I think most everybody, certainly you and I went through the 2008 recession.
Josh Cantwell: Right.
Scott Choppin: A lot of very hard, but well-learned lessons and one of those that I came away with was, how to better underwrite conservatively. The joke I make is when I was a young project manager working for, a major real estate development corporation, like my mode was every deal can work, right.
Josh Cantwell: Yeah.
Scott Choppin: There’s no deal that I can’t work on that I can’t problem solve and make.
Josh Cantwell: Jam them all in there. Let’s just see what happens.
Scott Choppin: Yeah, Terry, like I could get, I can do this, right.
Josh Cantwell: Yeah.
Scott Choppin: Yeah, I’m totally the opposite today.
Josh Cantwell: Yeah.
Scott Choppin: Now, the other side, I’ve met a different risk profile. But, when I first started my company now 20 years ago, like I was, I mean, I think a lot of entrepreneurs are optimistic. Certainly, real estate developers are right real estate people [Unintelligible 19:59]. But, what it was to basically just underwrite in a way that is like foundational, right like we ground all the assessments. So let’s say a project when you underwrite, it has a hundred variables, right. I mean, every project is different.
Josh Cantwell: Yeah.
Scott Choppin: But let’s say there’s a hundred, you need to get good grounded assessments, grounded research information on probably fifty of the most important ones. The second fifty maybe, you just have history or historical numbers that you can work from. And to then plug those in and either the deal doesn’t work, or it does, right. And if you see it not working, you might like research more and maybe there’s some data that you can get that can update rents or operating expenses or this or that, right. But, I really now, if it’s not a clear picture very early in underwriting a new deal, as our acquisition teams bring us deals, and we look at them and we assess them, and there’s a story there, we’ll continue to underwrite more definitively. But any step along the way, if it’s clear to me that there’s one major variable that is not changeable, like rents just cannot be….but a classic story, you know, for a lot of people is, oh, well, if rents are 3000 a month and this deal is not working at 3000, maybe up to 30 to 50. You know, that can make it out from a workman, you can make any performer work if you try hard enough.
Josh Cantwell: And it’s just numbers on a spreadsheet. You could jam them all in.
Scott Choppin: They are in fact…
Josh Cantwell: We look at hundreds of deals and…
Scott Choppin: Right.
Josh Cantwell: One of the first thing you’re trying to do, just like we’re doing development UTH. Is, how fast can I kill this deal? Like…
Scott Choppin: Right. Exactly.
Josh Cantwell: What are all the ways I can kill it?
Scott Choppin: Right.
Josh Cantwell: And if a deal just won’t die, then it’s got legs potentially right?
Scott Choppin: Yeah right. That’s it.
Josh Cantwell: There’s a lot of guys don’t look at enough deal flow. I think that’s where it starts, they don’t look at enough deal flows.
Scott Choppin: Right.
Josh Cantwell: So they’re trying to jam in like I need a deal. I need to keep my guys busy. I want to do the next thing. I’ve got capital. I’ve got investors that want to do a deal. So then they do something that’s marginal, and then all of a sudden, some shit happens like the Coronavirus that, deal that they probably shouldn’t have done, to begin with, that they were too optimistic about. Now might some real bad.
Scott Choppin: Yeah, right.
Josh Cantwell: It comes now a thorn something that there have developed in or they already own it and now they’ve got to own it. Commercial Real Estate’s not something you just exit tomorrow. It’s something that once you buy it, you’re kind of married to that thing for a while. We buy all of our stuff to own them forever. We don’t have to sell them we buy them to own forever. Obviously, we get an offer, we’ll sell the thing at the right price. But…
Scott Choppin: Yeah, if it makes sense.
Josh Cantwell: You own it forever. So you get married to a deal. So you kill it, kill it, kill it as fast as you can. That’s the rule. Right?
Scott Choppin: That’s right. That’s right. Yeah, in fact, I tell my teams I’m like, super brutal, right, in the underwriting process, if there’s any whiff of difficulty, tough city, rents just we just can’t get there on rents. Or, entitlements like us in California zoning and entitlement processes are exceptionally difficult. In fact, we design UTH when we created the program to only purchase sites that were zoned already.
Josh Cantwell: Okay.
Scott Choppin: Like, we only bought by right. Now we’ve expanded as we want to scale up, we’re having to take on a little bit of, a little bit of additional work. But if I look at a site today, and it needs to rezone and general plan amendment and site plan review, and you know, etc, etc, I got no, I won’t even touch it.
Josh Cantwell: No.
Scott Choppin: And it’s interesting because it sounds like not so much fun. But I honestly like you, right. I, you know, how to put this I enjoy killing a deal because I know when a deal makes it. It’s fun to execute on it because then you’re…you have more safety, you have more margin more cushion. Like we’re the way like…
Josh Cantwell: Confidence.
Scott Choppin: Construction right now.
Josh Cantwell: Confidence is so important in this business.
Scott Choppin: Yeah.
Josh Cantwell: When you get into a deal and you’re constantly second-guessing yourself, it can weigh on you as an entrepreneur every single night.
Scott Choppin: I mean, Josh, it weighs on you anyways.
Josh Cantwell: Right.
Scott Choppin: Even when you have a well-underwritten deal. I still….like, you probably do, you know you’re in the acquisition value-add mode is a little bit different. But, when you buy it you just close that deal on Mobile you said right.
Josh Cantwell: Yeah.
Scott Choppin: You still got to execute on the upgrades, you still got to capture the upside and rents. You’re in the Coronavirus environment, you bought well, I’m sure right.
Josh Cantwell: Yeah.
Scott Choppin: You made your mark on the purchase. And so but it does bring you more like you’re more settled to go look, I underwrote a safe deal. So I’ll give you an example, what I’m doing right now and you asked about what we’re doing now.
Josh Cantwell: Yeah.
Scott Choppin: So we’re seeing land costs and construction costs drop, like, I mean, it’s only been three or four weeks, and it’s already dropping. So we have we’re pursuing a land asset in Long Beach. They had already dropped the price because it wasn’t selling. And we came back to them with more of a reduction because we just said look, this is the environment. We’re already seeing people drop costs on deals that we track, right. And then construction on our Montebello project, which is another UTH project. We had a huge increase in labor, right? I mean guys showing up on the job site, “Hey, I want a frame or you got work”, and of course, we leave that to the subcontractors to deal with. We basically how we do as a homebuilder model, we go direct to all of our subs. We don’t use a GC, so I call it the homebuilder model, in other words where the owner going direct to subcontractor’s way to think of it.But we do know when more labor shows up, we’re going to tap two things happen. One is immediately we should start moving more with more velocity on the construction and we’ve already picked up probably 20 or 30% in you know the speed of execution. And then we’ll look to because labor is your biggest component of your subcontract costs generally, that we’re going to already starting to see contract drop, bids drop rather and then lower contracts and then we’re hearing and we don’t wish this, of course, Josh, we want everybody to be feeling good and be confident in the marketplace. But, subs are already saying, look, I, this job, when I finish, is the last job I have in my pipeline.
Josh Cantwell: Yeah.
Scott Choppin: They’re looking at no work. And I don’t like wish that and we’ve been there as a developer when you go, hey, there’s nothing more in the pipeline and sometimes that happens.
Josh Cantwell: Yeah.
Scott Choppin: And so we’ll our good subs who say, “Hey, look, you’re going to get all of our work, we’re still producing projects, even in this environment. And we can talk a little bit about that later, but, we’ll keep you going”. Right, and we can’t promise you that will be rock solid, unending work for the next three years, there may be gaps, but you’re our go-to folks give us good pricing and you will have the work right. And that’s the compact we made with them when times were good. “Hey, I know you got a lot of other demands to go to other projects will always give you our work, right? If you take care of us.” And that usually was pricy.
Josh Cantwell: It’s all about relationships.
Scott Choppin: So that, that pays off right now. We’re in an environment and I don’t want to, our intention is not to crush anybody, we need to keep these guys alive, keep them making profits. But we’re all going, “Hey, look, we’re in an environment where everybody’s less profitable”, right extensively. So, those are the kind of things that that we move with. So we talked about building networks of good subs, good vendors, good land brokers, right. We got good identity with those in our networks like we take care of people, we treat them fairly, we pay them well, it’s when we have the capability, we asked them for discounts when we want to keep working. So all those things pay off and I mean, and these are generalizations which are true and value-add investments generally. But, that’s just I think as an entrepreneur, so, we’ve learned how to underwrite conservatively. We’ve learned how to build powerful networks, we’ve learned how to build reputation identity, right. So these would be lessons that you know, I learned over the years…. [Cross-talking 28:00].
Josh Cantwell: So, stuff that’s gonna carry you through Scott, in this next could be six months to 24 months.
Scott Choppin: Yeah.
Josh Cantwell: You got to lay the groundwork for that stuff before, because now as everyone’s a little bit uncertain what to do. You go back to the guys or the gals that you have confidence in you go back to…
Scott Choppin: Yeah.
Josh Cantwell: You have confidence in, the investors that you have confidence in. the bankers and the lenders you have confidence in. You go back and look at okay, if you’re a buyer of land or buyer of a value-add deal and the sellers have to drop their price but, they know that you’re a player they know you can execute. They’re looking at you even though the price might be lower to say hey, I know Scott, he might have been even a 30 days ago willing to pay more, today he’s willing to pay less but I know he can close. I know, I he will be a good buy.
Scott Choppin: Yeah. You’re saying the same thing I am but it’s like trust.
Josh Cantwell: Yeah.
Scott Choppin: I can trust this subs going to perform and the sub says, “Hey, I know they’re going to give me their work”, right. They’ve always been fair and held their commitments. That’s incredibly important generally, I mean all business-like trust is just fundamental.
Josh Cantwell: It’s everything. Relationships no doubt.
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Josh Cantwell: Scott, help me understand on your deals that you guys are out buying….buying the land developing and then holding right? Just refinanced a bunch of your stuff to hold. Tell me a little bit about your investor profile like who’s your ideal investor? What’s kind of like the structure of a typical deal that you work on with your UTH product.
Scott Choppin: Yeah, so what’s happening right now, I mean, this was a story that was generally successful because housing costs were high. And we offered a more affordable version that was also coherent with the family lifestyle, right. So that was the story pre-recession and pre Coronavirus recession. After that, we’ve always anticipated and know that these families were generally they live defensively, right. So their working-class, their blue-collar, salt of the earth, and they always lived defensively they had been tested previously. We talked about being tested as entrepreneurs, they were tested as in their lifestyle and how they work. Guys in construction who had layoffs and they save their money and prepare for that would be an example.And so we’re actually seeing an acceleration in this marketplace, which is not typical, contrary to what the sort of mainstream story of what’s happening. Obviously, people are speaking about distressed assets coming. And so we’re, what we’re seeing is our model is a model where people come together to economically share costs for housing. So earlier, you talked about multiple family members, multiple wage earners, right. Those people live defensively and also they have the capability to sustain in upset times, right. If one person loses their job, there are three other income earners in the family that can pick up the slack…
Josh Cantwell: Right.
Scott Choppin: And continue to share incomes and expenses as what we say it. And so we’re seeing an acceleration that because now families are coming together, right. It’s the reverse of a new family or new household formation, which in the apartment market, you always look for as a sign of demand for rental units in the future. We’re on the opposite mode right now, where people are going, I’m getting out of that unit. I’m a single-earner household, I lost my job, I can’t pay this rent, I’m out. And, and so where are they going? Well, they’re going they’re moving home…
Josh Cantwell: Consolidate with someone else, right.
Scott Choppin: Yeah, consolidation. Right. And that’s a great word for it. And they’re moving home with parents. They’re getting roommates, they’re getting more roommates and so we actually are very well positioned to accept like our product lives. Well for multiple people we have five bedrooms and most importantly, have four bathrooms, right.
Josh Cantwell: Yeah.
Scott Choppin: Think about how…. the bathroom capacity both through [Unintelligble32:57] family. So, what that has us doing is we’re being cautious in our underwriting, but we’re accelerating. So we’re looking at acquiring and are looking at new land assets now and we’ll pair that with before I mentioned lowering or reduced land costs and reduce construction costs. So we’re in this interesting positive position right now for raising capital where we have a good long term asset, right. We’re still undersupplied, right. When we come out of this thing in 18 months, two years, whatever the time period for the recovery will be, California is still undersupplied, that’s not going away. In fact, arguably, we’re going to reduce housing production over the next 24 months, which is only going to exacerbate when we do recover. So we want to…
Josh Cantwell: You to, want to enter enough supply. Right.
Scott Choppin: Right. So…
Josh Cantwell: What you’re saying Scott too about the infill type of stuff, people that want to live in the urban core, but still family units.
Scott Choppin: Yeah.
Josh Cantwell: And workforce is the fact that in a recession that people are in luxury class A, like you said they’re going to consolidate or move down to the workforce. And in an expanding economy, people that are in maybe like a C class private property or B minus, they’re going to upgrade to work for us.
Scott Choppin: Yup.
Josh Cantwell: And so it becomes the product that’s got that perfect bandwidth in the middle. That’s a plastic that you have people on both ends top and bottom moving to where you’re at. That’s exactly why we invest in workforce value-added stuff.
Scott Choppin: Yeah.
Josh Cantwell: We don’t look for luxury anywhere. I just looked at a building… I mean, the diamond type of project in downtown Cleveland, the Rockefeller building built by John D. Rockefeller himself.
Scott Choppin: Right.
Josh Cantwell: The top floor 34 vaults.
Scott Choppin: Wow.
Josh Cantwell: The basement. Massive vault all marble, John D. Rockefeller kept his actual money in these vaults.
Scott Choppin: Yeah, cash.
Josh Cantwell: Unbelievable.
Scott Choppin: Wow.
Josh Cantwell: We talked earlier about micro-units, right. So…
Scott Choppin: Yeah.
Josh Cantwell: To develop, buying the building can buy the building for $13 million amazing deal. Current the office, Convert it, $83 million conversions all in for about 100 million dollars. Problem is right, unbelievable opportunity to do micro units downtown like right across the street from what will be the new Sherwin Williams world headquarters. But the reason why you don’t do that, why we opted out of that deal is everything just happened. One it’s a very specific core product for a specific niche people was partially dependent on Sherwin Williams. Who have now of course, in this environment has kicked off and postponed the development of their new world headquarters.
Scott Choppin: Right.
Josh Cantwell: Because one of the…
Scott Choppin: Falling off. Yeah.
Josh Cantwell: That’s why you do things that might not be the sexiest product, the luxury product, or your relative to C class, the highest yielding product. Because, often the cheap stuff is the highest yield, while you go workforce. Doesn’t matter if it’s single-family rental, urban townhome, or value add apartments because it can last in any type of economic time.
Scott Choppin: Yeah.
Josh Cantwell: Very often.
Scott Choppin: And also add to that why workforce makes sense. And what any of those products spectrums you described. The look, the middle class is right now and under pressure, right. So incomes are stagnant and housing prices at least up till a month ago were going up, right.
Josh Cantwell: Sure.
Scott Choppin: Say on the very much longer-term after we come out of this recession, I would expect housing costs to continue to rise right. And so what’s happening is it’s creating a gap between housing costs generally and incomes generally right. In the old days, you’d hear the story of, “Hey, I got my first job and I had my family and I made enough money to buy a house right” or, nobody says this but rather a unit right. Now you can’t you get that starter job that does not afford like anything in most markets, I mean, every markets a little bit different, but I think generally. And so the gap is where workforce housing goes into and the gap is really housing costs generally, and incomes generally right. And incomes are not going up and housing costs are generally rising, right. And so you’re going to have this ever-widening gap.So when we get out of this recession, we will come back to that because in the United States, we’re still generally under building and even in markets that are development-friendly, we’re not building enough housing for that. So this middle income, this middle class is getting dropped down the food chain, they either have to occupy inferior housing, or in California major metro markets have to pay more as a percentage of their income towards rent right. And, in California, 50/60% of income towards rent is very typical…
Josh Cantwell: Wow.
Scott Choppin: For your moderate-income family. So where we are with it, I think you’re in the same mode is that we love the long term story of these families being incredibly stable, working families right. There, salt of the earth right. There, the middle class of that we think of when we think of The United States in America, and they’re just not being taken care of well enough. And so you and I, as entrepreneurs are going into those marketplaces, and you’re right, it’s not the sexiest product. We throw our ways you guys can we can produce great yields to investors, and a solid, stable population for a long time. Right. So we are so excited about that story, just like you are, that we’re, we converted a year ago and everything, we’re holding everything back, right. Like you said, I say the same thing internally, like, I want to own everything forever, even to our investors. So I say, hey, invest with us for seven years, 10 years, right. Ten is our preference right now. We’ll put a mechanism into the operating agreement for the LLC that we have the capability to buy them out in the 10th year, we will produce their yield for them. But, I also know this because I look at all the assets that I sold over the years and I kicked myself.
Josh Cantwell: Yeah.
Scott Choppin: That I…
Josh Cantwell: Was should have every one of them. Yeah.
Scott Choppin: Right, I should have held that thing. It’s worth four max what I sold it for…
Josh Cantwell: Yeah.
Scott Choppin: 15 years ago and obviously the market cycle and ups and downs are going to change how much you make when, but it’s sort of like the stock market. And Warren Buffett, he says, “look in the long run, you want to be invested in the marketplace and if you look at on a 30-year window, you’re going to make on average 80% in the marketplace.” And yes, some years you’ll get your butt kicked, some years you’ll do great and just hit it out of the park. And look like by the way housing still a fundamental biological need, humans will never run out of the need for shelter.
Josh Cantwell: That’s right. That’s right.
Scott Choppin: A grabber. And [cross-talking 39:45] so it’s a defensive space in the long run.
Josh Cantwell: I love it. So as we kind of round third here, head for home. What I love about what we’re hearing is a couple of things from an entrepreneurial perspective, right. Is that often, it’s in, it’s in the seeking of creating value for others, that the entrepreneur finds sort of their wheelhouse. And that’s kind of what happened for you.
Scott Choppin: Yeah.
Josh Cantwell: Looking for what can I create that everybody else needs, wasn’t exactly what you were set out to find, but you found it to work in. It’s amazing, it’s a big lesson I think we take away from this interview. Secondly, is relationships, building that network, expanding the network for the long haul. Also, to hear you say, cause I feel the same way. Every asset that I sold, I wish I still owned and I think that’s a lesson for our audience’s look.
Scott Choppin: Right.
Josh Cantwell: When you invest for the long term, the sooner you can put your long term hat on, the better. I know life comes up, I need money from certain things have to sell some assets. It happens I get it.
Scott Choppin: Yeah.
Josh Cantwell: And to me before happens to everybody. But if you can find a way to stay liquid in the troublesome times and hold the assets, it’s going to serve you forever. So don’t be tricked. transactional and what you’re doing, whether you’re a developer, whether you’re a builder, whether you’re a private lender, whether you’re a single-family, home investor, whatever, find a way to get in for the long term. Now, the tax advantages, the true wealth creation is from owning the assets long term.
Scott Choppin: Absolutely.
Josh Cantwell: All the things that really make a lot of sense.
Scott Choppin: I would add to that, one of the key difference in my thinking is that had me to hold the capability to hold long. Because as you know when you’re an investor or a sponsor value-add or a developer. But particularly latter too it’s always, “hey the next deal is gonna pay me X”, I can be profitable I can sell the deal right. That puts you know a big chunk of money in the bank and that’s always a great even. But really where I turn the corner on that was once I started creating multiple sources of income right.So we, I mentioned earlier the advisory team right we having a team of people who are working constantly on diversified commercial projects, restaurant business although that’s under pressure now. We will advice other parties that need to do development but aren’t developers, and I would just counsel people that once you can create that source of income keep your household costs low, and then create that second source of income all of a sudden you can be patient and now you don’t have to sell that property. And, so get out of that like both put that thinking on but for me the strategy, was “hey create that second, third, fourth source of income whatever it is right”, that can be like coherent with your investing and your development. Then, all of a sudden you go, “oh now I don’t have that driving need to ever be putting a big chunk of money”. And it’s great like I’ll never resist big wire transfer into a company bank account after the sale of an asset. That’s an excellent thing and at the end of the day all these assets will eventually want to be monetized in one way or the other and that’s really, really long run. Right. So that’s a key.
Josh Cantwell: Yeah.
Scott Choppin: Multiple …
Josh Cantwell: Multiple streams of income, filling in, at other times beingresourceful. I think it’s the one of the top criteria of being a good long term entrepreneur is being resourceful because you just don’t know, what you don’t know you walk into an environment. Like this, with this virus that nobody could possibly ever seen coming. And you’ve got to be resourceful as yeck and a lot of it is relying on relationships investors your team your connections.
Scott Choppin: Yeah.
Josh Cantwell: And learning what are they doing, what’s working for them, how I can incorporate that into my team.
Scott Choppin: Yeah.
Josh Cantwell: I helped us get through this be profitable have multiple streams of income and then go back when things are good then go back to really honing in on the one or two things that you’re really great at and driving that during that’s an expansion time.
Scott Choppin: That’s right. That’s right.
Josh Cantwell: That’s really, really good advice there Scott. For our audience that wants to reach out to you whether it’s investing in your deals, learning more about how you build, people that just want to connect with you do deals with you, potentially bring you land deals. How can they reach out to you what’s a good place for them to connect?
Scott Choppin: Yeah. Great thanks for asking so best place to go to our web sites www.urban pacific.com. Go to the contact page and our entire team you’ll get direct access phone numbers, email so you we’re reachable in multiple channels. Check out our YouTube channel, under urban civic group of companies. A lot of good investor education, a lot of videos on our website, a lot of articles how to underwrite deals. A lot of like knowledge-based information there and then I’m on LinkedIn. So anybody can find my link to social media channels Twitter, Instagram. But, website and YouTube are great resources for investors that want to learn more about investing generally and investing a workforce housing.
Josh Cantwell: Fantastic Scott. Well, thanks so much for joining us today on an Accelerated Investor. For my audience of listeners, make sure you give us some feedback you know how we just love and crave your feedback, comments, questions, reviews any of those kind of things put them right onto our YouTube page. Right onto our Accelerated Investor podcast.com page or iTunes, so I can feed those over Scott. Get answers to you connect with Scott, will also put Scott’s contact information right inside the show notes so you can reach out to him as well.
Scott, listen had a fantastic time spending with you today learning more about your business and growing as an entrepreneur. And also love the concept of really focusing in on your kind of ideal and specific way that you make money with your UTH projects. Thanks so much for being on to that.
Scott Choppin: Yeah thank you for the invite appreciate it
Josh Cantwell: You got it.
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End of Podcast Interview
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