Realty Speak Podcast with Host Bill Weidner and Guest Scott Choppin

Scott K. Choppin is the founder of Urban Pacific Group of Companies. Scott oversees all operations of the Urban Pacific family of companies including business development, capital acquisition and strategic planning. Prior to that, Scott was director of land acquisition for the multifamily development division of Irvine-based Sares-Regis Group. In that position, he was responsible for all land acquisition activities for the development of luxury, market rate and senior rental communities throughout California, Colorado and Arizona. Before that, Scott was with Kaufman and Broad Multi-Housing Group (KBMH) as senior project manager who was responsible for all activities including multifamily development, acquisition and more. He was with Snyder Langston Real Estate and Construction Services. He has a B.A. with a specialization in finance from Cal Poly San Luis Obispo.

 

 

For full transcript click here Expand Episode Edit Tr1 Bill Tr2 Scott
Host: Bill Weidner
Guest: Scott Choppin

Bill: Hey there everybody. Welcome to Realty Speak, the podcast where experts share valuable insights, answer questions, and tell some real-world stories. That’ll get you thinking about how you can tweak your real estate investment strategy. Build up revenue, realize higher returns, and retain more profit when you sell. I’m Bill Weidner and today August 07, 2020, Realty Speak takes a virtual trip across the country to beautiful Long Beach, California. With this episode, guest Scott Choppin, and I are going to talk about new development of multifamily rental housing during a pandemic and how that is impacting his business model. We’ll also chat a bit about my favorite topic, which I wish I never had to talk about state-wide rent regulation aka the blanket solution that doesn’t solve anything and only results and poor consequences for all the stakeholders except the politicians who love to use it as a platform to gain popularity. Yes, as of the fall 2019, California has it too. Thanks for being here on Realty Speak Scott.

Scott: Great to be here Bill.

Bill: Scott, you were the founder of Urban Pacific Group of Companies and you’ve been developing for decades. Please tell us how you came to be in this business and why the West.

Scott: I got exposure to the business through my family, my uncle Mike and my dad, Carrie were both Real Estate Developers in many ways grew up around the business of real estate development. And that’s what helped me understand it. Now as many kids do, they don’t want to do what their parents do. That was me for a while, but a couple of key things happened for me when I was around 18 years old. So one is, I had a close family friend who had a sort of, one of those, life talks that people do and really sort of brought it home for me that if I was going to choose a certain career, what would I do? And my feedback to him was I want to work for myself. I wanted to be able to call my own shots.

You know what we’d call an entrepreneur today. He gave me certain guidance that really sort of, you know, resonated with me. And then at the same time, while I wasn’t in college, at that point, I was working in the construction trades right out in the field. Every day I read a book, one of those famous fifties’ era, real estate books, How to Make a Million Dollars Investing in Real Estate on the Weekends. And although I had this great family background in real estate development, I didn’t really have a fundamental understanding of what it was that a person did. I mean, yes, you buy land and build apartment buildings and rent them and own them, but it didn’t have meaning for me at 18 and 19 years old. And so, this book basically brought meaning to the real estate transaction, to the real estate business, the ownership, and development of real estate assets, multifamily assets specifically. And it really opened my eyes and go, Oh, okay, this is, this is deal-making is this is how you become successful. And how you make money to live a good life and take care of your family. So they’re really, those two things sort of came really almost at the same time. And then sort of launched me at that point onto my career which was to basically, go to college and go out into the professional development industry to build background, which I did. And then ultimately back 20 years ago, this year I launched Urban Pacific as an urban infill real estate development company.

Bill: What did you focus on when you were in college?

Scott: Because I had this, I don’t want to call it an epiphany Bill. It wasn’t like that dramatic, but at this sort of clarification or clarity in my ambitions and my intentions for what I want to do in my career, meaning, you know, I wanted to be in real estate. I wanted to work for myself. I wasn’t going to necessarily be a corporate guy, the long run–really at 18 years old, that set my entire course. So I ended up going to school here in California called Cal poly San Luis Obispo, and specifically designed to be a business administration major specializing in finance. My thinking at the time was in true, and this really came from my uncle, Mike that finance and capital structures was the heart of real estate development. Ultimately so, I chose to be a finance major in college.

Bill: Funny. Because I think a lot of people go to college and they don’t necessarily use what they learn in college, but it sounds to me like you really put it to use number one. And number two, I think what a lot of people realize is that in the real estate industry, it’s not just about the brick and mortar and the real estate, whether it be new construction or existing assets, it’s really about how are you going to finance those things. And it’s not the same as when someone buys a house and they go out and they get a mortgage and they pay it for 30 years. There’s a capital stack that can be very, very complicated. So having that finance background I’m sure really helps you with that great story. Thanks. Let’s get started on the meat and potatoes of this, or as we like to say in little Italy the meatballs of it. So, Scott explained to us the difference between the development model that you subscribed to as opposed to buying in place assets.

Scott: I’ve thought a lot about this and sort of the way that I’ve come up with the differential between, you know, what I call value, add in-place assets and development really is in three groups or buckets. I call them. So it’s sort of the three-bucket difference, the way I describe it, and the buckets include similarities and differences. And so, the first bucket is what everybody’s used to who buys existing value-add in place, or even just buying a multifamily to own is that you review the market. You look at the depth of demand, you underwrite the deal. You figure out this project worthwhile, you do a feasibility analysis, you run a proforma. That is the same. Whether you’re buying an existing asset or you’re developing. We as developers have to do the same thing. We make the same assessments or should make the same assessments. If you’re a professional developer investor owner, there are some differences.

And this really is in the second bucket. And that’s really the sort of new design and new build portion of development. So in other words, as a developer, I go find an underutilized piece of land or an empty piece of land. And I have to our company and myself, you know, as the CEO of that company have to envision, what’s going to go on that site. Whereas when you buy value-add, you don’t have anything to visualize or envision. You are looking at underwriting, an asset that already has an existing mix of units, unit types, so much parking as a new construction developer, we are able to design all those new and that has some advantages to it. So, if I go into a new market, I can basically specify what product I want to introduce into that marketplace. Because I’m not locked into an existing assets, you know, product mix of studio and ones. If I want to do different unit types, I have that choice.

That’s also the most complicated part of it relative to what most real estate investors are used to. Right? If you buy an existing value-add asset, you don’t have to worry about the zoning. Maybe the zoning’s changed and it’s not multifamily, but your asset is existing. It’s in place. It may be grandfathered. They call it nonconforming use, but you don’t have to worry about that. You never even give it really much thought. Unless you’re going to reconfigure the building in some way. So that’s bucket number two and then bucket number three is really the heart of any real estate deal, which is what do I produce as profitability and value of the project. At the end of the day, if you’re a value-add investor, you want to buy the property below replacement value or at a discount to the market, improve the property, increase the rents, increase NOI value increases, and then you can sell it for more than what it costs to invest in it.

As a developer, we have to do the same thing. Our model is we have to deliver value of a property more than what it costs you to develop it, build it, do the construction, buy the land, et cetera. So, at the end of the day, the most important thing is what’s the valuation of the property when you’re completed with the asset. And how does that perform relative to your cost structure? And how do you maximize profits to investors in the house? So those are the three buckets, sort of the similarities and differences between value add a new construction?

Bill: Well, one of the aspects of that in terms of the difference between existing assets and new construction, is that in existing assets, you already have cashflow number one and number two, you don’t have to predict the future probably as much as you have to really analyze the past. Whereas for new construction, would you agree that you have to predict the future a little bit more than you analyze the past, especially since there’s a period of time between when you actually break ground and have it fully leased.

Scott: As a value-add sponsor and a developer, value-add you have to see into the future a little bit. Let’s say you buy a property and you approve the units and then you turn the units and you have to look out three or six or nine months out into the future for what your new rent’s going to be on a new construction project. We’re still looking into the future, but it’s further out. And depending on the size of your project, I mean, you might be two or three years out on a really huge project. You could be multiple years out. So I think you still have to anticipate the future. It’s just, the timelines are longer. And therefore the confidence level of your assessment of the future has to be better researched. In fact, this is one of the reasons why we spend so much time creating new projects that are differentiated from the regular market in design and unit type. Because we know when we do that if we’re delivering a specialized high demand, but low supply product, whether it’s two years out or five years out, we can at least have an assessment that the confidence level of that being successfully rented as higher. The opposite is true. Say in your value-add space where let’s say you buy a building that has all two bedrooms. That’s the most statistically the most common product type in a, in the multifamily existing asset marketplaces two-bedroom units.
Let’s say you buy a value-add you get great value discounts to stress. Maybe it’s low occupancy. Maybe it needs a lot of work. You have a tougher time to assess your confidence and your success of delivering that two-bedroom unit into the marketplace. Yes, it’s upgraded. Yes. It has new countertops and appliances and flooring and all the things that you do in value-add. But it’s my assessment that you’re going to have a harder time because you’re going to compete with more units. When you get to the future. That’s a bigger question. It’s all about like confidence levels, nothing in this business, nothing is black and white. In fact, I’m teaching, I have three kids. My oldest is in college. And so he and I are spending some time he’s. He wants to be in the real estate development business as well, sort of teaching him about, the difference between the black and white thinking and, confidence levels. And anticipating, how likely something is going to be because nothing is black and white. We’d all love it to be, but you’re always operating with not enough information. And so, then the tactical and strategic advantage comes in how well you anticipate the future and underwrite and be conservative. Really. It was where it comes down to. I agree with your assessment. I think just the timelines of future anticipation or longer in development.

Bill: When we were preparing for this, you indicated to me that you focus on a very, very specific property type and demographic and location, and it all centers around something called workforce housing. But as you said before, you’re doing something a little different with that. You’re creating a product that actually is, is a little different than everything around it, so that you can compete more in times of uncertainty, which we’re going to get to later on. Because right now we’re certainly in a time of uncertainty. Your business model now for workforce housing, while you’re doing that at the onset two decades ago, when you started the company or did you evolve into that and whether you started doing it right back from then, or you’ve evolved into it, what was the reason for that?

Scott: There’s a couple different answers to that. I’ll go back in history a little bit. So my first job out of college at Cal Poly, I went to work for a guy named Mike Costa at a company that is known in the businesses, KB Home today. It used to be Kaufman & Broad, and it was a home building company. One of the big national majors, Mike had created a subsidiary division inside of the corporation, Kaufman & Broad that developed apartment assets, very specific type of what’s called tax credit, finance, affordable housing. So, it was new construction multifamily, but it was utilizing what’s called the Section 42 or low-income housing tax credit program. Some people call it Lytec for short, and that was purely an affordable housing development model, but eventually enough, it gave me that was my first job I was there for about four years.

Working for Mike was great. In fact, Mike and I still do business together today, but that gave me a really deep background in very complicated capital stacks. Like you talked about earlier, these government-subsidized deals have many, many, many different sources of financing that you have to combine together to make the deals work. And importantly, that gave me a background in low-income housing and affordable housing. In other words, families, and in this case, seniors, we did family and senior housing really gave me a clear understanding of how that industry worked. And so when I went to another company Sares Regis for a short period of time, and then in 2000 launch from Pacific, we weren’t specifically looking to do affordable housing per se. Although we ended up doing that because that was part of my background. We really launched the company. I launched the company to pursue urban infill. In fact, that’s the name why we call it Urban Pacific. Urban infill is building new construction development projects in existing cities, existing neighborhoods. So not going into green-fields or undeveloped land areas, maybe on the periphery of the city. We want to be right in the middle of the city, not necessarily right in downtown, although we’ve done that. But we were looking for, you know, underutilized land or vacant land that was in an existing fabric, call it urban, call it downtown close to transit. And that was for us in 2000, that was the really the future trend. And that turned out to be true. In fact, by the time, 2003, four or five rolled around urban housing was the hottest thing that existed, and urban housing and affordable housing or workforce housing sort of go together to some degree. In other words, cities and existing neighborhoods are where the job bases are.

And that’s usually where families who are working-class families will normally live at least generally, particularly in high traffic marketplaces like California. And we in California have not the best transit we’re getting better, but historically we’re not great at it. People who were in these middle-income working family categories that we serve now with our product, they don’t commute very far. They choose to live closer to where their work is. So they don’t commute long terms and we don’t have the transit really to serve them appropriately for these long distances that some people commute. So urban infill and these working family, demographics sort of live together. We just more recently in the last three years of combined those two into our new urban townhouse workforce housing,

Bill: You talk about the transportation here on the East coast, especially in the New York area. We have fantastic transportation. I mean, people complain about the New York City subway system all the time. And I think it’s one of the best things since sliced bread. And now it’s actually very, very clean because they shut it down at 1:00 AM every night and they clean it for four hours and open it up at five. And not that I’m taking the subway very often lately, but when I do, I’m amazed, I’ve never seen it. So clean.

Scott: Cleaner than it’s ever been. Probably.

Bill: Yes. What I’m seeing a lot in the media and also hearing from people that I talked to is that people are leaving the urban areas because the transportation is there to bring them back to the urban area. If they need to work in the urban area. Whereas in California, it’s probably not going to be flight from the urban area because people don’t have the transportation to get back, to go to work.

Scott: Agreed. Although I would add one additional component, which is the work from home. That’s a new trend, particularly since coronavirus hit, obviously, people are at home, you know, sequestered. What we’re seeing in California compared to what you’re seeing in the East Coast and New York is that our urban areas are having some of this also. So like the Bay Area is the place that I’m most familiar with that has this trend. I’ve read this from studies done by groups like Yardi and, Cushman and Wakefield RCLCo these kind of market study firms. And so they have actually had a huge increase in the search in Zillow for houses, from people in San Francisco and the city, as an example, out to outlying places around the Bay Area. So these would be places like Marin County Contra Costa Alameda County.

So, people are looking to move. And if you listen to the mainstream media, they’ve picked up on some of this, you know, the CNBCs of the world. They’re talking about this, that my gosh, it’s, it’s a major change, statistically. At least the reports that I’ve read, and Zillow is one of them. They’re like, it’s not happening the way people say yes, there is a narrative that this coronavirus work from home will now give people the option to live wherever they want. Companies like Facebook are now saying that people have the option to work remotely. So, then you get into this story of, Oh, well, I’ll just move to Springfield, Missouri. I don’t have to live in the city anymore. And that’s true. I think for some folks, but also it’s not nearly right now, at least today speaking in August of 2020, the amount of people that are actually making that move is low.

Now it could change. We are I still suggest that we’re early in the ultimate consequences of the Coronavirus in a recession? I mean, what are we, four months into it. Some people have said no more than really 20% of any population that lives in the city is going to move far away and work from home. Zillow’s even said that they’re seeing people move, but it’s the next city over. So you live in San Francisco in the city, but you go to Marin County and live in a suburban environment. Well, that’s 45 minutes away, depending on traffic. It’s not as radical. I think as people are saying today, although I could anticipate that people will move further away, but just to put a final point on a bill, these are predominantly white-collar jobs. These are tech industry. These are people that can work remotely, email, and computer. This is a vast differential to the working class. So blue-collar service industry, food servers, people that work in retail that are customer-facing construction or do auto repair, diesel mechanics, they can’t move far away and do their jobs. So, they are required, mandated if you will, to stay close to home. And that’s really where our, our product type, our UTH, urban townhouse model really serves those kind of families. Now they are, by the way, the hardest hit and this, this present recession.

Bill: So, with respect to being hardest hit, how is that impacting collections say, and by the way, how many existing units do you have right now that are in place that are rented? And what are you seeing in terms of new vacancies and collections over the last four months?

Scott: The UTH model is pretty unique. So about three years ago, we created this model, which basically is a three-story on gray townhouse. And specifically, it is purpose-built and designed for larger families to live there. And what that means, we have five bedrooms, four bathrooms, two-car garage. We have a downstairs bedroom bathroom for a mobility challenge in law or a grandparent. And so we’re and building these units for families who live multi-generationally naturally a place for them to live, which they don’t really have. So why specify that is because it, it really is a vast and deep differentiator for us versus the standard apartment market. And we did that by design. In fact, we innovated the whole idea of urban townhouse, meaning large family units, serving a family, renter demographic, even a middle-income demographic, if you will. The challenge in the service industry, multifamily, renter population is predominantly focused in, let’s say like a C product, right?

So if you have your ABC product, you know, a B and you’re brand new luxury B being your older five or 10 years older, and people will disagree on the stats that I’m giving, but that’s how I think of it. And then C would be anything that’s, you know, 10 to 15 years old or older and has, inferior location, maybe inferior product mix. Also, the cheapest rent, right. Affordable by default is how we say it. And that’s really the concentration, and the C product of where these service industry folks live in these older neighborhoods, this older product. And they’re also having the most pressure from rec collections like you asked about, but here’s the thing about that predominantly that C product is going to be an older design, might be, an older two-bedroom unit probably doesn’t have good amenities, good parking.

And so, one of the ways that we compete in the marketplace to enhance our offer where families would combine together. So let’s say an adult kid moves home or in-laws move in. Our product is a place where they can move to have a better lifestyle yet be able to share the expenses of the housing across what we call multi earner households. And this is really the unique part of serving this product, this product category, these demographics of family renters is that we are the place that people go when they leave the older, see product, let’s say, they’ve got a one-bedroom or two-bedroom and an older apartment unit and somewhere in Los Angeles and they’re a single-earner household. Well, they leave that unit because they can’t continue to even afford the rent and a C product on their own. And so, they’ll move home. They’ll move in with their parents. The combined together with roommates is the other option. So we’re in this interesting time period right now where our product’s actually accelerating because we are the place that people go when the half to combine together. Because we have five bedrooms and four bathrooms.

Bill: What’s the occupancy right now?

Scott: We actually have three projects that we’ve completed. We don’t own these particular three projects we’ve sold these off, but I continue to keep in touch with the people that own them now. And they’re actually having relatively healthy, performance and collections. The collection rates are in the high nineties, and those are all a hundred occupied even in this environment. And all those projects have these characteristics of multiple bedrooms and bathrooms so far so good. I’m always a person who is looking into the future and trying to anticipate.

And in fact, we created UTH three, three and a half years ago now specifically to address the affordability issues we have in California, stagnant wages in a high-cost housing market, right. Particularly in the rental industry. So we were producing UTH projects to solve that problem for these working families that make too much money to afford the government-subsidized affordable housing, but yet, don’t necessarily want to, or can’t afford to live in the, a high-rise, you know, studio one-bedroom product in downtown LA. These are families. They want to live in family-oriented neighborhoods and they need a physical space that will accommodate kids and grandparents. And, all of our nits have a two-car garage, which is very much unique in the apartment markets have your own direct access garage. And that’s because we’ve designed these townhouses. Three stories of living space is it’s all your unit, so it lives like a house.

Bill: So, at this point, you’ve sold out your entire portfolio?

Scott: Yes. We’ve sold out that’s right. As an entrepreneur in real estate and running my own development company, I’ve experienced the sort of start a new product category or move into a new marketplace or a new market type or a new product type and really going too aggressively. So, maybe you go in a and I want to do urban housing and I go try to do as many huge projects as I can. And I watch how things perform for our own projects and other people’s projects in the 2008 recession, we did go through that. And so it really taught me a lesson that if we’re going to try anything new or go into new markets or establish new product types or new designs, we really want to demonstrate it at a level of product size that allows us the flexibility to experiment and be relatively safe in terms of the performance of the project in case the experiment doesn’t work.

And so, we did that. In fact, purposely with the UTH model, we did three really four projects in the beginning, we called the demonstration phase. Three that I described that are sold where the first three in that demonstration phase. And we sold all those off. We’re just finishing the fourth project. Now, once we had finished and sold those first three projects, it was clear to me that we’d proven the model. And there’s really three factors that we’re trying to prove in this demonstration first that we could generate the rents that we, we perform it, that we believe that we could generate with these large units, second, that we could build them for what we put in our proforma. Construction costs rising as a factor we all had to deal with over the last ten years, particularly in California. And the third is most importantly, is can we sell these or refinance them, but the values that make sense for us to produce the yields that we need to investors to be competitive in the marketplace relative to other capital offers other projects that would raise capital from investors. So, when we finished the third project, I was like, this product has now proven itself. We’ve proven all three of those factors were able to deliver the product at a profitable executable level. Two things happen. One is it became clear at that point when we’d sold off that third project, which was in January of 2020.

Bill: Good timing.

Scott: Yes. About 18 months ago, to me, you know, we were in that longest economic expansion that we’d ever been in us history last year, I think was the 10th year of that expansion. And so, 18 months ago I was starting to go, it’s starting to feel we’re due for a recession. I didn’t know what it would be from all my reading. It wasn’t going to be a housing-led recession. Like it was in 2008 or even real estate centric per se, right. It wasn’t going to be the recession. Wasn’t going to be caused by real estate. Certainly, real estate would be affected, but all the economic voices that I look to that are people that I value their opinions are real said, look, we think there is a recession coming. It will probably be caused by a Black Swan event. A guy named bill McBride, a writer who is a good voice in this. That was his opinion.
But he said I don’t think it’s going to be a housing centric recession. So, we had relative comfort that housing wouldn’t be crater like it was in 2008. But of course, having gone through 2008, we’re like cautious. We go, look, we don’t want to be in a position where an economic downturn puts us into a situation that we can’t recover from. I’m a real big proponent of being defensive and conservative and underwriting. Part of that is having capital structures where you’re not over-leveraged, having time periods that are allow you to get through a recession. So, how this all came to ahead. If you will, was about 18 months ago on the fourth project was just our project. We just finished in fuller. And I said, we’re now converting everything to long-term hold. Two reasons for that. One is we’re such firm believers in the under-supply story and the demand characteristics of this housing bill for many, many decades in the future that we go, this is a great space to be. We want to do everything. We want to own everything that we build and keep this really in perpetuity as a portfolio. But second, I said, if we have a recession, what I do know about these working families is that they, because they have multi earner households.

And because we’re under-supplied, that’s going to be a relatively stable marketplace to be in. When a recession comes versus say, you had a millennial centric, younger centric project with one bedroom or studio units, single or households. I knew that would be subject to pressure in a downturn. And that’s in fact what’s happened. And so, we kept all this because we knew if we kept it long-term. And we had stable NOI from stable renters that we could ride our way through a recession. And if we have to sell in five or seven or ten years, we at least could say that we have some level of confidence that we would be through a recession and not in the middle of a recession have to sell. So now all of our projects, we have several projects that are all in various stages. We have a couple of– completing Fullerton, couple hundred construction. And then we have a fairly robust pipeline of projects that will start in the next 12 to 18 months and are relatively confident given the performance of rental right now on our Fullerton project. And then we have another project in Montebello and those are renting relatively well, good velocity on absorption of the units, as we deliver them new and, we’re holding our rents, if not Fullerton, I think we’ll actually achieve above proforma. Coronavirus isn’t a, you know, we’re not indifferent to it. We have to be cautious and try to anticipate what consequences will come out of it. So that’s why I do all this reading, which I do anyways, about what are the economic impacts of coronavirus on working families on single-earner households versus multi-year and households. So these sort of coalesced together in this, this narrative I have about multi-center households and undersupply markets being the best possible rental risk. And if you’re going to take rental risks, meaning develop new projects, then this is the place to do it.

Bill: When you found that UPH almost two decades ago, almost 20 years ago, you said you’re getting very close to that 20-year mark. It’s only like in the last three to four years that you delivered this new type of product, this urban townhome multigenerational unit that combined families.

Scott: Yes. In fact, we stopped doing, I mean, different product types in the urban housing environment, almost all mid-rise what we call podium projects. I think like four or five levels of stick bill, apartment product over a concrete parking structure, either above grade or below grade. And we got really good at that really fairly complicated type of development to do construction and development is complicated for those types of projects. But we have moved to the UTH model exclusively. We stopped doing any other product type, which, you know, we can go into that if you want, why we did that, but really it revolves around this, what is the future? And where’s a marketplace that has low supply and either medium or high demand that we don’t think that people will come to compete so aggressively. In 2012, 2013, we picked up a series of podium projects in downtown long beach, our hometown.

And we bought them really well. They were sort of distressed land deals that we purchased good value. And we executed relatively well. It was still sort of returning out of the recession. And then we sold those projects in 2016 and set the high watermark for the valuations in downtown Long Beach at that point in time. But by the time we sold them in 2016, there was a whole wave of other competitive, similar projects to what we had just sold that was coming online. And it was like guys like Trammell Crow and Holland partners and JPI, all the big players were now back in the marketplace, all the institutional developers and REITs. And so that was for us the signal to go look, we don’t want to be in this market anymore. And we’re, if a downturn or when a downturn comes and we are delivering a building with new units to rent, and we’re going head to head with Trammell Crow, they’re going to beat us.

There’s just no way that we’re going to sustain rent with Trammell Crow. And I don’t mean to pick on trauma. Crook could just be any big developer. That’s got the capability to use public capital and sustain a reduction rents over maybe years, not a model that I’m interested in. So we finished all those projects, sold them all, and basically turned to it took some time to develop the model UTH or Urban Town House. But within about 18 months of that decision, we were now delivering projects into a highly differentiated marketplace, meaning we were delivering new rental units that didn’t exist to renters and had this undersupply story. And particularly in California. Which is, you know, California’s problem generally is we’re just undersupplied and housing across the board.

Bill: Quick little break here, Realty Speak fans to take a moment to share with you that I love that you choose to listen and learn from Realty Speak. We go deep with so many topics on the show, the result you get plenty of great information and strategies you can use. And what I learned from my guests as the creator and host of Realty Speak translates to me being the best I can be as a trusted advisor consultant and real estate broker. Remember every transaction is different. And so are you, the people involved a successful outcome will depend on execution of proper planning. And I welcome the opportunity to listen closely to your desired outcome, and then carefully guide you through the process to ultimately achieve your goals. So if you’re contemplating a purchase into your portfolio or a sale out of your portfolio of a building or development site, or you would like to refinance, get a purchase mortgage or construction loan on investment real estate, then feel free to reach out to me.
Infomercial: I can help you no matter where you’re located, happy to chat, no transaction required. Call me the number (917) 232-8529. And all my contact info is on the contact page of my website, billweidner.com. That’s billweidnercom. What else can I say? Real estate is in my DNA. And now back to the show.

Bill: It’s apparent to me that you really know how to read the details based on the conversation we’re having. You’ve made some really, really good decisions. And the timing of those decisions was impeccable. I want to go a little bit more into that because I think the listeners will really appreciate the source of that. It’s not like you’re reading tea leaves, right? I mean, you, you’re actually doing a specific kind of research and then you’re coming up with a conclusion that apparently works. And I think the listeners, would love to learn how you do that. I don’t know. I’m not asking you to give away any trade secrets, but tell us as much as you can please.

Scott: Yes, no trade secrets, a couple things. So one is the 2008 recession taught us tons of lessons. Anybody who goes through a recession, sees how things go and says, Oh, I thought this would be the case for this thing, but it turned out to be that thing, right? And particularly in development, the oversupply of product in any particular category was really what I observed in the 2008 market in California. It was condo, urban condo, product, new construction for sale. We were taught lessons about how to be rigorous and disciplined, where we were always looking out into the future to say, look, a recession is coming. And I don’t mean like fatalistic or like my gosh, the sky’s fallen. Because if you think that way, then you’ll never do any business, right? The safest way to avoid that is just do nothing. And we’re in the business of real estate.

We’re paid to take appropriate and well-mitigated risk. And so I think it just, it had us really start to think about reading the economic cycle from all the background noise. But the other thing that I really remember and carried forward with me since 2008 is the signals for the 2008 recession. Bill were all there. All they were all there. You could see things like negative yield curve, graphs of delivery of units and sales and rental of units. You could start to see the graphs turned downwards. Even maybe six to 12 months before really, we started to go, Oh, there’s a problem. Good. Six to 12 months before that, you could start to see that. And as I looked back from say, 2012, look back at “Oh five”, “Oh six through 2010”, you go, “Aw”, there they were– they were right there were developers.

And so most developers are naturally optimistic people. But when you go through a recession, you continue to be optimistic, but you got to be anticipating the change. I call it signal from the noise. So in other words, you have to pay very close attention to as many signals as you can. And then the skill, the art is to be paying attention to the right people and the right economic indicators that don’t have some hidden agenda. Bill. You’ve seen this, the guys who want to sell gold are all saying that the world’s ending tomorrow. If you look at their logic, you should buy gold because the world’s going to end tomorrow. You go, okay. But yet you’re biased, right? And that’s an extreme example. But in the real estate business, the national association of realtors, their economists has certain tack that they need to take. Market’s good. It’s growing, buying a house is the best thing ever. Right? In 2005, 2006, they were publishing stats that, you know, housing prices specifically, hadn’t gone down since the thirties. And you get into this environment of it’s different. This time suspending disbelief from economic rules, you know, 2001 is a great example of the internet era, where people were saying, “Oh”; well companies don’t need to be profitable now. They don’t actually need to generate revenue. They just need to have a great technology story. And that will transcend economic rules. Well, BS, man. I mean, economic rules are fundamental principles, laws, and mechanics of economics are there. They don’t change person. I work with Toby Hecht and something, he called it critical. The Aji Network, Toby has a great way of saying, because look, markets go up. They go down, they go up, they go down and we know this fundamentally.

And then I add on to that. It’s just the timing. That’s different. And so if you look at the future and you go look a recession somewhere out there, I’m not going to be paranoid about that and say, I won’t do anything. Because I think it’s tomorrow. You just start to go. What are the non-influenced opinions, economists and economic tools that aren’t having some undue influence from a third party, who’s trying to sell a book or sell newspapers or be on TV. And so we were able to track several sources of economic data, that Bill McBride, who writes a blog called Calculated Risk, great writer, housing centric, not an economist in the traditional sense, just a retired fortune 500 executive that happens to do the best graphing of economic variables that I’ve ever seen and particularly focused on housing. So, he was the guy who I tracked and followed who you could see those graphs demonstrating the change in the housing marketplace in 2006.

If you look at it, you go, God, darn I was right there, man. And I was young was optimistic and many people do go, gosh, it’s, you know, yeah. I we’re as prepared as we can be and the market will turn, but you know, it won’t necessarily affect me. I don’t sit there and say that I got to go, whatever it is, is going to affect me. Even in this coronavirus environment, like multi-families probably the healthiest residential for sales starting to pick up some steam, but I don’t sit here. In probably in human history maybe, or at least since we’ve been tracking it. I don’t know what’s out there. And so, I have to be cautious, but because we’re combining that signal from the noise view of the world, we’re tracking these non-influenced economic indicators and economists. And then we’re combining that with really the second part of is that I, in my way, that I structure our new offers in my business, we are always working to produce what’s called margin utility. In other words, that part of our business plan or our offer that is just slightly better than the marketplace, so that when people look at our product, they go, “Oh”, I want to rent there because it’s better. So, for us, when we rent tenants Bill, guess what a brand-new unit, air conditioning, a laundry room, and a multiple bathrooms and a two-car garage.

That’s our margin utility for renters who have families that can’t find that no apartment developer, any of any institutional-grade builds up two-car garage for their apartments. There are some people out in the marketplace that are doing, there’s not nobody, but that’s a true differentiator. So it’s combining this, you know, really a close read of the economic cycle with a anticipation of a future downturn, not in a bad, like in good moods about it. In fact, for us, you know, it’s a time to potentially accelerate combined with innovation creation of competitive advantage and margin utility, which is what UTH is.

Bill: What kind of pivots have you had to execute as a result of Corona virus in terms of how you’re building? I don’t know if you need to build different when you are building how the site is managed. And then of course, when you’re done, how you’re leasing and the moving.

Scott: Like many company’s really all companies, anybody who wants to do business, trying to be compliant and thoughtful in your management of tours during coronavirus lockdown. So obviously we’re asking staff to mask and stay social distanced. I will put it this way, but we’ve actually accelerated during this downturn. So we’re fortunate. We’re in California where construction is considered to be essential and essential activity. So, it’s not government-mandated shutdowns, which other States I’ve seen that we’ve actually had an acceleration probably because other developers and other residential projects have shut down. Like they, their developers made the choice to not move forward for them, if it was right. Great. We just had a couple of projects that were in the middle of construction. Construction’s essential, so we should keep going. Like at the end of the day, when you’re building, you got to finish the building no matter what, no matter what the environment is, you got to get it built and ready to generate rent.

But we saw this probably 30 or 40% increase in labor availability almost overnight within the span of about two weeks on our Montebello project, the subs that we hire, we’re able to double their framing crews, double drywall, and foundation crews. And so we actually took what would have been a 12 month construction cycle, and we’re going to do it in eight months. We’ll finish way, way earlier, which is amazing that hasn’t been a pivot so much. I think the way that you mean the question, but it’s been a sort of like a positive pivot where we’re actually pivoting into our business plan more fully meaning that sale will last 12 months was not able to, our teams were not able to find a large amount of new projects because land prices were at their peak and construction costs were at their peak because of the economic peak itself. Those go together. And we just naturally tapered down our pipeline. Our inventory of opportunities for new developed projects just started to dwindle to some degree, because as our land acquisition teams were bringing us new projects we were looking at and we’re just going, the metrics just don’t work well. I mean, they work generally, but they weren’t great projects. They weren’t like highly profitable projects. And I started to insist to our teams. I go, look, if we can’t generate X or Y returns, depending on what market was in. I just said like, I don’t have an interest in doing this. I don’t have any need to do more projects to just do projects. Sometimes that happens in a peak, market peaks, construction costs and land costs are high. You start to get thinner profit margins and people will just do it for fees.

Not that’s not our style plus was appropriate. We were on this long term economic expansion 10 years, and you go, gosh, it’s time to not do more. It’s time to do less. So now the land costs are dropping and construction costs haven’t dropped yet. Certainly availability of labor is increased. So that’s expediting projects and we’re seeing some early signs of construction costs reductions, but I haven’t seen it enough to really say that it’s a trend that I can really count on between land dropping, construction, accelerating, construction, conceivably dropping, and then us able to basically continue the lease units lease at the velocities that we were before. If not more, plus have basically holding the line on rents that as a signal for us to actually go do more projects. I’m balancing, we’re not going in doing 25 new projects, we’ll be appropriate.

We’ll be cautious and make sure they’re projects that are, have a really, really good profit story, great locations, at least close to jobs. We’re not doing anything edgy, not nothing experimental. This product has not proven itself. We’ve got the bill costs down to the penny. We’ve got great subcontractor teams. We got the landmark it’s cooperating now with better land pricing. Yes, because we don’t know the consequences of coronavirus. We’ll, we’ll do a certain amount. And then, you know, we’ll in fact, one of the things we did tactically is we said, Hey, any new projects we want to start building those say eight to 12 months from now. And then delivering units say two years from now, we won’t be delivering any new projects in the span of about two years. And so, we can say at least functionally that we should have made our way through the recession. A good deal to the extent that when we’re delivering units, we’ll know what marketplace we’re in, or if in a year it’s not any better than we won’t start the construction. So we’re trying to design in flexibility and time that sees us to go further through the recession, at least to know what the environment’s going to be better than we do today. Because the consequences to some degree are unknown and gives ourselves certain milestones where if things aren’t going good, we have a choice of what to do. We own the land. We don’t have to start construction. If you haven’t started construction and the economy is bad, then you don’t start. If construction has started and the economy is bad, you got to finish it, completing the project and producing the best value. So we’re timing projects to try to work around those, the next couple of years to try to be defensive during that time period.

Bill: Positive pivot then, and you’re actually scaling up and everybody’s safe and everyone’s healthy. I mean, there haven’t been any negative consequences of continuing to scale up.

Scott: We have not. I mean, the place I worry about it predominantly is in the construction teams. So our model, we use what I call the home building model. So we don’t use a general contractor. We act like home builders do, which is that we’re not we’re not a general contractor in the way that people normally think, although we do have all the licensing, but we’re like a home builder. We’re, we’re a developer that goes directly to the subcontract markets. So we buy all of our subcontract work directly for each project. And so that gets us really a little bit closer to the subcontractors and owners of those companies and how are they managing? But the reality is if you think about construction and particularly in California, some of the best weather in the United States, other than that sort of final third of the project for the most part, people are working outside through the framing stage.

And then, obviously once you wrap the building, at least in our construction cycles, it’s a pretty rapid completion. We ask the subs to manage their crews at that. They’re not working in the same space as you know, if a guy’s putting in flooring and we got some guy doing finished carpentry, “Hey”, let’s, keep those guys, “Hey”, you work in phase a and you guys go work and phase B if, if we can time it that way. So, we do some of that. We have had no issues that I’m aware of. And we do talk to the subs regularly, our project managers do how’s everybody doing? You know, you guys feeling good about it. People are masking up. It’s a thing that everybody’s dealing on. I think it’s probably same for you guys in New York or back East. There’s a very positive thing, Bill, which is our business plan is accelerating, which allows us to serve more families.

In a bigger unit with more room and a garage and air conditioning. And it’s brand new. That’s a positive environment for people to look forward to moving into. Plus our units have no common hallways. You drive from the driveway outside and your garage and your front door goes outside. So, there’s no common hallways, no elevators, no foyer, none of that. So that’s a net positive plus, when, guess what, when we lease units, we’re leasing a brand-new unit. And then the other part of it is I’m feeling exceptionally positive, not only serving families, but also we’re able to keep people working the additional labor that our subcontractors have picked up our guys that wouldn’t be working. Otherwise they’d be idled. We’re seeing some people that are coming out of other industries that have construction skills. So, somebody who waited tables, and that was a career choice that they had, but that’s stopped or shut down. And they had skills as a framer of concrete guy. We’re seeing guys come back to the industry, which I’m highly encouraged to, to be able to actually grow the availability of employment that we have on our projects. You put those two together. We’re feeling very encouraged by the model. Still need to be cautious and rigorous some of the best like sort of social impact narratives that we’ve ever had UTH itself as a social impact narrative we’re housing, working class families. We’re giving them attainable housing using private capital. But now we get to enhance that by saying we’re able to actually employ many additional people that might be unemployed otherwise.

Bill: I’m glad you brought up the employment aspect of it. Because I was going to ask you about that. It’s huge that during an economic downturn, you were putting people to work. We’ve already discussed how you’re serving the families in terms of the units that you have, the fact that you are able to absorb some of those subcontractors from other construction projects that was shut down, which was the choice of the developer. And like you said, they made that choice and that, that was their choice. Sounds to me like you’re definitely monitoring the situation in terms of keeping everybody safe and healthy and you haven’t had any problems yet. So that’s great. I think it’s a real good feel, good story during the time when there’s not a lot of feel good stories, and a lot of people are afraid and shaken. I’m glad we’re sharing this story.

Scott: And to me, what’s interesting is we’re the counterintuitive story. And now we’re a business plan. That’s accelerating in an environment of downturn and we’re a new construction housing model. That is totally, you know, just not the norm. I’m happy for that. I mean our design work and our preparation that we’ve been doing over the last few years has paid off. And I don’t say that we’re sitting here cocky and bulletproof. We’re not; we need to be as cautious as anybody. In fact, we need to be more cautious and more rigorous because we’re going longer in the market. Right. Meaning we’re, we’re putting out a bigger bet with building more new units. And so we have to be very careful and cautious there, but we are encouraged for sure.

Bill: Yes. And I promised the listeners, I was going to talk about the thing I don’t like to talk about, which is, and, that’s actually a joke cause they do like to talk about it because I just think it’s something that doesn’t make sense anywhere. And that’s rent regulation. I actually have two episodes that I recently did, but so number 27 and episode number 30 listeners, if you want to know more about rent regulation, what’s happening in New York. And if you’re not in New York, it might be coming to a theatre near you. It came to California in the fall of 2019. When you and I were preparing for this, you mentioned to me that that particular law doesn’t necessarily impact your units at this point. But tell me what you know about that. I think it’s a little bit more liberal than what we’re experiencing here in New York State and especially New York City. You have people that are renting apartments for 250, 350, $600 a month. They’ve been in them for decades and then they’ve succeeded them to their heirs.

Scott: Ancestral a passing on.

Bill: Right.

Scott: Here’s the way I think about rent control is it really is reaction to high housing costs compared to what while other markets, but particularly inside those markets comparable to what the incomes can afford. I think New York’s already got the most rigorous rent control regulations that I’m aware of in the United States, but California is catching up as of early 2020 we’re in the highest priced housing markets, the cycle that we had ever been in. Arguably the most historically the counter reactions start to come out of that politically rent control being one of them. Other regulations also in California, all cities are subject to something called the Costa Hawkins Law, which I won’t go into detail about it, but it basically it’s a state regulation that compels cities to structure their housing rent control ordinance is a certain way. The old rent control law basically said anything.

I think it was pre-1978 was rent controlled, anything after 1978 was not rent controlled, right? So, sort of favored new housing. There’s actually a new law as of January, 2020. And I don’t remember the law designation, but basically that has amplified rent control requirements. Given some cities, additional capabilities of instituting more drastic rent control requirements and also take into account some of the new regulations or helping the coronavirus situation. We’re doing things like a mix of moratoriums. But that new law basically said any projects that are 15 years or older are subject to rent control. So therefore anything that’s 15 years or newer is not it’s excluded or exempt because every project that we produce is new. We’re always exempt for 15 years. So we’re, we have that window to play within. And because what you heard earlier; we’re now keeping all of our projects that we build. We’re now holding those, and we’ll build a portfolio of, of the UTH model. We can look forward to or anticipate in the future that at some point will become subject to rent control and that’ll be what it’ll be. And I don’t know what nobody can, it’s a state what the political environment will be in 15 years.

I can add that in California, the state legislature is starting to make some moves to help zoning regulations, such that it would help developers to produce more housing where the most restrictive development marketplace for housing in the United States. And that’s based on our zoning regulations and things like the California environmental quality act or SEEQUA for short plus prop 13, you throw that in there that has this sort of, so we’re just, we’re in a, we’re in an awful political environment for decades. That basically makes it very, very difficult, and costly to develop new housing. We’re fortunate that we’ve been able to create this UTH model to work inside of that will continue to be the most undersupplied marketplace in the United States for probably at least several more decades. And I say it that way because although we have these new laws that are incentivizing or, helping new projects, new development to move forward, which is still a huge fight politically there’s trench neighbors single-family owners that resist development, generally, that resist regulation changes at the local and state level, but it’s the most enhanced and beneficial for housing development that it’s ever been. It’s one of those forces that we have to pay attention to track it the same as we do economic cycle politics and economics are forces that we have to track and monitor and anticipate and designed to continue to have our offers be productive and profitable inside of that.

Bill: Fantastic summation capital stack. Let’s go pick the capital stack. And let’s talk a little bit about the relationship between debt and equity. UPH is own capital. Is there a specific way that you’re structuring that that’s consistent across most of your projects or you do it differently? And how are you attracting investors and are they, are they individual investors? Are they, are they institutional investors? A combination of both.

Scott: Like everything in the UTH model, we have designed everything to be simplified as much as possible. Now development is never simple. So it’s simplified or reduced complexity. In fact, my saying is complexity is the enemy of profits in real estate development. We really have worked to have our UTH model be as production oriented as possible. So same floor plan, same subcontractors, same specifications. And then we carry that over into other parts of the business execution. So we always buy land that has the zoning in place already. We want to work with the same lenders as much as possible because we know their structure. They know the UTH model. We don’t have to sell them on five-bedroom, four bath units in Southern California. So we have a stable of lenders that we use over and over again. And we also have the same capital structure.
So generally, these lenders are always lending it right now. It’s 75% loan to cost. And so that produces 25% of equity. And then to answer your question, the UTH model has actually brought us into different sector of the equity markets than we had traditionally operated in. So traditionally we had numerous institutional capital relationships. So think guys like Weyerhaeuser some of the bigger institutional equity names that invested in these, in these types of projects. But UTH was such a differentiated model that when we started to approach those institutional investors, it was just too different. And we knew that going in and that’s the same with some of the lenders that we have that are in our cadre of lenders. We just knew it would be too far on the end of the spectrum, like bedroom count locations. We go and B and C neighborhoods, right? For lower land costs, plus that’s where our tenants already live, but we just try to keep the capital stack really the same from project to project.

So, of all the UTH projects that we’ve executed on so far, it’s always been 75/25. We have the same lenders on all these projects and they continue to lend, even in this environment today, they understand our product. They understand and know our capability to execute in the space or don’t have project acceptance yet from the institutional capital sources. And we’re going to continue to buy the way that to press that with them. I think that will help when we get into much larger projects. So, when we get into the 85 to a hundred-unit projects that will put us into a size of equity check, that will start to be more relevant to them.

Bill: What’s the unit size now?

Scott: We’re in the 15 to 85 domain. So, 15 units up to 85 units. So we have one project, 85 units, and two phases– break it up into two phases. Again, this caution and rigor and risk mitigation on execution has us to say, Hey, look, let’s not try to do all 85 at once. Let’s just do two phases. We’ll be 54 and 31. That’s the first big project in the UTH program that really will, I think, functionally be a fit for institutional capital sources for about the last two years. We’ve been doing a lot of work to get ourselves out into the marketplace and build identities of trust, value, authority, and leadership amongst high net worth investors and family offices. That’s really the main area that we’re gaining new networks of investors that are oriented around long-term hold multifamily. And not everybody is some people, “Hey, I want to be in and out in three years”, love the product love location. Don’t love the time, right now we raise all our capital on a 10-year bull basis, although we will hold them, you know, in perpetuity as a company.

So we built a whole marketing and social media platform to be communicating out into the marketplace. That is what the new, this new environment of technology and social media demands. And if we want to be competitive in that marketplace and we need to be doing that, and that also anybody who follows a guy named Gary Vaynerchuk or Gary V, he has a great saying. He basically says all companies are media companies today in 2020 to be competitive, you have to be competitive in the media space, media being social media predominantly. So that’s the main channel and main effort that we make for getting out into the marketplace with ambassadors is through those marketing channels. But I do a lot of public speaking, we’re members in a lot of different networks. Write a lot of articles we’re in production on two books, one book about workforce housing and the other book about the real estate development process. Doing a lot of podcasts we’re out there. And then we’re actually having really good success because of course our story of UTH and workforce housing, the idea of workforce housing is I think well known and well understood throughout the United States. Like a lot of people understand the stagnant incomes meeting, high housing costs all over the United States as an issue and that we need solutions for that. So we’re, we’re getting a lot of good feedback in that domain.

Bill: Do you have a statistic for what percentage of the population represents that workforce demographic?

Scott: Depends on the marketplace. I’ll speak predominantly about California. One of the things that we’re dealing with in California, and this is sort of a sad story about California is that we’re really– we’re losing our middle-income population. Now that’s sort of an argument against our model. But yet I don’t have any worry about the middle income working families staying in California. But what we’re starting to have happen is we’re starting to have this effect. There’s a guy named Joel Kotkin. He’s an economic professor at Chapman university here locally in Southern California. And he wrote a paper called the New Feudalism. Feudalism is, you know, you have the, you know, sort of the monarchy or the people who have wealth and own land they’re on one end of the economic spectrum. And then the other end of the spectrum, you’ve got the servants and the serfs and the farmers Joel’s argument is that because we’re losing our middle class, you know, we’re starting to work our way through, into sort of a feudalistic structure.

We’ve got the wealthy and the poor and not much in between. I can’t remember the stats exactly but at a hundred thousand people a year. And it may be much more than that. I can’t remember the exact stats are leaving California to go to other places like Arizona and Texas and Colorado, and like going to markets. But Texas is the largest single recipient of middle-income families moving out of California. Now it happens that we’re replacing people coming into California, almost equally to the people that are leaving so that we have a neutral growth category. Although this year, I think this census will be the first census that California actually loses population. In fact, there’s some argument that we may lose a house seat because we’re losing population. As you know, it’s based on population, so stats are rapidly changing for middle income families. So, in Southern California, we really go more around demand, characteristics of housing units, not so much. What’s the total population of those families that earn this income or that income, some stats I’ll share with you. Harvard joint center for housing studies did a study of Southern California. The five counties that make up Southern California and their estimate of housing needs for populations that are for moderate income and downwards, meaning moderate down to low income was a million units. So, in five counties, their suggestion or their research says that we’re a million-unit shortfall. So why say that way, Bill, because it almost doesn’t matter what the population is and it will, if we lose enough middle income families, we could argue that in our product type could suffer from it. But there are literally millions of people just in Southern California alone that are under housed, meaning they have a large family, mom and dad it’s two or one or two adult kids.

It’s in-law’s or grandma it’s me younger kids of either the parents or the adult kids. And they have between two and four wagers in that family. They’re happy in California, their extended families close by their kids are in school. They don’t do long commutes. They usually live close to where they work. Like I described earlier, I say it that way because these families have very strong social networks that keep them in California. This family style is what I call an economic sharing lifestyle. In other words, that multi-year household they’re naturally already living in a lifestyle that shares incomes and expenses across the larger family group and multiple earners. And people have a propensity to stay where they are comfortable, where they’re used to, if they can, right now, these middle-class families that are leaving California are leaving, even though they have, sensibly some history. And so, the dynamic of their economic situations has exceeded their capability to stay in California. Now, we may say that the jobs that are generated in the future start to be lower wage producing. So I think this economic sharing model will become ever more important in the future. But also we need to address the housing costs marketplace by producing more units that can accommodate people that are not making $200,000 a year. I think in San Francisco, you have to make something like 300 or $350,000 a year to, for like the average rental unit. You would see in those kinds of marketplaces that most radical trend of middle-income families leaving that marketplace to go to other places. But we’re also seeing that move a few cities away or move to the suburbs and they stay still stay in California. And we are a solution to allow those families to stay in town, stay in the coastal urban areas and provide a housing type that’s affordable for them attainable. However, you want to describe workforce housing. And so ours is just one solution amongst many that are needed. And our hope is that over the next several decades that we’ll start to have a reaction on the development marketplace and the development industry towards serving families that want to stay in California but don’t necessarily afford the prices that cost them to stay.

Bill: What’s the range of rents for your units?

Scott: Our rent ranges are between 3500- 4,000 a month. That’s for a five bedroom, four bath townhouse unit with the two car garage. If you look at the physical space, it lives like a house. And those rants end up what we call the 80 to 120% of medium income that was looking yesterday for LA County. It’s between about 90 and 130,000 is where those 80 to one 20 median area, income families and others. Those are the incomes that they generate that puts our rents right in that category. If you argue that 30% of your income is appropriate and affordable, then somebody who’s at a 100K and you can do the math 30% of income for thousands, probably closer to 120, maybe higher, but we’re certainly seeing really no competition in that space. That’s the notable thing about it is that for all intents and purposes of a large family who produces this sort of income really has limited choice of housing. It’s either units like ours, which almost nobody’s building, or they rent a house. If you need four or five bedrooms, nobody’s fortunately so far competing with us in this five bedroom rental space.

Bill: Are there amenities in the projects?

Scott: All of our early projects were on smaller sites in infill community. So we’ll have kids play areas, we’ll have outdoor seating, barbecue areas. Those would be typical amenities that you see. We are seeing as we get into bigger projects that we have the capability to set aside larger land areas for different or larger amenity packages. So as an example, our El Monte project all toll is about five acres. We’ll end up donating to the city of El Monte, about an acre of the land to build a public park for which our project are will surround it on two sides. And we’ll have pedestrian accessibility from our project into the park, which is actually, will be our largest amenity of any project to date. In addition to the park, we’ll have other smaller spaces inside our site plan. Again, more seating areas, we get activity areas if we can barbecue areas, but really we don’t do common area building. We just found that people don’t use the indoor space. I particularly in California, people want to be outside. They want to be in the sunshine. And so we’re really creating really exclusively outdoor spaces has as far as our amenities.

Bill: Yeah. And I would say that our outdoor space is going to be more popular going forward. People are really not. Yes, people are not congregating and indoor spaces anymore. I mean, I could go on forever, but we don’t have forever. And I know you don’t have forever, but I want to ask you one more question. Our time is drawing to a close unless there was something else you just wanted to share with everybody that you haven’t yet.

Scott: No, I’d go for it. Go for it on your question. I we’ve covered a lot of ground, so yeah.

Bill: And everybody, he has no idea. I was going to ask this question, right. So he’s really going to have to be spontaneous with it. So if you woke up tomorrow, Scott, and something in the real estate world changed, what do you wish? That would be?

Scott: Great question. I think the answer that I would give Bill is really around zoning regulations. So I alluded earlier to, we’re starting this process in California. We really need a sea change in our zoning regulations to really incentivize and, and sort of clear the pathway to produce, seen more housing. I don’t wish that middle-income families have to leave California. But we’ve, over-regulated, we’ve, over-regulated businesses, we’ve all regulated, you know, from a political and economic standpoint on the development industry to produce more housing. And so tomorrow, if I woke up, I’d wish that that was, you know, that was gone, that those regulatory drag on business would be gone. Now, of course I would instantaneously have a lot of competition. But we would continue to innovate and produce margin utility.

Because that’s a standard practice of ours anyways, as a company. So it would be something different. So I think the elimination of regulation now, that’s never going to happen in California. So I think to some degree always be restricted, which is a benefit for us, like a competitive advantage if we can operate in that environment. And other people are challenged to operate in that environment. That helps us from a competitive standpoint where like reduces competition. But it’s a huge factor. I mean, we have the, you know, I mean, look, Bill we’re, we have the most expensive housing markets, like what’s the stat of the top 25, most expensive housing markets, United States, 18 are in California and all the top 10 are in California.

Bill: Wow.

Scott: There’s something wrong with that, right. It shouldn’t be that way. I mean, the real estate people go great. That’s great. It’s like, no, no, this is like, this is bad. But also if you look at regulation, in fact, this is in the Joel Kotkin report. I talked about before look, I’m a fan of environmental positive environmental efforts as well as anybody, but California has the most expensive gasoline in the United States. We have the most expensive natural gas in the United States. We have the most expensive electricity in the United States. And this is all a function of the regulations that we produce, which, you know, we want to be in environmentally cutting edge. Like I don’t dispute that, but environmental regulations on housing probably add at least $50,000 a door of costs on the unit by itself, that’s in impact fees.

This year we we’re now mandated. We actually have to install solar and it’s not like, “Hey”, make it ready for solar. If somebody wants it, you got to actually install it. And I liked the idea of it, but guess what? It has a cost. So, if I’m going to try to maintain our rent levels to stay inside those workforce housing, moderate income, rental ranges. We’re under ever weighty or pressure for those kinds of things. So, if you look at that and totality, while you go, we have instituted and constitute all these regulations and we’re cutting edge, and that’s, that’s, that’s an admirable thing, but we’ve also increased the cost of living for our entire population because of it. And when you start to look at the dynamics, and again, this is in the Joel Cochrane report, he looks at the economic benefit of the environmental regulations versus the increased costs on the population.

And its way out of whack, its way more expensive for people that like, if you add to the economic impact of these environmental and all regulations. Not just environmental, but political regulations, development, all those kinds of things, they fall out way. The economic impact and the cost savings of, of environmental benefit. And plus guess what; unfortunately, the environment doesn’t end at the California border. China’s, across the Pacific, and it’s polluting probably more than ever. So I don’t mean to make this a political conversation, but you really look at it just from a functional people can live and how they live and the cost for them to live. We’ve gone very far against those people and that’s why they’re moving out. And I’m a California native, I don’t wish that anybody would want to leave California, but the reality is that we’ve made it so difficult for people to live here, that they have to leave.

And it’s right for their families. Like if they go look, I can, I mean, there’s a stat. I can’t remember the exact numbers, but basically people can move to taxes and make pretty much the same wages for middle income working family that they do in California. But guess what, the, all the living costs are much less, including most importantly, again, I don’t know the exact numbers, but I want, I saw that. I go, well, why would anybody choose differently? If I made the same money working for Toyota in Torrance, as working in Dallas, Fort Worth, and my housing costs is one third in Dallas. That’s a decision people should make. I haven’t made that decision myself personally, but you look at it on just the totality of a, what’s a good life for a family. And how do I take care of my family? That’s an economic choice people should make.

Bill: Scott. That was amazing. And I’m certain our listeners agree. Please share how everyone can get in touch with you.

Scott: Yes, I appreciate that. So I would encourage people to go to our website. It’s www urbanpacific.com. Go to the homepage, hit the red signup button, get on our email list. We put out a Saturday e-blast with a lot of good economic tracking data, all the stuff you’ve heard me talk about economic tracking. We share that out into the marketplace. Every Saturday, we encourage people to go to our investor education section, tons of articles, videos, blog posts, underwriting deals, pretty much bill. Everything that I read gets shared out into the social media space and our website and our blog posts. And then our contact page on that website has my and all of our teams direct emails. And then my cell phone number is on there. People are welcome to text me if they’d like, they can email me. Email is usually best, but I would encourage people to go to the website. You can check us out on LinkedIn, LinkedIn/Scott Choppin. And then I would encourage people to go to our YouTube channel, which is under Urban Pacific Real Estate Group. We’ve got a lot of good video content there.

Bill: Great. And fans that’ll be in the show notes, so you will be able to see it in the show notes. If you didn’t get to write it down because you driving and we don’t want you to writing while you’re driving.

Scott: Please. Yes.

Bill: Thank you, Scott.

Scott: Thank you, Bill. Really appreciate being here.

Bill: There you have it, everyone. Thank you for listening. I look forward to you joining me for the next episode of Realty Speak the podcast, please subscribe. You can do so on the website. Just go to the podcast page on the website, and there’s an opt-in option at the top of the page. Where search Realty Speak on your favorite podcast app like Podcast Republic, my fav on Android devices or Apple podcasts for an iPhone, find it open it hit subscribe, and you’re in. And please help Realty Speak, grow by sharing the show with others from the website player, just click share and choose your preferred social media platform. And of course, like to talk about purchasing, selling, or financing, investment real estate access past episodes, or just chat. You can contact me directly via the website at billweidner.com. That’s billweidner.com. And remember, it’s not about us, but how we help you make the bottom line rise until next time.

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