The Real Estate CPA Podcast | The Benefits of Real Estate Development, Market Cycles, & Competitive Advantages with Scott Choppin

In this episode, we’re joined by Scott Choppin, founder of the Urban Pacific group of companies, a group that specializes in the development of workforce housing. It’s important to note that Scott has gained extensive knowledge in real estate development and project management throughout his career working with several top developers. Today he oversees all operations for the Urban Pacific family of companies including business development, capital acquisition, and strategic planning.

Today we discuss several topics including why Urban Pacific focuses on developing workforce housing, the benefits of developing vs. the value-add strategy, what makes Urban Pacific’s development process unique, recognizing competitive advantages, low-income housing tax credits, and much more.

Why Workforce Housing?

Urban Pacific didn’t always focus on workforce housing. However, Scott’s exposure to low-income housing tax credits gave him a certain level of comfort and understanding in this area. Urban Pacific’s focus has been urban infill assets – downtown, loft-housing, living in the central city. Over the years, urban infill has still been the focus, but lately, Urban Pacific has been focusing on middle-income workforce housing. The area is undersupplied, and Scott’s business fills the need and adds a lot of value there. The concept of workforce housing has been growing over the years, and many would even consider the concept mainstream these days in 2020. Urban Pacific is looking to directly meet this middle-income workforce housing model.

Developing vs. Value-Add on Existing Assets

Value-add multifamily is the highest demand asset in the country. There are a few key differences. Value-adding adds no new assets to the market. Urban Pacific, operating primarily in California, is in a state of perpetual demand for housing. When you buy value-add, you’ll only ever meet the market demand with the asset you’ve purchased – there’s no customization or flexibility there in the mix of the type of asset you hold. In the mind of Urban Pacific, oriented around very long term, why not add a brand new asset to the marketplace? Scott and Urban Pacific prefer to deliver a new asset, designed exactly how they like to fit the current and future market, as the developer they have full control over that. With a brand new building, you’re looking at several years of extremely low maintenance needs and costs and low repairs. Lastly, Scott strives to differentiate UrbanPacific from other real estate groups.

Development should drive better yields than value-add multifamily investing. It’s a higher-risk endeavor. There are large fundamental differences in the risk profile and the requirements for success between these two types of investing. Many investors decide that the risk is not worth the potential higher returns. There are additional issues, such as zoning issues and deep planning required in construction and design. Others include grading, demolition, full plumbing and electrical – everything that goes into taking a piece of dirt and turning it into a multifamily asset. Urban Pacific has their ways to how to navigate these waters, and it involves reducing complexity by creating repeatable processes.

Another large difference is the cash flow. Many investors are dissuaded by the lack of cash flow for the first several years after investment. The truth of development is that you’ll be putting money out for at least two years before you ever see a dime come in.

Building a completely new product, designed for large modern multi-generational families, with monthly rates are lower the comparable housing – that’s a huge difference and is part of what makes UrbanPacific unique. Scott loves the idea of marginal utility and competitive advantage: what do you have or offer that differentiates you from your competitors, that adds real value to your clients or investors?

Challenges Through Economic Cycles

One great lesson taught by the Great Recession was the planning and management side as it relates to General Contractors and the construction timeline. First, the timelines need to be fast – construction that’s slowed or sitting in limbo is much more dangerous and risky. As you get towards the top of the market, this issue becomes more and more prevalent, as many GC’s are busy and their timelines are backed up. Often, they are stretched thin over many projects. To deal with getting burned by this, Scott and Urban Pacific brought all of the higher-level construction in house. By hiring superintendents, project managers, and general contractors, the risk is higher, but the owning company also has the ability to schedule and plan exactly in line with the ideal process. It’s easier to manage subcontractors when the managers of them are within the ecosystem of the investing entity.

“We worked on an asset in Westminster, Colorado, which is about halfway between downtown Denver and Boulder. That was a 16-acre site that in fact the city of Westminster owned, and we took on the development of that project under the auspices of the city’s vision of creating a new downtown node.

That ended up being about a 10-year project, 5 years of which were ’07-’08 recession, at which time we were not working on it…

But we came back in 2013 and finished, and actually entirely reentitled the project – redesigned it to be coherent with the now new trend, although it’s been going for a while, of infill apartment assets in the Denver market.” – Scott  Choppin

For full transcript click here Expand Episode 90- The Benefits of Real Estate Development, Market Cycles &
Competitive Advantage with Scott Choppin
Duration: 50: 48
Three Speakers
Host: Brandon Hall & Thomas Castelli
Guest: Scott Choppin

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Brandon Hall: Hi, everyone and thanks for tuning in. Brandon Hall and Thomas Castelli here with Scott Choppin, founder of the Urban Pacific Group of companies, a group that specializes in the development of workforce housing. It’s important to note that Scott had gained extensive experience with real estate development and project management throughout his career working with several top developers. Today, he oversees all the operations for the Urban Pacific family accompanies including business development, capital acquisition, and strategic planning today’s episodes exciting because we discussed several topics including why Urban Pacific focus on developing workforce housing, the benefits of developing verse, the value add strategy. What makes Urban Pacific’s development process unique, recognizing competitive advantages, we also touch on low-income housing tax credits, and much more. Scott, thanks so much for taking the time to come on the show today. Would you be able to share a little bit about your background and real estate experience with our listeners?

Scott Choppin: Absolutely. So I basically been a real estate developer my entire career, never had any other career aspirations really, from about the time I was eighteen. I had set my sights on becoming an entrepreneur in real estate and I had a huge advantage in that I had family members that were in the real estate development business. My dad Carrie and my Uncle Mike were both real estate developers in their own right. And so basically, from the time I was eighteen, designing you know what, where I would go to college, went to Cal Poly San Luis Obispo in California got a Finance Degree. But most importantly ended up working for a couple of different companies that were, in my estimate high performing companies where I could learn and particularly had people who were willing to instruct and educate and bring somebody who was sort of junior level Project Manager type person real estate development. One of those guys, a guy named Mike Costa, with the time ran a subsidiary of what you guys now know is KB Home. This is called Kaufman and Broad Multi-Housing Group basically a real estate developer of apartment assets for that corporation that is the homebuilding company that everybody knows. And so I was always seeking ways to educate myself on the real estate development business, and had through a series of choices and forming what is now Urban Pacific Group in 2000, which puts us back this month, March will be our 20th year of operation. So we’re happy to be here and loving the business as much as ever, let me put it that way.

Brandon Hall: That’s good to hear, it’s great to hear. So we understand your company, Urban Pacific you develop workforce housing. Why focus on workforce housing?

Scott Choppin: Yeah, great question. We didn’t always focus on workforce housing, although I will say this, the years that I spent working for Mike at KBMH, we were developers of new construction apartment assets that use something called the Low Income Housing Tax Credit Program, or people call it LIHTC for short, Section 42, Low Income Housing Tax Credits. And that gave me a background in affordable housing and understanding families and seniors that were at or below 60% of median income. Those programs generally provide housing to those income categories, and then I went to work after that for a company called Sares-Regis Group specifically to get exposure to the market rate side. So just think, straight ahead, luxury, apartment assets, but again focus on new construction that’s really been our focus the entire time. And so when I started Urban Pacific we were at the time focused and really are in a way on urban infill assets right in 2000. Urban infill downtown loft housing, living in the central city wasn’t really a popular move.
But for us, we had the luxury of having access to some very high-level thinkers. A guy named Bob Gardener, Robert Charles Lester, and Company at the time was very, very enthusiastic about urban housing projects in the residential domain, be it apartments or for-sale housing. And in 2000, again that was Anna Thema, we though me, we’re like, this is exciting, we want to be doing this. So fast forward over the years that we ran the business, we’ve always focused on urban infill, but in the last three years, we’ve now come to a place where we think the middle income and our model middle income workforce housing really is meeting a social need for middle-income families that are being ever lowered in the food chain of housing, and it’s vastly undersupplied. And so we think that story is a great long term story and also, space that we can be exceptionally competitive. Not a lot of fellow competitors, which is a market that we love. It’s a niche, maybe a contrarian movie might describe, but it’s also become mainstream, workforce housing as a concept is now much more talked about in the mainstream media, cities, employers, even the employees themselves are now realizing that there’s a space between luxury high-end housing and true affordable, these families that we serve, make too much money, they’re overqualified income-wise to be in true affordable housing. Yet they may not choose to live in downtown Austin as an example, because the housing types are just not current or it’s just too expensive for them. So we’re meeting this middle-income workforce housing model directly.

Brandon Hall: So why choose to develop assets rather than buy like existing assets?

Scott Choppin: Great question. So you know, value add, as you guys are, probably in your other interviews and for your own work. I mean value add multifamily is the highest demand asset in the United States. I don’t think there’s any question about that read any report, Marcus Millichap, CB Richard Ellis. But two things come out of that, in fact, I’m writing an article right now to differentiate value add and new construction workforce housing. So there are a few key differences that I really focus on that and why we think that for us the story of new construction. So one is value add workforce housing adds no new assets to the marketplace and so we’re based in California. California is in a deeply undersupplied condition across all income categories across all asset types in the residential rental markets. And so our mind is like this is a good story to be adding new units to a marketplace that’s so undersupplied that the pricing has gone wild, way up comparatively, so adding new units is one.

Scott Choppin: Two is when you buy value add, If you think about it, you’re only ever going to be able to meet the market demand with the asset that you bought, and the physical mix that you bought, the style of unit, the location. So if you have all one-bedrooms and a value add asset that you buy, you maybe could combine two one-bedrooms into a two-bedroom and some people do that. But I think it’d be just looking at generally, you are like buying that asset with the physical condition that’s in then you’ll improve it, but the mix won’t ever change generally, you will always have an older asset. And so in our mind if we’re going to attract investment capital and use our own capital and projects and because we’re very oriented around long term 10 year plus holds, we go, why not better deliver a brand new asset into a marketplace, adding new housing, we’re now able to design exactly what we want. So if we don’t want to do all one-bedrooms, we want to do some other mix to better fit them. market and the future of a market that we’re building in, then we, as a developer can choose that design, that mix, that program, right, if you will.
And then I think there are some other just operational characteristics, even though value add assets will upgrade, I think some will upgrade system some well. I think the less you dig into value add asset in the rehabilitation process, the better right usually makes the numbers as long as you can achieve the rent bumps that you want. When we complete an asset, we have a brand new building, so we can even look forward to at least a few years of very low maintenance needs, very low maintenance costs. So you have here just starting with the best possible brand new asset that you could engender, so those three are functionally really important for us. And the last one is we’re just differentiating ourselves, guys, we’re like any other investor or developer, really developer, that we are, the main part of my business is going out in the marketplace, attracting capital to our projects, and delivering a superior performance relative to our competition in the investment space, where investors will put their capital. I want to be able to differentiate and I can even the three things I spoke about are what I speak to investors about. If they can get comfortable with the development model, maybe they’re not used to it, they’ve never done that. But we can bridge that space and say, “Hey, if you can get comfortable with this, and you see us as a sponsor that’s capable in that space, we can deliver these advantages in spades”, and we think that’s a real differentiator.

Brandon Hall: So it sounds like when you acquire like existing assets, you’re kind of limited in the value that you can add at the end of the day. I mean, there are definitely ways to add value, but overall, you’re going to be limited versus going and developing a new asset.

Scott Choppin: Right.

Brandon Hall: You’ve got this open, very cool.

Scott Choppin: It’s like a clean slate.

Brandon Hall: Clean slate, clean slate, that’s the word I’m looking for. You got a clean state, you can really add a ton of value there and they just mentioned superior yields too. So this development driving better yields than value add multifamily.

Scott Choppin: It should although every deal is different and I say it should because fundamentally if you look at them if you sort of take away the specifics of a deal like. Hey, I got an institutional-grade asset in Nashville versus California. So, if you just sort of looking at them equally not comparing market neighborhood characteristics, which you always would, but in this case for this example, development is a higher risk endeavor, you do have functionally things that you have to undertake like heavier construction, you may have well, you will have or you may have an underutilized asset or empty piece of land. And this is functionally when we talk about the value out investors. In fact, one of the questions I always ask is, what is somebody experienced as an investor in value add multifamily investing versus new construction multifamily investing, and I asked that because I want to understand their background. Because when I start to have the conversation with them about new construction, there are fundamentally such huge differences in the risk profile and what you have to execute on that I find a lot of people are they get lost, not lost, but they determined for themselves, that the risk is not worth what the additional return should be. And so let me give you some examples of this differential, right.
So one of the things is you’re buying raw land or an underutilized asset that you’re probably going to demolish, and then you’re going to build a brand new building. So that brings into play zoning and deeper plan, check and design CD construction drawing and process. And the way that we mitigate that is just by experience and strategic knowledge in the space. So I’ll give you an example in our UTH or Urban Townhouse Model, right now, we’re only acquiring assets that have sites that are zoned already for the use that we need to build, which is a three-story townhouse product, let’s say 25 to the acre, garage on the ground floor, five-bedroom, four-bath, which we can talk about later. So we’re only going to buy sites that are already zoned. We’re not going to go through a rezone in California, that’s a particularly challenging process. In fact, I would say it’s probably the most challenging state in the United States for that. So we say we know it really well how to do entitlements, we just choose not to do it, we’ll only acquire assets. Now, you know, their stories for sites, hey, maybe this one only requires design review and they’re going to get into colors and material choices that kind of stuff we’ll deal with. But if it’s a heavy lift the way I described it internally, you know, big general plan amendment rezone site plan review, where we’re going to have neighbors coming to the Planning Commission to be upset at planning commission or city council people, we just pass we just say we’re not even going to engage on that, so that’s one way to mitigate risk.
Another one is basically you just have a heavier duty construction process. You’re basically taking a raw piece of dirt and you’re building the entire building, all the way from beginning to end which a lot of people aren’t used to or comfortable with a good value add asset should move you away from structural issues. Maybe you have a lighter mechanical, electrical plumbing system upgrades, and then you’re doing paint, carpet amenities, common area, landscaping curb appeal, those, that last set of items are going to be an easier construction process. It’s not hard, at least in my world, to strip out old cabinets and put new cabinets in, the tradesmen that subcontractors that you would need for that are less critical, I mean, you still got to get them to perform and have them meet the timing and then the standards that you need to value add correctly. But for us, we’re doing grading demolition, full foundations framing, full MEP, mechanical electrical plumbing systems. And so, the way we mitigate that, in fact, what’s unique for our UTH model urban townhouse, is that traditionally we had done a lot of like very high dense what we call podium buildings. So this would be parking structure underneath concrete, parking podium, maybe below grade three, four or five levels above that and we have a lot of experience in that.
But we’ve also learned tons of tough lessons in that space because it is complex and my saying is, complexity is the enemy of profits and real estate development. So we work to simplify, so we went to a three-story on grade townhouse model, no parking structures, no parking podiums, no below grade. It’s a three-story framing, undertaking so it’s the most dense housing type that we can do the most simplistic layer, the most simply write an execution. We have a production model, in fact, in my running the company for twenty years, this is the first time we’ve enjoyed the capability to build the same unit over and over again, we’re designing different projects. Using the same unit type, we’ll do six units in this module and turn 90 degrees and do four units and we’ll lay a site out that, but fundamentally, it’s the same unit, same cabinet specs, same cabinet locations, the islands in the same place, all the plugs are in the same place, we’re using the same HVC. So that removes the complexity and again, I never say it’s simple. It’s just simplification, and then we use the same subs over and over again. So we’re really true production, we’re just cranking these units out, and they’re, they’re nice units. So don’t get me wrong, but our risk mitigation is to basically execute the same process instead of practices over and over again. And then I think the last one that I would say is fundamentally a difference between value add and new construction is you have a non-cash flowing asset. In fact, you’re gonna have a non-cash flowing asset for probably two or three years. And that point usually is where I, wherein my conversations, I will usually lose most investors who aren’t interested in orienting around development or new construction, as they’re like, “Wow, really, you know, when I buy value add, at least I have, you know, some occupancy, maybe it’s low”, if you’re buying a distressed asset, if low occupancy, you’re going to try to fix that, but it’s usually not zero income.
In fact, my argument is not even an argument, the truth of development is that you’re going to be putting money out, you’re going to be funding capital debt funds, equity funds, for a two year period before you ever see a dime come in and I think that’s just such a fundamental difference. And, how do we mitigate that we been doing it for a long time and not to say that history is the ultimate determiner of knowledge and capability and execution and space. But all the things that I described earlier, buying land that’s already zoned, simplifying the construction process taking on less complex, more simple build types are all those are to add up to better execution times and simpler execution which fundamentally firms up the fact that you can go faster through this non-cash flow period time. And then we have to, of course, make powerful assessments about the marketplace, rent comparables, operating expenses and that kind of thing.

Brandon Hall: Yeah, so kind of what I heard in there is you have to simplify the process whenever possible, starting in the beginning of it, you’re only going to assets that already had that already zoned. So you’re bypassing the entire zoning process and all the complexities that I imagined and pain points that come with that.

Scott Choppin: Right.

Brandon Hall: And then you’re here to basically have a really good system in place and a really good process, if you will to and how you’re going to ultimately build each of these buildings to these properties, and you’re kind of building on the success you’ve already done. And that’s how through this process is how you mitigate the risk that comes with development. It’s inherent in what’s [Inaudible 17:47].

Scott Choppin: Correct yeah, really, you could just say fundamentally, it’s a production housing production process that’s built from the ground up designed from the ground up to execute quickly and with less complexity, that’s the way I would describe it. And by the way, I’m like, we’re not the first to do this, like, if you look at homebuilders, your KB Homes of the world, your Easers, your Tolls, your Lennar’s. Their home building model is that, in fact, that’s the best representation of that process. It’s just that’s less common in the multifamily development space, particularly if you go into urban locations, downtown LA, Dallas, Austin, back East, these podium buildings are what is the correct choice for like a central business district close into the downtown location, but those podium buildings are always generally one-off buildings. You only ever build that plan one time because that site configured your building design, in a way it’s a triangular site versus a rectangular versus a square, you’re always going to have to fit within the parameters of that, you know, probably great downtown Austin site. I don’t make any complaints about the location. But now because of locations characteristics and it’s site layout, you’re going to build the building to maximize that particular site, where we come into it the different way, which is we want to maximize the site, of course, like any developer would, but we maximize it with our townhome unit and modules of those townhome units.

Brandon Hall: What’s like a key the unique aspect of your development process that makes your company, your development more successful than say, like a pure developer or a competitor?

Scott Choppin: Yeah, great question. So I think that the practices that I described earlier about the speed of execution and high-level practices, I think that’s common in the business. So really, where we differentiate and what makes our deals more successful is the actual, what are we building? and so you’re describing earlier this urban townhouse or UTH model. And so what we’ve done is we’ve created this innovation of pairing workforce housing rental product with private capital, really If I were to say fundamentally what is our innovation is serving that middle-income moderate family space in between the true affordable and the luxury multi-family. And the way that we’re doing that is basically we’re building a five-bedroom four-bath townhouse unit, two-car garage on the ground floor and we’re making it multi-generational so one of those bedroom, bathrooms is on the ground floor. So we’re in a family our tenant demographic, or tenant avatar really is a large working-class family. Let’s say that six to eight people two to four wage earners usually will have an older in law grandma/grandpa and they live this way functionally already. We’re just now giving them a new unit type to live in, it would be similar to a house. In fact, I say ours are purpose-built to rent, purpose-designed to rent but they live like a house. So the townhouse is three stories of your own unit above and below. So differentiating from a stack flat, where are you got a family above you who you may or may not know, you got a family below you that joke I use, if kids are jumping on the bed in our units, they’re my kids. I can go tell them to be quiet. And so I think that has a lifestyle, a configuration physically that has it and much more enjoyed like a house, but we price it to be just below or even maybe equal to the bottom end of the house comparables that are renting in a marketplace that we would be in yet we’re competitive. We’re brand new; we may even be 100 or $200 per month below that.
So that’s really the differentiator to answer your question is that we’re building an uncommon product, we’re building for large families. We’re building to be price coherent with these working-class families that have multiple incomes and these families, they are going to pull down between. I’m going to give you California numbers versus other markets that we’re looking at like tax has been in California. You’d have a family that makes 80 -140,000 a year. Now, when I say 140 people, “oh, wow, that’s a lot of money, right? I’m hearing you know, average income is 30K or 50K in a market”. The difference is the housing type, the five-bedroom four-bath allows these family groups to live in one unit together, and they share incomes and expenses across the family group. And what I say, guys, is we don’t create that we didn’t bring a family together that wasn’t already together, they live this way naturally. And in fact, we find globally in other cultures, living multi generationally is the common way and living in the standard sort of nuclear family that we’re used to in the United States, although that’s changing, that doesn’t get the capacity to have these two to four wage earners. So if you think about it, if four people have jobs and they make 30K apiece, any one of those 30K wage earners doesn’t afford a new unit by themselves, but all of a sudden when they combine these incomes. Now they’re in a different game or a different state of their lifestyle where they can afford a three or $3500 or $4000 a month rent, which in many markets, people go, wow 4000 that’s really big checks. If you’re getting five bedrooms, you’re getting four bathrooms, you’re getting a two-car, direct private access garage, you’re getting your own house. In essence, it’s attached with other houses of course, but this is the real differentiator for us and this is what we need to describe UTH or urban townhouse this is what…

Brandon Hall: I love that man he muted to my ears, everything you’re talking about is great. So we talked about that too, at our firm, just what makes us different than other CPA firms? Well, one of our core competitive advantages is just being virtual. And you wouldn’t normally think that being a virtual CPA firm like anybody could replicate that right? But then when you really start thinking about it, well, no, because then you have to change how you hold your employees accountable.

Scott Choppin: Right.

Brandon Hall: You can just hold them accountable. showing up at the office now has the results base. How do you do that? What systems do you build out to the…

Scott Choppin: Yeah.

Brandon Hall: You start to find that you like kind of dig into this and I’m sure it’s the same with you, right? Like anybody listening, I could go start a development company that focused on work. But could you really, but could you really?

Scott Choppin: Yeah, you’re right.

Brandon Hall: And you just figure all the working parts out and now all of a sudden, you’re one thing that seems surface level like, Oh, I could do that. Wait a second, you get into realize, no, I can’t.

Scott Choppin: Well, and a couple of things to response and I totally love what you’re saying if in fact, it brings for me, there’s a terminology I use called marginal utility. In fact, I learned with a group in the Bay Area called the RG Network and they taught me that some marginal utility is what do you have in your company and your companies offer and the same for me and my companies offer that differentiates you from your competitors that have real value for your customers, or your clientele, or your tenants or your investors in our case, that says, hey, I look at this and this is just better enough that that will attract me to buy or attract me to pay a premium in the marketplace. So for you guys, it’s been virtual, by the way, and you keep costs down by doing that, you’re not running traditional office space. Our marginal utility is that we can build brand new assets. So like let’s say from an investor standpoint, what’s the more utility for urban civics UTH offer, we can deliver brand new assets in infill close in urban communities close to job centers, close to transit, close to where these families already live, where it’s very difficult in California to deliver new assets in these neighborhoods, right, politically, entitlement wise, even functionally, or underwriting wise if you had to go to a big podium building in some lower-middle-income neighborhoods where you’d love to have new housing, nobody else has that. It doesn’t work, it’s not feasible.

Scott Choppin: So we’re sort of pairing up this differentiator of new housing in urban infill markets, and also our margin utilities. We are renting to families that have these two to four wage earners and our claim and our research supports the fact that in a recession environment, these families, they stick together. I mean, they do that naturally, they’re already culturally, doing that income and expense sharing thing I was describing, that if I’m going to claim margin utility for my investors, and I do, then I say when you own this asset with us as an investor, and we stay in long term too, we’re not selling these assets, we want to stay long term. We believe in it so much that these families they batten down the hatches in a recessionary environment. And so if I say we’re at the end of our longest expansion and economic cycle in US history, and we look forward to a recession, I don’t say we want one, but we’re also like preparing like everybody is and we have an asset that’s going to be stable and defensive in that downturn. Then in 10 years when we go to decide whether we sell this thing or keep it, we’ve written through the recession.
The valuation may have adjusted because cap rates adjusted, but we had stable what it called sticky tenants, they batten down the hatches, they stay local, their kids are in school, their jobs close by their extended families close by, they’re not moving to back home, like a Gen Z or millennial, nothing wrong with that choice for a millennial to move home or Gen Z, like my kids are Gen Z. That’s perfectly coherent where they are in their life cycle, it’s just say I want to rent to families that are going to be here that they are local, like hyper-local, and they don’t ever want to leave if they can help it. And I can help them do that I can help them be sticky, and stay with their extended family because I’m now providing them a unit that spreads the cost of their housing amongst these multiple wage earners, right by having more bedrooms and bathrooms. So that margin utility concept is so powerful and people I learned with and I speak to everybody should be looking at their offers that way. What can I be doing to differentiate, and I call it margin utility. And you might call it a competitive advantage, you might call it differentiators, there are different ways to describe the distinction. But in all reality, we are in the most global hyper-competitive marketplace we’ve ever been in history. And for somebody like you guys working virtually you’re now competing on a global stage, right? There are people in overseas markets that can claim to do accounting and claim to be CPAs. And they’re not licensed locally. So there’s that thing, but we’re in a new era, guys. In fact, I’m calling it or people I work with, call it the fourth industrial revolution hire for and so we now need to compete in a different way. And so UTH is just our design of that competitive stance and margin utility in the real estate development space.

Brandon Hall: Tom, what do you think our marginal utility is?

Thomas Castelli: In my opinion, it is proactive tax planning. It’s something that I do, I’ve stepped into a little bit of sales here at the firm and something that everybody tells me without fail on their phone calls that their tax professionals, their tax repairs, they don’t do any planning, no strategic advice. It’s just they fill in the numbers and that’s it. You know, that’s all well and good, but at the end of the day, a lot of the tax savings comes not fulfilling for me. You need to fill out the form, it’s requirement obviously if you’re a business, but it’s really what can you do from it? What actions can you really take at the end of the day to impact that ultimate form. So basically, what strategies can you implement to reduce your tax bills. I think that’s something that we bring to the table that a lot of firms frankly, just are not bringing. Yeah.

Brandon Hall: I will go even deeper there. Because I would say you’re right. That’s the, in my opinion, I think that’s the symptom of what our actual marginal utility is. So I would say that because we are virtual, we get to a niche in just real estate. We’re not setting up shop locally here in Raleigh, North Carolina, and just hoping that everybody that drives by is a real estate investor. We get to, we get to market nationally and we get to take on clients nationally, because we’re virtual, we’re using technology that enabled us to do that seamlessly and easily. And because of virtual, we get to hire talent all over the United States and we get to focus on the best talent not who’s the best in Raleigh, North Carolina.

Scott Choppin: Right.

Brandon Hall: Which allows us to be proactive, which allows us to become experts at Real Estate because it’s all we do. We see situations from all over the country and international is as you mentioned Scott. So, I think that you’re right that the tax planning piece is great and I think that’s what we sell to customers at the end of the day. But I think that’s also a lot deeper than that, at the end of the day, too. And it’s really just the overall structure of how we do things allows all of these kind of interwoven parts to come together to deliver that productive attack strategy.

Scott Choppin: And by the way, guys, you can have many marginal utilities, in fact, arguably, for you to be effecting and making your business profitable. You always want to have multiple margin utilities, creating new ones all the time, every fifteen minutes. You may have an overarching theme like you know, strategic advice that you give for tax planning, but I would say you’re working virtually while clients may not like, that may not appear to them as a margin utility, but you could speak in fact, margin utilities more often than not are brought forth by you guys, for others, your clients to say, hey, by the way, we do these things, here’s a story of what we can help you with that’s outside the norm. But let’s say, let’s take the virtual employees, you can have employees anywhere. So two things show up for me is one, you can get the best employees, and you might even get them more cost-effectively because you can hire that person who lives in central remote Florida, and they, that’s where they choose to live, and they’re taking care of their families, but they can provide time and help to you guys to do that. You might never get that person. And in fact that the terminology I use is networks of convenience, those around you so you guys are in Raleigh, North Carolina.
So normally old school, it would be the clients that are in those marketplaces around you and also your employees or drive time, is it half an hour or whatever to drive to your office and sit in the office. Versus that IR four version of that is what I call networks of capability and we don’t care where you are, we care how much we pay you, it’s got to be coherent with our business model. But I might find you overseas, and I’m just looking for the capability first because that helps me deliver a better offer to my clients. And, so that computer and the internet give you the capacity to have networks of capability globally. We do this too, we real estate as you guys deal with your clients. I mean, real estate is always local, generally, it’s going to be wherever that office that you start does projects is it and South Cal, is it Dallas, there’s that hyperlocal characteristic, but by the way, we have a project coordinator effect. We have a small team that lives in Florida, that works virtually, when does project coordination, the other one helps us with social media in our marketing efforts. I don’t care where they are. I mean and I know where they are and but they first were capable and willing and our offers together and the amount that we pay them were coherent with what we needed to produce. But anymore everybody’s doing email and text and maybe phone calls and Skype and zoom. You might be two feet away and texting somebody. Doesn’t matter where they are anyways, anymore at least. So that the convenience factor is gone. Or it’s, it’s, I shouldn’t say it’s gone, it’s diminishing rapidly and the best competitors globally are orienting around capabilities and the networks they have for that, and not anything else.

Brandon Hall: I love that. Yeah, we were laughing when you said find the CPA out the middle of nowhere, Florida. And we were laughing because that’s what we’ve talked about internally. It’s, hey, we have access to anywhere in the nation as long as they have an internet connection. So how many of the CPA is great, maybe they are now a stay at home moms or maybe they went with their spouse somewhere to randomly nowhere and there are no great CPA firm jobs there.

Scott Choppin: But they’re calling me think about it for them, like, let’s say they engage with you guys, and there’s some rural location in Central Texas and that’s they love their lifestyle, and everybody needs to produce income for them to take care of their families. They may be so much more enthusiastic because they can be part-time with you guys, they can live exactly where they want to live obviously remote work and the Tim Ferriss sort of methodology of work lifestyle is changing that, but I’m finding the people that I engage with at this level are much happier, much more enthusiastic we’re able to be more coherent with their lifestyles, even just people who work part-time. So, not to belabor that but I think a lot of people are still in the old modes of our three the last industrial revolution of FaceTime in the office, I got to see you, I got to see you sit in that office and I know you’re going to get work done and it is a challenge to track production and execution remotely. But that just basically requires us to set up new sets of practices, actions, we’re in together systems, you might call it, that produce it. And so accomplishing objectives becomes so much more critical versus FaceTime in the office.

Brandon Hall: Right.

Scott Choppin: I mean, I don’t even care about that. I mean sometimes it is facilitating human interaction, to see people so when I meet investors, I always eventually want to meet them in person, always require a phone call upfront, because I want to find out what they’re after, what are their objectives as an investor, maybe my offer isn’t a fit for what their objectives are. And so, therefore, that interaction at whatever level virtually or in person is going to be critically required. I mean, we demand it of course, yeah, fire to make sure we’re a good fit for people but, it puts you in a whole new set of systems and practices. And that by itself as a differentiator, even you guys having a willingness to engage in that design of new systems and ever new improving systems, and practices, that in itself is a differentiator.

Brandon Hall: There’s nothing I mean, the office is can be good, right? Like, the office environment can be created. Virtual is not for everybody, that’s for sure.

Scott Choppin: But I don’t Yeah, you’re right. I don’t mean to overstate it, you know.

Brandon Hall: Well I do.

Scott Choppin: In fact, I would argue your point is well taken in fact, human interaction that does happen becomes so much more important. So when you do it, you better do it effectively, competitively strategically and that could be another differentiator. If you have a producing margin utility for your actual physical interactions. That’s a way to differentiate. I’ll give you a quick example, so we have people in my networks that run large restaurant company here in Southern California, and they are designing their business all around being experiential. So when people do come to eat because of course restaurants are the one thing you can’t do virtually. I mean, yes, we have Grubhub and delivery, but people go out to eat, they’re going to go to a place, they got to go there physically. And so now the idea is to design these retail and restaurant locations to be experiential, so that when people do go, they go, oh, wow, so cool. Yeah, I ate food, but I did this and I did that. And you’re knocking people’s socks off, that’s going to cause them you’re producing more utility want them to come back.

Brandon Hall: Absolutely. Yeah, so we get our team together at a bare minimum at least once per year and for a whole week, we could like to some big mansion or a couple…

Scott Choppin: Offsite.

Brandon Hall: Yeah, right. Yeah, we’re doing off-site or an onsite. I guess in our case.

Scott Choppin: There is no on-site to go off-site. It is off-site.

Brandon Hall: But no, yeah, to your point. Whenever we get together, we’re all super innovative. It’s a lot of fun, my energy stuff, but we always go Well, yeah, but how much of that do you actually need, at what point does it become detrimental. Remember when I was working at the big four; I had direct reports underneath me that I was quote-unquote, managing. And yeah, they’d show up to the office at 8 am and leave at five and I was like, yeah, they’re doing a great job the billionaire’s, whatever. Now, if Tom doesn’t show up, I don’t know. It’s not on me. I tell Tom, I need these results.

Scott Choppin: Right.

Brandon Hall: And that’s Tom’s job is deliver. So it just changes the mindset a little bit.

Scott Choppin: Well, now you’re focused on accomplishments or reaching objectives right.

Brandon Hall: Is it?

Scott Choppin: Now, it’s like, okay, that guy sitting in his chair and the old school way of thinking that guy was there from eight to five or that person shouldn’t say guy.

Brandon Hall: Yeah, which one other? Where? When would you ever pay a vendor for not delivering results? I guess maybe a CPA?

Scott Choppin: Yeah. Well, I mean, the way the answer would be never I was meaning. Like, let’s say you had an employee, and in the old way of thinking you would see them in their chair from eight to five and they take lunch and they are not gone too long. And I think in some companies, you would, you might accept that as an accomplishment or an objective, but you go when you strip that away. Now you say, what did they really get done, did they complete that report? And I’m not saying that was never all face time and no production of whatever deliverables. I’m just saying now it’s purely production and deliverables for our virtual workers. We have I’m purely focused on, Did you get it done? Did that report go out? Did we submit that drop to the bank? So, yeah.

Brandon Hall: Alright. Well, let’s, let’s switch back to I’ve got another question here for you kind of coming all the way full circle back to real estate.

Scott Choppin: Right.

Brandon Hall: So this is a great conversation, by the way. I’ve enjoyed this. You’ve got extensive experience in the real estate industry. Can you talk about some challenges you face through multiple cycles, specifically down cycles that maybe how you overcame those?

Scott Choppin: So earlier, I talked about this defensive position and a recession of our UTH model, and the orientation around designing the product and the business plan to meet those potential changes comes from our background. So, for me, I went through the 2008 recession with this company, and it taught us, some hard lessons. So the orientation around execution and velocity in our production cycles of construction came right from that. I’ll give you an example, so we used to always use general contractors and you’d sort of as a developer you live and die by the selection and choice and quality and performance of your general contractors. And in 2005 to 2006, if you wanted to execute on a project, it was very difficult. We were at the peak of production of housing in California, and really the US in that those last couple of years before the recession. So if you didn’t have a deep enough network of good GCs to execute on all your projects, and you had to go find new GC relationships, and of course, everybody was busy, and so you sort of like whoever was available, and was like had good bids and seem to meet the test and the criteria and standards we have, and no one else was bidding. And in some cases, you went down that path. And so what we ended up doing, in many cases was managing the GC really, as much as if we were managing the subs.
In fact, we would go out regularly on some of our sites, and we go, why are there not more plumbers here? Like we should be, we should have twenty or thirty guys on this job. I see five guys like, what’s the deal? And so you talk to the plumber and, in our case, in this particular instance, the plumber goes, “oh, well, the general contractor hasn’t paid me for three months”. I go, “what do you mean?” I paid the guy been paying once a month, like what’s the deal? So when we dug into it, you know, as GCs are inclined to do their trading money between trades to try to manage the job, I think most have good intentions, or, worst cases or trading between projects. I don’t want that and so, we actually brought our entire construction operation in house. So we basically had our own project managers, own superintendents, and we operate that way to this day. And so what I basically when I did that and was talking to recruiters, they’re like, “oh, Scott, you should have a GC, you sold stay with the GC, you are going to shift the risk-off to them”. And I go, yes, that may be on the surface out appears.
But ultimately, our company is the guarantor of the construction debt, or even me personally, as the principal of the company. I always own that risk and if that guy fails, that GC doesn’t perform, of course, they only do that once, and then they’re gone from our networks, but I go, I own that risk anyways. And so if I’m going to own that risk, then I might as well control the process of dealing directly with the subs, of managing the subs directly negotiating the contracts. If there are change orders, is it a legitimate change order, is the scope of their contract correct and are the plans good or bad, where’s the gap that caused the change order to be produced and what I found is in many things, cases I was helping GCs to negotiate with their subs anyway because of course, I cared I didn’t want to have a project go badly. Because I was personally guaranteed it. I would basically we would take that on I mean it was I say me and was either myself or our team that we are doing that project managers. So we’ve designed our entire system around basically, again, this production, in fact, I call it the homebuilder model, which is, we act in the capacity of a general contractor, or a CM to the project. So we’re the developer owner, we also supply construction management services, but the development LLC contracts directly with all the subs, I call it CM Prime as a way to describe and this is this a known model in the business so I’m not creating anything new. I’m just taking a more production-oriented role. This is the same thing that homebuilders do so your KB Home, they don’t hire out third party GCs, they act in that same capacity even though they won’t call themselves that and they go direct to the subcontract markets. So, we do that as a function of having seen it not work of having to manage it ourselves anyway, of keeping the risk, in fact, heightening the risk because we’re trying to manage through a company of GC that didn’t want to cooperate with us. So we basically clear the decks of those old structures and are now working under this CM prime model we’ve been doing since 2005, almost the entire history of the company numerically in years. So I think that’s an example of just the kind of things that I think answers your question, hopefully, what are lessons that you learned historically, or from a recession, bring those forward to today and how do we manage differently in that case.

Brandon Hall: Great answer. Great answer. Just one more question before we were asked our final question, of course, is a question in question. So, you mentioned low, low-income housing tax credits before, is that something that you’re still seeing being done these days or is it something that you moved away from just be able to talk a little bit about that credit.

Scott Choppin: Yeah, so I mean, that program exists more robustly than it ever has. I mean, you guys are in the accounting business. So you probably at least come across the idea or people who deal in that. Now, there is a fact, some of the highest performing professional colleagues and companies that I know in the industry of mine networks are in that business, close colleague or a colleague, who’s number one affordable housing developer in the United States, two or three years running. So it is a very robust business. But the thing I think about and why we created UTH is because, if you look at that, what I call true fordable housing marketplace, and that’s 60% of median income. And below those are that’s the tenant profile. Those are always government-subsidized projects, low-income housing tax credits, community lending from whatever bank you’re dealing with on construction of perm debt and then usually soft money if some type from the cities. My stance on that is that’s always a finite source of capital, we would always wish there was lots more and there plenty of demand in those low-income housing income categories for more units to be produced, there’s never enough. The limit is functionally government subsidy and government programs that finance those projects are not unlimited. So they’re sort of like just capped generally.
On the other end of the marketplace, you’ve got your true luxury private equity-financed multifamily development projects are value add. And you could argue that that’s an unlimited source of capital, at least to the extent that the market is robust to make those projects feasible. UTH sits in between those two spaces, as sort of pairs up the source of capital in the private equity markets with a workforce housing model. Now, it’s not as deeply rent reduced or income reduced, we carry higher incomes 80 to 120. But that is the way the model works in part and there are other variables that we need to make work as well right cost efficiency as an example.
But this basically brings this out of the unlimited or the cap source of capital, that you have in true affordable housing, brings it to a moderate-income family and pairs that up with private capital. And then one last point I’ll make is one of the things that’s happening right now is that middle-income families are being dropped ever lower in the food chain of housing because incomes are stagnant. Let’s say nationally average and housing prices in most urban metros is going up, that will change the recession to some degree, but we have a very wide gap between housing prices and incomes being stagnant and housing prices generally, continue to go up at some level. So what’s happening is middle-income families are having to pay ever more a percentage of their income. So thirty is the standard in the business, that’s what should be paid to have that be affordable in the context of families incomes. In California, I mean, people are paying 40, 50, 60% of income for housing alone, which means that you shrink their discretionary income to spend on other things necessities, food, and living but also, you crimp the economy that I can’t remember the stat, but somebody had the claim that in California, we’ve lost some percentage GDP in the California economy because people are spending so much of their income on housing, that it shrinks the discretionary income that people get to spend in the economy that could then have it perform at a higher level. And every major urban Metro has this issue some or more or less a Dallas is different than an LA has an example. So is the tax credit market still robust absolutely. It’s a permanent program, there’s a lot of demand for it. It’s like any market it varies, right demand and supply increase and decrease over time. But we also say it’s going to be forever limited there’s only so much government capacity to ever finance that many people are always looking for new ideas, but I think that the model really is figuring out a way to pair up the private capital markets with some version of affordable workforce housing, that to me is where the innovation is really going to come forth in the future.

Brandon Hall: Makes sense, makes a ton of sense. If our listeners wanted to me, this has been an amazing conversation today. If our listeners want to get in touch with you or learn more about you or Urban Pacific, what is the best way for them to do so?

Scott Choppin: I would just encourage people to go to our website, which is triple www.urbanpacific.com. And if you guys want to reach out to our team or myself, we have a contact page, email, our direct phone numbers are on there, you can actually contact us through the website if you’d like. Also, people can find me on social media, I’m on every major social media channel, LinkedIn, Twitter, Instagram, so we have a team, the team in Florida that manages that, so we’re always tracking people who reach out and want to engage with us and we’d love to hear from people for sure.

Brandon Hall: Awesome. Well definitely appreciate you coming on again, take the time to come on and talk about development, your development process and all that it was like I said, a great conversation. We put it out there quite shortly.

Scott Choppin: Right. Thank you guys for the invite. Appreciate it.

Brandon Hall: Thanks for listening to today’s show.

Infomercial: If you enjoyed the show, please find us on iTunes and leave us a review. You can also email us at contact@therealestatecpa.com with any feedback or topic suggestions, we are always taking on new clients and with the new tax laws in play. You really don’t want to navigate this alone, let us help you save money on taxes with your accounting and CFO needs. To become a client, navigate to our client page at TheRealEstatecpa.com and fill out a webform with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.
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