Ep 17: REI MBA - Developing Workforce Housing for Multi-Generational Families in CA
In this episode, Scott Choppin joins us for an interview where he shares his unique investment model with Workforce Housing for Multi-Generational Families in Southern California. You will want to hear Scott's story on how he got started, to what continues to motivate himself to improve, and also details on what makes his investment model one to take another look at.
Scott is the CEO and Founder of The Urban Pacific Group. The company was founded in 2000 to pursue urban infill real estate development. Urban Pacific is exclusively focused on the innovative “Urban Town House” rental housing model, which was created by Urban Pacific. The Urban Town House is a new construction housing model that pairs private capital with multi-generational workforce rental housing. The Choppin Family has been in the real estate development business since 1960, including the development of the World Trade Center in our hometown of Long Beach, CA. Scott entered the business in 1983, working on family multifamily development projects.
You can reach Scott at: https://www.urbanpacific.com
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Interview Transcripts
Tejas Gosai: Hello, ladies and gentlemen, welcome back to your favorite podcast in the world, RealEstateInvestor.MBA.com and Jeremy Moyer, my partner over here has done a wonderful job. He helps with the guest, gets everything cooking. So Jeremy, I can now announce that we are on iTunes, Spotify, Stitcher, iHeartRadio,TuneIN and Google Podcast. We are on Facebook, LinkedIn, Instagram, and just thank you to everyone that has been following. We love talking to entrepreneurs, Real Estate Investors, people that know what's going on and pride ourselves on the information. So, thank you. Thank you and with that Jeremy, let's introduce the guest.
Jeremy Moyer: Absolutely. Today, we are very excited. We have Scott Choppin with us today. Scott is the CEO and Founder of the Urban Pacific Group. So the company was founded in 2000 to pursue urban infill real estate development. So Urban Pacific is exclusively focused on the innovative urban town house rental housing model, which was created by an Urban Pacific. The urban townhouse is a new construction housing model that pairs private capital with multi-generational workforce housing; rental housing. And the Chapman family has been in real estate development business since 1960, including the development of the World Trade Center in their hometown of the Long Beach, California and Scott entered the business in 1983 working on family, multifamily development projects. So Scott, thank you so much for your time this afternoon and joining us for an interview.
Scott Choppin: Great to be here guys. Appreciate the invite.
Jeremy Moyer: Absolutely. Can you just... Let's just start off by telling the listeners a little bit more about yourself. I know that intro said that you; it was like a family business when you were brought up. Kind of tell us how exactly did you get started and then more how you got started with the multi-generational housing. I know you and I we talked a couple weeks ago probably for over an hour and it was very interesting. So let's...let's get at it.
Scott Choppin: Yeah. So yeah, like you...like the intro said. Family background and the real estate development business. You know, when I first got out of high school, I didn't have any you know specific ambition to go into real estate development. In fact, you know as kids do when they're that age sort of want to do, you know, whatever your parents, you know didn't want you to do or do the opposite maybe and I actually worked in the trades for a couple years. So I worked as an electrician out on job sites, you know from time I was you know, 17 to about 19 years old. And you know, that taught me a few things. One is it taught me I didn't want to do that as a long-term career choice. Like, you know clearly this is not you know, this is not a sustainable model for various reasons. One, you know, you can sort of figure out you're going to have limited generate; wealth generation capacity. You know people, their bodies wore out, you know eventually and so that sort of informed me what not to do, but although it did teach me a lot about construction. So how to build apartment buildings. In fact all the work I did was on new construction apartment projects. And then at about about the age of 19 a couple things happened to me....late 18 - 19 years old. One is I was on one of these job sites and the developer pulled up and I knew who the developer was because I had this background right like. And you know, he's driving the nice car, you know, wearing the suit and tie. You know, and those days... I mean you guys are both wearing ties. But you know like we used to it more. And I go oh I want to be that dude. Like I finally got a light bulb went on and you know, this is, this is what I want to do. And also I read a couple books. I read a lot and I always have and it was you know, sort of a number of books, but you know, they were sort of in that genre of you know, invest in real estate in the weekends and make a million dollars, right? You know, some of those old 50s era books and that really enlightened me to deal making right. So although I have the family background in real estate development. I didn't understand the deal-making side. Of course, I knew you know you find land, you build a building, you rent it out. Right, that was like sort of in my background. But the idea of you know, being an entrepreneur in real estate and what you do to produce value and profitability was, you know, sort of a missing element for me and I read this book and I was like, all right. I got it. And really from about that, you know time at you know, 18 years, 19 years old, I mapped out really what was the rest of my career which was you know, get a college degree, go work for others and in the professional real estate development domain. In fact, I did all those things and then you know fast forward....
Tejas Gosai: You work for free, right?
Scott Choppin: Say that again.
Tejas Gosai: Work for free sometimes right?
Scott Choppin: I do recommend that. In fact, I wrote an article if people want to look on our LinkedIn profile, "6 Ways to Build Your Real Estate Development Career", and one of them is get an internship and do it for free, right? It will be so worth it. In fact, I had people that I have intern with us that are now actually developing into their professional real estate development careers. In fact one guy called me and he's like dude. I didn't know how much that internship for free was worth, but now that I am in the professional... He got like a full scale project management job at a real estate developer and I think, you know, he and I talked about it, like if he didn't have that background that we built for him.... He was with us for about a year. He wouldn't have been able to sit down with those folks and get that job. And he was you know, it's nice enough to come back and and you know, tell me about that. I don't think at the time when he finished his internship he recognized it, but that's all good. He's happy. He's a happy dude now, so... But I went into the professional business working specifically for a subsidiary of a company called Kaufman and Broad at the time, which is now KB Home. Big multi, you know home building company, but our division built apartments; built and syndicated apartment buildings, new construction. And so that gave me, you know, I was there for about four years and that gave me the most insane education like way... Like I wanted that job when I was you know, finishing college, but I didn't know how good that caught, that job would be and it really set me on really the rest of my career arc. So I learned how to be a real estate developer at that job.
Tejas Gosai: That's awesome. Thanks for sharing all of that. I'm going to ask the first question. So...mindset. I love asking the first question about mindset and you know how you built that or build into that or making it, like do you have kids?
Scott Choppin: I do. Yeah three.
Tejas Gosai: I think that's like a big... I have two. Jeremy has a few. That's a big piece of like how you can stay motivated in the game...things like that. But can you share some of your kind of tricks...how you stay, you know headstrong in the real estate business with how much deal-making and cutthroat, you know concepts there are out there?
Scott Choppin: Yeah, great question. I appreciate that and you're exactly right. I, like I say at home and with my family, my wife, my marriage and my kids are the best thing I've ever done in my life right hands down. I have three kids...19, 16 and 13. And that's what I work for, right? And when I started my career like, I was 32 when I formed Urban Pacific. I'm 53 this year. You know, I was after you know making my, you know building my identity in the marketplace, being known as a competent developer, making money, of course, but over the last about 10 years, maybe eight to ten years really it's very much solidified my existential purpose. What I work for fundamentally is for my family right? For our family now, to produce a good life now, to take care of my family and my and their future, my wife and their future. And then I, the other place that I go is working with powerful networks. And now of course like people think of networks in the sense of you know networking. But what I really mean is working with people, vendors, partners, capital partners, lenders, you know JV partners, anybody who's around me, that they, that I constitute them, like I build that network and constitute them to be high performers themselves. And also surround myself with people that are you know, looking to build their careers and work with me to help me build my career and my business and that you know, everybody's expectation is to operate at a high level. And in fact part of that is to keep everybody, you know accountable to each other both in, you know, business transactional, you know structures, but learning structures like I do and I'm all about, you know, continuous competitive learning practices and networks. And you know, a big part of my learning networks now are people that I study with and we have weekly calls. I mean you might think of it in the context of a mastermind by don't call it, we don't call it that. But it's really working in the context of people who all study business and strategy at a higher level and who we work together to keep each other accountable to help each other for us to all produce our you know, our own good lives and whatever ambition that we have...financial ambitions around taking care of our families, how that looks.
Tejas Gosai: That's awesome.
Jeremy Moyer: No, that's great. It's you know, sometimes we feel alone, you know, when we're in business, in certain projects.... and those groups are great. I'm a part of a few as well and it's just, it's great to bounce ideas off of each other. Just to get different perspectives.
Scott Choppin: Yeah. How to solve a problems So that's awesome. And you really need it because I think one of the things I'll share as you know, everybody has cognitive blind spots, right? Like, you know, like just things you don't know that you don't know. Right and in business, that's particularly a like a weak spot for entrepreneurs because all entrepreneurs are optimistic by nature. We self-select, we're self-selected optimists, right? If we weren't, we wouldn't like launch own endeavors, but part of that is to be around people that will reflect on you know, what their blind spots are and also go dude, I see this happening with you, or I see, you know, watch out for this, or hey, you should think about this, or you should do that. Not in the context of you know forcing somebody, but just to open up space as a possibility and thinking together right? Thinking and thought and action together, right and you know, two is always better than one right? No Lone Rangers and although we live in the United States where the idea of the Maverick, you know business person. I did it all on my own. It's like culturally a common narrative. It's not really true. Right like if you look at it. I don't know pick anybody. In fact a guy, the guy I study with predominately it's a group called 'The Aji Network'. Toby Hecht is the founder and Toby always has this great way of saying it is...like hey when Jack Welch operated GE, he had a network of help of 300,000 people right? Like that was the employee base of GE and really when you think of it he sat at the pinnacle of 300,000 people and we all know GE had this rigorous, you know, hiring practices set of, you know set of practices and you know, they would, you know, drop the bottom 20% of performers or whatever the number was. But if you think about it, anybody whether they're small company, midsize or big right, if you think about like your own employees, your teams, but also networks of transaction learning, that really to be oriented around like being a help to others and they be a help powerfully back to you. Like that's the most important thing that I've learned in the last, you know, 8 or 10 years of studying, you know business at a fundamental strategic level. And then you know, it's like then you're all about picking and selecting and upgrading your network constantly. It's your ever-improving and you know, sometimes it's hard right like sometimes you got to tell somebody, 'Hey, look I love you, but I can't work with you. Sorry.' You know, it's hard, that's a little harsh. But if I don't do that, in fact, this is back to this idea of family. I really, where I go with it guys, like look if I don't make this move, if I don't upgrade my network and change to a better performer and be a better performer myself, I hurt my family. And I don't do that.
Jeremy Moyer: That's a good way to look at it. That's all good points. So Scott, I want to kind of go into a little more about what you're doing right now. Can you, for those that are listening that are not familiar with Workforce housing, can you kind of tell everyone what that housing model looks like? Why did you pick that Niche specifically and how does…. I know your model from our previous conversation is a little different from maybe some other Workforce housing models. Can you kind of give us a sneak peek on what that looks like?
Scott Choppin: Sure. Yeah, you know our model, our Workforce housing model is called "UTH" or "Urban Town House". That's the, that's the name we've given it. And Workforce housing just first as a definition has many different definitions, right? If you ask one person their definition, it'll be different than ours. So I'll define it. Basically, we build a new construction townhouse style rental unit that has 5 bedrooms, 4 bathrooms 3-story townhouse. So it lives like a house right, like you live above and below your family. One of those bedrooms and bathrooms is in the ground floor making it multi-generational 2-car direct access garage. So really is like a Townhouse Condo, maybe people might think of it commonly, but we build it to rent. So we're a "build-to-rent" model, but we're at a low or middle density. versus your standard podium product in whatever major urban metro, you know, 4 or 5 or more stories over a parking structure. That would be like the more common new construction model in this era. And Workforce housing for us is we're literally building for families, right 5 bedroom, 4 bath like, you know sort of informs that like we're looking to house multi-generational families that have several members. You know could be Mom and Dad, adult children, kids of the parents or kids of the adult kids, grandparents, in-laws, right? One of the reasons we do this ground-floor bedroom / bathroom is for grandparents that might have mobility issues. But we're really looking to serve a multi-generational working-class family. You know, right now we're active in Southern California at an affordable rate. An affordable, like that as another definition, but you could think of the incomes for our families are generally between 80 to a 120% of median income. That would be either for LA or Orange County or any metro area that we would build in the future, that would be the income demographic. And really importantly for these families... One, they already live this way. So they already live multi-generationally and they already live what I call an "economic sharing lifestyle". So they're sharing incomes and expenses across the family group. You could maybe think of it as a form of co-living, except these are all related, you know, a single family group, right living together. Commonly will have you know, when we have these families come to us they may be living in maybe a couple of different apartments. Maybe they're you know, side-by-side. Maybe they're you know one part of the family lives in this unit and the block down the other fan part of the family lives, but they already work as a cohesive economic unit, and they have multiple earners. And this is really the sort of the secret, you know insight into these working-class families is that they do have multiple earners. Generally, they're blue collar, service industry, obviously in this era of coronavirus these are families that are probably the most hardest hit, but what you find amongst these families is because they have this economic sharing lifestyle, it really does two things for them. One is it allows them afford more housing for the family given all their multiple earners. Like if you were a single learner and you made X dollars and you had to pay for one bedroom that was you know, $2,000 a month while you're going to have a limit to what you can afford. In fact, the statistics in the newspaper, you know, it's like hey, somebody's got to make $37 an hour working full-time to afford the average sized unit in Southern California. And I'm making that number up but you get the point. But when you start to get three or four or five income earners together in a family, any one of them may be making $20k, $30k, $40k, $50k a year, which by themselves wouldn't afford a new unit like in the marketplace. All of the sudden they're combining together and they're a $120k, $150k, right and so that then basically puts the housing costs at 30% of their income at a bigger number which means they can afford better housing. Now all we do is give them a unit that now serves their family from a lifestyle standpoint. They can all live in one unit. They got the 2 car garage. They got the in-unit laundry. And so this is sort of the unique characteristic of "UTH" that serves these, you know, these middle income families, you know, most coherently. And by the way, it's a probably the most undersupplied marketplace in you know in America, as middle income working families, they make too much to afford true affordable housing right like government-subsidized. They don't want to you know occupy the studio unit in the high-rise in downtown LA. That doesn't serve their family and cost is too expensive. And so we're basically serving a part of the population that's been pretty much ignored by the development Marketplace, generally.
Jeremy Moyer: That's awesome. When you told me this the first time we talked, I thought it was very ingenious because in my mind this is kind of the flip side of single family investment housing and multifamily investment housing from the investor standpoint. You usually....multifamily investments are more attractive because if one unit goes vacant....on the flip side it looks like well what if one income earner lost their job. And in your model, there's multiple income earners, spread the risk.
Scott Choppin: Yeah also one fact to add real quick. You know, they do well during up markets because they have more income to pay for housing but also makes them resilient during recession because again multiple earners means if one person becomes unemployed or underemployed, the family doesn't you know doesn't have a breakdown. In fact, the poverty rates amongst multi-generational households are much lower than single and dual income families. And this is you know, we don't necessarily serve, you know, low-income families per se, although of course if there's a fit, there's a story, we'll do that. But really what ends up happening is these families are sort of dragged down economically because they have to pay a lot of their income towards housing. We resolve that issue for them. And particularly during a recession as an investor, as the owner / sponsor, that's a good story for resilience during you know right now, right in the middle of the coronavirus era.
Tejas Gosai: I wanted to ask like a two-part question here. One, it just seems like this is a math equation. And then it's a location equation and you probably have figured out both of them. And where the second part of it is, where are those places that you're finding these projects, or finding the ability for these projects? Because I'm a big hotel guy. Built a bunch of hotels in my life, and I think of a feasibility study. And I'm assuming that people don't do a feasibility study for what you're doing. It's a different metric.
Scott Choppin: Yeah, when you say feasibility study, you mean like hey, we're thinking about this product and this location tell me if it's feasible generally. So we don't do that in the way that you mean. I mean we have done it, you know in the past but really we're as a developer we're doing feasibility studies in-house, and particularly, you know, we're sticking with what we know which is Residential income-producing rental housing right? We just happen to be doing a different form of that. But it's still basically an apartment community a multi-family, you know, income-producing property. But actually your first question is actually very intuitive because really there's several things that make this product feasible and to produce market superior returns to investors because we really have two missions. One... we need to serve our investors by producing you know sustainable resilient, you know market superior yields to their equity and we need to serve the tenants appropriately like, you know attainably housed, meaning they don't pay too much of their income towards it and so we bridge that, those two. And they're not normally bridged by the way, right? Like those are usually the opposite right? You go ohh, if it's affordable it doesn't make money. If it makes money, it can't be affordable. And there's several things and I'll sort of list them in no particular order. So, one we're going to pick land in locations that's more affordable and easier to build on. So think of like B and C working-class neighborhoods where land is going to be less competed for. It's also going to be less sensitive to building new housing. Right? Like if you go into a high or middle income neighborhood, the neighbors are going to you know, they're going to not want your project there. At least in California we have that big issue and I think that's common in many big cities, but California is the mecca for difficult entitlement, you know development, you know approval processes. Like most difficult the United States I'd say. So, you know, we can buy it more affordably. We can we can get it ready quicker because we don't have to rezone it. But also it's coherent. The people who live in these units already live in these neighborhoods. These are working class neighborhoods like already. I mean we didn't do anything to change them. We just went into that neighborhood and found the project. But commonly, you know, when we open up a new project to lease up, I would say most of the families that come visit us are from the local area, maybe 10 to 15 minutes away. And there's a reason for that. One is that you know, they have strong, very strong social networks. So their kids are in school locally, church is down the road, extended families in, you know, whatever city we're in, their jobs are generally close by. These families aren't big commuters, right? They don't drive an hour each direction to work. They're generally 10 to 20 minutes range from where they live to where they work. And that's...there's several reasons behind that. So, Okay. So first is the land right we talked about. Then the unit type is really important. We build this three-story product. That's a big unit. But if you think about how we format it, you have mostly bedrooms and bathrooms right? Now bathrooms are you know, and kitchens are the most costly part of a residential unit to build, as you guys, you know, well, know. I think that's pretty known in the marketplace. But we have a lot of bedroom space that actually happens to be your most efficient cost-effective space to build, right? And somebody....so, I'm on the Executive Committee Board of Directors for USC Lusk Center and Richard Green is the Executive Director. He and I met a couple of years ago and he had a great observation. He goes, you're not doing more density and units, you're doing density and bedrooms. You have a lot of bedrooms on a given piece of ground and normally that would convert into units, like I've got 20 units and 20 bedrooms if you do one bedrooms, but we're doing five units and five bedrooms or four units of five bedrooms to get to the 20 (bedrooms), which means that each unit we only build one kitchen and yes, we have four bathrooms. And that's a key part of our you know competitive, you know capabilities to serve tenants. But we, what I say is we're at the equilibrium point between building the most cost-effective space with generating the most income appropriate for the family income demographic of course, but we're at that crossover point where we're producing maximum income for lowest cost. If you went up one more story, and did a 4-story, product costs go up and maybe generate a little bit more income. If you go less than; say you did a single-family house. You'd build a cheaper building, but the, you can't produce as much revenue, right? And then there's extremes like if you went high-rise, you produce, you know, huge incomes on a per-square-foot basis, but you pay a lot, a lot of money to build that high-rise. And then if you went to your single family, you know square house, you know in a subdivision, that's your cheapest space, but you couldn't again, you know rent it for the maximal amount of money that you.... Because development is all about maximum income generation given your cost structure. Whatever we do to increase revenue and decrease costs and operating expenses is going to benefit the bottom line to the deal. Now, of course, we still have to hold what makes the rents attainable to our families. We don't want to, we can't, you know move away from that but it happens to be at least at this time in the you know in you know this time and this place this formally works. And you know, we don't assess that it will work forever, but at least in California and this is a product that you know is generated and innovated from the California market place, where we have high housing costs and flat middle incomes. That's a real key in the gap between those is where our housing serves.
Jeremy Moyer: That makes a lot of sense. It's that sweat spot in between two opposing factors that you're targeting.That's great.Do you mind going through like a specific deal that you guys are either in the middle of or that you just you know from the beginning? Like how you found it? How did you find the land? What did the zoning look like, that entitlement process you said California is not very friendly. How much did you buy it for? What did you know just some of the figures just to kind of...
Scott Choppin: Sure, in fact, I'll talk about a project that we're like right in the middle of right now. In fact, we're in the midst of raising capital for it on a crowdfunding platform called Small Change. It's "1491 Atlantic". And so this is you know, we only do "UTH". In fact, we don't do any other product type. We're such firm believers in the product and believe in the undersupply story and serving these families, you know. Like were full, we're all-in right all in on this product type, on this business plan. So you know up to about January this year we really were tapering our business plan down, right like construction costs were high, land costs, you know in a peak market always go high. You know keep...you know, land sellers are always trying to push the limit to... We just couldn't find deals, enough deals to make sense. We had a deal here or there that we could find appropriately priced, but we were like just finding less and less deals and you just you know, when that happens you just do less deals, right and maybe eventually might do no deals if the market you know goes against you enough. But you know February / March came, coronavirus hit, you know we're in California, we got locked down in March. And so through March and April we were really in a story like look, you know, we're now in this recession like we you know, maybe you know, obviously the pandemic hit first and the recession came, you know immediately thereafter, but that's when we started to travel in the story of this recession resilient family. We always anticipated that these families would batten down the hatches, combined together in larger family groups or roommates, if that's what they do. And that was actually Pew research did a study in 2007 to 2009, 49 million households moved in multi-generationally in that era as a function of the recession, meaning families joined together. That's 49 million households, which you know, you could argue that's you know, 75 to a 100 million people depending on the family size. So we knew to anticipate that would be the case and that in fact turned out to be true. So a couple things happened. Land prices we anticipated would drop which that started to happen and also some Sellers on the land side will capitulate. They just go I gotta I gotta move this thing man. The markets going against me. I got to drop my price. I got to get more, you know realistic on my terms. So we've actually picked up several new deals. And in fact, we're more...we're busier now than we were in January because we see, we're doing good on leasing, you know with these families combining together, good lease rates, good velocity on absorption, that kind of thing. So 1491 Atlantic was actually the first of a series of these mid sized projects in close to home nimble, you know in our backyard, right if we were going to do deals and they're in a recessionary environment knowing that these you know, we could still rent units right? We can still build them for the costs that we had projected. Then we started being a story. Let's like be really close to home right? We can be very active. Very hands-on. Not try to go out of Market. You know that kind of thing. So 1491 Atlantic is a pretty small site. I want to say it's like literally like 6,000 square feet. Maybe it's bigger than that. And we ended up fitting 5 UTH units in there, which is actually 4 of the townhouse units and then we're going to do what's called an accessory dwelling unit or ADU, which will basically create a small 400 square foot space in one of the garages in this new construction project that we can convert under California law into a Studio unit, right? Which is a new law. I mean, it's several years old in California. But the ability to do this in multi family is new. We bought the land for $365,000. In fact, we're still in escrow. So one of the things that changed when we saw that the seller market started to capitulate, you know, we negotiated for land price reduction. That's the first thing we did but we also started to ask for a much longer time lines on the escrows. So we're in several projects now where we have several months of time and that Escrow period. You know, we'll put up land deposits and probably pass that through non-refundable, but we're really insisting that we're getting anywhere between 6 to 12 months of time to close the land and really with the idea of get everything you can done, fully plan check, permit ready, get the loan ready, raise the capital, and then just to put us in a patient position. I mean, we've always done that but we're now being even more aggressive right? Like let's just not be, you know obligated to close quickly. And in fact, that's part of the capitulation in the land market is you know sellers in a peak market go dude close in 10 days, close in 30 days, you know close in 20 days and in a peak market they would get that. Now that's not happening. And particularly again, we're in these B and C neighborhoods right even less so. If you went to really high-end neighborhood, you probably would still get sellers that are you know, holding onto their price. My joke is you know, land sellers are always get the last, to get the news that the market turned down right? They'll hold on to that price like, you know for dear life. And it's hard to be a seller. We've been a seller multiple times of land assets and you know, you owned that asset already. You want to sell it. You got to try to get your price. Me as a buyer or our company as a buyer, I can say no to a site and I can go "no, it doesn't work, timing doesn't work, price doesn't work, you know next, next, next", right? So it's much you know much more fluid to be able to move move through, you know projects that way. So we'll do five units. We are in plan check. You know with a five bedroom units, I think we're underwriting right now about $3,500 a month for the 5 bedroom / 4 bath townhouse unit in this project. We're doing the studio. We also have a two bedroom unit which is going to be a three-story townhouse, two bedroom and that will actually be our affordable housing unit. So in California if you can't quite meet the zoning code... Like we never want to do heavy lift entitlements, like rezone and general plan amendments and big you know, discretionary planning commission / city council based. So sometimes if our project won't quite fit the zoning code under California law we can ask for relief from the zoning standard by what's called an "affordable housing incentive". Which we say Hey, we're going to give you a unit at very low income restriction rent and incomes, and for that you give us better parking standard, you give a smaller set backs, you know lot coverage, whatever it is that you need, you know that, those kind of things. So we're actually using that as a tool pretty regularly these days. Because not every sight and every Zone will fit our model and so we want to build our model and it makes sense for us to trade that affordable housing unit to get the better setback or the better parking. Particularly 5 bedroom / 4 bath on parking a lot of cities will go, Hey 5-bedroom, I need you know 4 full parking spaces inside of a garage, enclosed / covered. Like we've got cities that have the standard. So we can invoke the affordable housing parking standard, which is two per unit which we already do in this 2 car garage that we build plus half a space for guests. That's pretty typical of for our project layouts. So we talked about rents what else so, you know, I think at the end of the day, so we're raising capital right now on Small Change. I think roughly over a 10-year hold, which is what we're raising capital for, we should look for about an 18%, 17-18% internal rate of return over that 10-year period. It will cash flow during the life cycle of the build, of the you know the hold period. We pay quarterly. And actually Small Change. I work with Eve Picker who's the CEO there and this is our first crowdfunded deal where we're doing a side-by-side Reg CF side by side with a 506 C so we can accept both not accredited, you know Reg CF style investors and then you know Reg 506 C is your standard accredited structure. So we're really after trying to do more crowdfunding in fact. We've been working on crowdfunding for several years, but never quite fit with all the mainstream crowdfunding platforms and they're all good folks. But you know the idea of the social impact, family serving housing product in B and C neighborhoods just didn't fit. You know, all the mainstream crowdfunding platforms. They just didn't get us, they didn't get the product. They're like, you know great. But hey, we like value-add. Got some of that? We go, No, we don't want to you know, we don't want to be that. We want to be differentiated like on purpose and that just wasn't a fit. So Eve is very entrepreneurial. She has a development background herself so she understood it immediately and then Small Change has a social impact index that they apply to all there, you know capital raise offers on their platform. And we you know, we fit that nicely. You know, we're Urban Infill. We're transit-oriented. We're serving, you know, middle-income families, you know, those kind of things so that's good. So….
Jeremy Moyer: That's awesome. No, thats great. That gives a good picture in your head of what... So do all your projects roughly you try to produce the same return profile?
Scott Choppin: Um, you know, we were actually, if anything, we're normally above that. You know that for various reasons Atlantic, you know, it's land price and build costs and you know, those kind of things you know gets us into that 17 to 18 range. If we merchant build, meaning if we build it, rent it and sell it immediately, the IRR's will be you know much higher; you know, 25 plus percent, IRR. So we've got a couple deals. In fact, I'll have another deal, 1115 East Artesia, up on the Small Change platform in the next few weeks. And that's about a three year deal. We will build it, rent it and sell it and I think you know, we're well above 25 (IRR). I'll just you know, say we're doing 25 plus, it would be the IRR for and you know investor equity on that deal. But of course the timeline is shorter, so the IRR is going to be higher. But you know at least in our research, you know, particularly, if you think about the resilience of this model, right? We're not distressed prone, you know one and two-bedroom product. We're not competing with, you know, one bedrooms in downtown LA where new construction is dropping their rents to compete. You know, they're losing renters, you know, we're really the product where when the renters move out of that one bedroom, they move into our unit with other people....roommates or family. So we're you know, we're sort of the receiver of you know, people moving out of other people's projects, you know, we're you know capturing those people as they come out. Because you think about it fundamentally, biological need people need shelter. Right? I mean, you know, as I say that people go…of course, but if you think about it, that means somebody when they move out of someplace they go someplace else, right? It sounds patently obvious. Maybe they move home with their parents. Maybe they move in with roommates. But they're going somewhere. That 49 million household move I talked about; that's what that is. That's people recombining is the terminology; it's a medical term but it's you know combining together in a family group to then, you know afford. In fact, you know, we're talking to you know, we're lease up on our project in Orange County in Fullerton and you know, one of the folks we talked to, one of the family groups was a mom with her kids that they lived in one house, the dad and the mom are getting married, you know, they're newly married or will be, and the Dad has kids in another house and they're going to come out of those two houses to live in our unit potentially. So, you know, that's a different recombination story. They're not distressed from an employment standpoint, but they see the logic of trying to you know, live more official and particularly if it's a brand new unit. You know, think about it. These families, these middle income families normally never have any new housing as a choice right? In fact, in Fullerton we did the math. It's been like 40 years since any new housing was built in the neighborhood where we're building new. We're the first new units to be produced in that neighborhood in 40 years. I mean think about that, right? So if you're a family that's I live here because it's affordable. My kids go to school down the road, but I happen to want to you know size up because my family grew or kids are moving home or grandparents moved in, in-laws. You really don't have any choice and not all like wish that for people. I wish that they would have all the choices they could but when you look at it from a you know realities operations standpoint, if there's no new housing then they don't do new housing. It just doesn't exist. So we're giving them something that they didn't have before.
Jeremy Moyer: That's tremendous. I love what you guys are doing. So...raising the capital side since COVID. I always like to ask this question. Do investors kind of get the like, what you're doing and you know, what you're doing, kind of is like, I'm going to say perfect for the environment that we're in right now because we just said, but you know, do they understand that? Do you, are you presenting deals differently or when you talk to investors, are you presenting differently? Do you have to….what does that, what does that look like?
Scott Choppin: Yeah, so it is a little bit different. So it's counterintuitive right? Like when the pandemic first hit, you know, the story I was traveling I go, Oh there's a you know investors will be in a new story about what their investment choices will look like over the next six months to three years, right? And most sophisticated investors in a recessionary environment will start immediately to be looking for distressed assets. If you look at all the big, you know all the big names on YouTube, you know, I think like Ken McElroy, you know, he's a guy who's associated with Robert Kiyosaki, you know, any of the big, you know, YouTube Real Estate, you know sort of investor / syndicator, you know, were starting to talk about. So we were like, okay we have to be in a new narrative now. For us it wasn't a new narrative. It was just our second narrative. So before I talked about that these families could afford attainable housing, new housing in a peak market because they had multiple earners and can afford the housing, right? That's a peak Market story. Then you go, we're now in a recession. So people will look to save costs right if they're a renter and they're going to move in with more people, more roommates recombine with family, right? And so what the difference is, we have to create a new narrative or sort to put forward the second narrative, which is this is recession resilient housing.We're the receiver of benefit in the downturn because our families have multiple earners, they have strong social networks, are going to stick around, their jobs are close by. And so the idea that we convey to investors that this is a very stable family demographic right there. Sticky social networks are strong. They're not moving away versus if you had your Gen Z or Millennial who's just maybe they move to LA. It's their first job. They lived in Dallas, but they move to LA to get their job. Well as soon as they lose their job, they no longer have the one income that was supporting that housing. So they're going to move out. Or right now, they're going to stay there because eviction moratoriums are in place, but realistically on a long-term basis, they're going to move somewhere else. Either they're going to move in with roommates or they're going to move back home or whatever again back to the story of we're receivers of benefit for that move. We have some people that will decide to stay in California and I don't say there's anything wrong with that young person who's going to be mobile. They are mobile. They're young. That's their life cycle where they're at. They don't have kids, you know, their extended family may be at home where they move from, you know, they're you know, they have nothing to tie them and that's perfectly logical. We just say we don't want to rent to them, right? We want to rent to these families that are already here, that that naturally batten down the hatches in a recession, they already economic share, they already live multi-generationally. We didn't create into that by the way. That's just we're delivering a product to a market that already existed; just nobody recognized it, or few people did we should say. So that's the story we tell to investors. We go we're recession resilient; not recession prone, right? Everybody's going to be looking for distressed assets, which is again perfectly appropriate but we start to talk, travel in the story with investors like that property was distressed for a reason, right? And what is that reason you're going to think hard about that. Does is it have all one bedrooms in Chattanooga? And that happens to be a hard hit employment center and the single earner households had to move out right? And then what made it prone before is going to continue to make it reception prone now. Now, if you can be a pro Savvy investor and buy it at enough of a discount, then you can protect against that but, ultimately you can't change that one bedroom mix. You're, like you live with that. As a developer, we can create our own plan that meets the market needs right then and right there which we, you know are firm believers in this, you know, multi-earner / multi- generational household. So that's the story we're in right now. We are trying to like compare and contrast between hey, you could you know, you could invest in distress assets and which are distressed prone or you can look at our product which is, you know, reception resilient and you know, the opposite of you know distress prone or recession prone. And then we, then we start to talk about the long-term sustainability and stability of the model. Right? And that's where we get into an undersupply story, which in California we've been under-supplied for decades right? No change there. And in as bad of a recession will get in California locally will still be under supplied and will be under supplied for decades in the future. Right? So if you're serving a family housing type that was already under supplied, that's just going to continue. Yes. Will there be adjustments in the marketplace for employment or rents adjust to some degree? Absolutely. So, you know, we're we have several things that you know are the resilience part of it. In fact, there's a book called “Antifragile”. It's written by a guy named Nassim Taleb and his idea of anti fragile is a business or some structure that actually accelerates from harm. When things are bad, this thing gets better. Like, you know when you build, you know when you work out and you know lift weights, you damage your muscle and then it grows from that damage. That's you know, that's anti fragile. And that's how we see the UTH model. And so, in fact, that's why we've converted other than a couple projects which will sell, everything predominately, everything is long-term hold because we you know, so firmly believe in the long-term undersupply story and the long-term stability of this tenant base, the sticky, you know, you know socially strong family groups that we want to own this product really in perpetuity.
Jeremy Moyer: That's awesome. Thanks for that explanation. That makes a lot of sense. So Scott in closing, how can our listeners learn more about what you're doing, follow you on social media? I know you post a lot on LinkedIn which I find very informative. How can they get in touch with you if they're interested in talking?
Scott Choppin: So I would encourage people go to our website www.urbanpacific.com and do a couple things when you're there. So there's a red sign up button, you know, get on our email list. We put out an e-blast every Saturday, and we're really focused on delivering value and knowledge to investors. Market updates, market trends, you know, all the economic tracking tools that we use internally. We share those out like you'll see that you know, just like the steady drumbeat of you know, how we're seeing the market, new trends because we're you know, we're like everybody else. We're vigilant, you know. We want to be, you know, looking for the best sources of economic information like trusted, you know, economic resources with no agenda. So get on our email list and then go to our contact page and send me an email. So my email is choppin@urbanpacific.com. You know tell me you heard me on your guys' podcast and then we'll...if people email me directly, will send them out an e-book that we published called, "How to Survive and Thrive in a Recession", which is I think timely given where we're at in this part of the economic cycle. But we would be happy to you know, send that out. Send us an email and we'll send that out to folks. And then you know go on the website and we have an investor education section, which has tons and tons of articles, videos. Again, all this value and information gathering that we're doing internally as you know, is all in there, you know, including, you know things that could...tools that could be useful to investors.
Jeremy Moyer: That's great. You know Scott again, like I mentioned a few times today. I love what you guys are doing and definitely serving a need in the marketplace. It's very unique. And yeah, I'm interested to see what you guys do.
Scott Choppin: I appreciate that. Yeah thanks so much for the good words.
Jeremy Moyer: So again, thank you so much for your time today Scott. And to our listeners… If you're seeing value in what we're doing, you know, just go onto iTunes, give us a 5-star rating. Also, please tell five others about our show. Everyone, this is Scott Choppin with the Urban Pacific Group. I'm Jeremy Moyer with the Real Estate Investor MBA. Take care. Cheers.
