JF1947: Developing, Acquiring, & Syndicating 1,900 Affordable Multifamily Units with Scott Choppin
Scott Choppin is here today to give us an insight into how to build and run a growing real estate business. In this episode you’ll hear his most challenging deal in the past five years, what he ran into, how he got through it, and what the big lessons learned are. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“Sellers are usually attached to their property, they think their land is the best piece of land” – Scott Choppin
Scott Choppin Real Estate Background:
- Founder of Urban Pacific, a real estate development and advisory company
- Has been involved in the development, acquisition, or syndication of 1,900 affordable multifamily units
- Based in Long Beach, CA
- Say hi to him at https://www.urbanpacific.com/
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Scott Choppin. How are you doing, Scott?
Scott Choppin: I’m doing good, Joe. Nice to meet you.
Joe Fairless: Yeah, nice to meet you too, and looking forward to our conversation. A little bit about Scott – he’s the founder of Urban Pacific, a real estate development and advisory company. He’s been involved in development, acquisition or syndication of 1,900 affordable multifamily units. Based in Long Beach, California. With that being said, Scott, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Scott Choppin: Absolutely. Our company and my background has been in real estate development really for my entire life. I come from a multi-generational family in the real estate development business, so my family has been in real estate development in Southern California since 1960. So I grew up around the business, it gave me a background on what real estate developers do, how you make it a career and how you be profitable in it.
I’ve worked for a couple major companies. I’ve worked for a subsidiary of what used to be known as Kaufman & Broad, now KB Home, and that division was in the apartment syndication and development arm of that major Fortune 500 building company.
Then I worked for a company called Sares-Regis Group, which is a regional apartment development company in Southern California, based in Orange County. So my entire career history family background, and now 19 years of having formed and running Urban Pacific Group – all is laser-focused on the real estate development space.
Joe Fairless: What does Urban Pacific Group do exactly?
Scott Choppin: We are a real estate developer that has focused, since I started the company in 2000, on urban infill real estate development. Urban is what everybody would expect; infill, for those who don’t know, is basically finding sites that are vacant or under-utilized in an already existing urban metro area, and then putting a real estate development project together on that piece of land, on that asset, with the intention of producing new construction, apartment projects that we either sell (merchant build style) or own long-term, with all the advantages of being in urban locations.
Joe Fairless: What’s the most challenging project in the last five years, that you’ve worked on?
Scott Choppin: Great question. I’ll give you an example of what we did… 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…
Joe Fairless: Oh, my…
Scott Choppin: 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. So that one was certainly one of the longest, I would say.
Joe Fairless: Did you have to pivot in the vision of what you were initially planning on doing?
Scott Choppin: We did, actually. We started working on the project in 2004, and at that time, as everybody knows, the market was very strong, and in particular condo projects were much more viable in that ’04, ’05, ’06 time period. So we entitled the original project as something like 700 or 800 units of predominantly condo, although we had a little bit of new construction apartments in there; mid, and not quite high-rise, but pretty dense… Which worked at the time, because the sale prices of condos supported that land price plus that build cost.
Then the recession came, and as everybody also tracked, condos were probably one of the worst-hit portions of the market, at least in the spaces and domains that we work in, urban infill.
So when we came back in 2012-2013, it was a completely different market. We had learned lots of lessons in the recession and applied those, so basically pivoted to doing the project entirely as a slightly lower-density, purely apartment development project.
Joe Fairless: Okay. Did you have any mixed-use in there?
Scott Choppin: You know, this project in particular, Joe, was interesting because it was right next door to a major retail project called the Westminster Promenade, that was anchored by Dave & Busters, and an Edwards theater, lots of retail… So we didn’t have to do mixed-use in the way I think you’re meaning. I might call this a horizontal mixed-use, which is next door. It’s not stacked over. But you could walk out your front door and be at the movie theater in five minutes, and the surrounding area around that had been developed with a lot of urban amenities, parks, a skating rink, and some hotel assets. So we didn’t need to do the vertical retail below. It made all the sense in the world to have very walkable, on-grade apartments. Plus, simpler to execute on the construction.
We ultimately did a joint venture with Lennar’s, what’s called the Multifamily Communities Investment arm, which is their apartment arm… Lennar, the home builder. That asset completed probably about three years ago.
Joe Fairless: And why bring in a JV partner?
Scott Choppin: It was a big project. Probably [unintelligible [00:06:49].24] about 100 million dollars in a single project… So we do this quite often, where we’ll joint-venture with others to bring in capacities that maybe we have, but it allows us to do bigger projects, more projects, more volume… And spread risk.
Joe Fairless: Right.
Scott Choppin: At that time — let’s see… This would have been about 2014-2015 that we completed the reentitlement process, and at that time downtown Denver and Denver Metro Area had something like 15,000 units of apartment assets in the pipeline. So you look at the marketplace and you go “Okay, we have to judge at the time what’s the appropriate course of action. Do we build it, do we JV it? Maybe we just entitle and sell it”, that’s sometimes an option; like, not build it all. So in this case, it made sense.
And Lennar was hungry. Their division was new, and they were trying to accomplish a certain production volume for their investment dollars, so us JV-ing made sense to them and to us.
Joe Fairless: So in that case, would then there be three partners? The city, plus the new partner, plus you all?
Scott Choppin: In this case, the city was just the land seller.
Joe Fairless: Oh, okay. Got it.
Scott Choppin: So we bought the land from them, and then did the development project.
Joe Fairless: Okay.
Scott Choppin: Although – interesting dynamic of having the city, who’s the approving body, give you the entitlements, and they own it…
Joe Fairless: [laughs] Right.
Scott Choppin: At the time, the staff and the council were very aligned with what we had produced as the original urban infill vision as part of this horizontal mixed-used. They were very ambitious.
Most cities don’t buy land speculatively, so at that time, that staff and that council was very aggressive, in a positive way, so we just happened to come together with them, with our urban infill style of development, with their visionary of producing a mixed-use, horizontal type [unintelligible [00:08:44].05] town center type situation.
Joe Fairless: And when you bring in a joint venture partner on this type of scale, what is the typical way you structure it?
Scott Choppin: Well, as you know, having structured all the deals that you’ve done over your career, there’s an infinite number of ways to structure it… In this case, it was just some version of participating shares in the LLC that developed the project, with each party basically being rewarded by their back-end profits as to what they brought.
Generically, we might say “Hey, look, Urban Pacific brought the relationship with the city, delivered the entitlements, has the land and site control, and then Lennar brings heavy-duty financial capacity, brought their own equity… So we just negotiated a back-end share based on those capacities that are brought to the table.
And I say it that way, Joe, because in speaking with people who are trying to form joint ventures, or in some cases when we advise people, as we do in our advisory teams, there’s no set standard of how one might do it. Now, some investors may say “Hey, I only do JV’s this way, I only do this split. Here’s what I offer”, but there’s an infinite number of ways to negotiate a structure. Obviously, everybody’s looking for a win/win… And sometimes I’ve had lots of JV offers that weren’t accepted. They said “No, we can’t fit that with how we wanna do it.” We approached a lot of landowners to do land JVs; that’s a pretty typical move that we make… Although the ratio of success in land JVs, at least in our experience, is fairly low.
Joe Fairless: Why is that?
Scott Choppin: Land sellers – they wanna sell, if they’re sellers. So the idea of participating on a longer timeline… And also, on a land JV they would participate their land into the partnership, which puts them at some risk. They lose control of it, or at least in the sense that they don’t own it directly. They own shares in an LLC that owns the land now, after the JV is formed.
Some land sellers – they just don’t have that appetite for risk… And no fault of theirs. They’ve said “Hey, here are our philosophies. We wanna sell.” Although I do say, Joe – being a land seller is actually really hard… Because me as a buyer, as a developer, I can always basically move on. If it doesn’t work, if it doesn’t underwrite, if it’s too expensive, if the entitlements are too hard, I move on to the next one, assuming my real estate acquisition team is doing the work that they’re supposed to, which is producing lots of new opportunities to look at… Whereas a land seller, if you really have decided to sell, then you can only sell. So there’s a certain emotional attachment that most sellers have, or many do, and they of course all think their land is the best piece of land around… So the value should be commensurate with that.
Joe Fairless: Well, speaking of emotions, 2004 is when you started this project, and then the recession hit, in 2007-2009. Had you purchased the land, or were you in the entitlement process where the purchase was contingent on it being entitled?
Scott Choppin: Great question. We as a standard practice never close on land unentitled, for this exact reason. The scenario of ’08 was exactly why you don’t close land and then go get your entitlement. So the deal we had structured with the city was contingent. We would close only upon granting of entitlements… And then this certain period of time afterwards.
If I recall, the city had actually approved the project; we had gotten through City Council, and they had done all that they were supposed to do, and we were in that time period between that and the closing, and then September of ’08 – obviously, the world split apart, so we just approached the city and said “Hey look, the economy is off. It’s not an appropriate time. It’s now too dense, too expensive, the condo market is off.” That was the narrative that we spoke to the city. And we said “Hey, we love working with you guys, it’s just not the right time to do this.”
It also helped that we probably left hard deposits in the deal, that they got, of about 200k… So we don’t wish to lose that deposit, but it’s better than we lose 200k than bought a five million dollar piece of ground that is no longer viable, right in the middle of a recession. So that’s the trade – do you do option money, escrow, hard, unrefundable deposits and pass-throughs, or do you buy the land and take that risk? I’ll always take the deposits, and ostensibly assume we lose those, but we’re protected on the downside, because we don’t own the land.
Joe Fairless: Right. And since you had the 200k non-refundable, I imagine you weren’t able to negotiate – maybe you were – a better price, since the value (I’m guessing) was lower than what you originally had the option to purchase it for?
Scott Choppin: It’s a good question… Two things came out of it. When we came back in 2012-2013, a couple of other developers had tried to work on the site, but they had really not the vision that we had. And it was the same staff, same Council, and they recognized that they were gonna make a choice. Either we choose to go with somebody whose vision we agree with, like ours, or other developers can come in and maybe they get the vision, maybe they don’t… But leaving the 200k built goodwill with the city. Typically, I think most developers would say they would fight it, they might go legal… Not all, but some.
So our orientation is always for the long-term; we build and hold assets for the long-run, we wanna have long-term relationships with cities, have these kinds of deals… So that was a part of the calculus that we did when we left the 200k in. We said “Look, we like this deal, we like working with you, we like the location…” It was really a once-in-a-lifetime location. So we did the math and said “This is what we’re willing to bet.” And when we came back in 2012, it was after having talked to other groups that they saw what we had offered was better still on the project, but also there was this [unintelligible [00:15:00].13] on the 200k, we built goodwill, and when we came back in, we actually got the same purchase price that we had… But here’s the trick, Joe – this was the purchase price from 2004.
Joe Fairless: Oh, okay.
Scott Choppin: It was still a very good value, and it was still unentitled at that point… Or at least unentitled in the sense of what the new market was in 2012, which is all apartments… And they didn’t really politically wanna do all apartments. Westminster is one of those cities, as many are, that “Hey, we would rather have for-sale homeowners.” The political weighting is always gonna lead towards homeownership. But they were very intelligent people, and we walked them through the story of why apartments versus condo in particular doesn’t work, and the site was never gonna be single-family; it was too low-density.
So we basically went back in at the original purchase price, which even given the units – I think we ended up with 453 units entitled on the second go-around – was still good value.
Joe Fairless: And were they affordable housing?
Scott Choppin: They were not. That was actually entirely a market rate project. So there was no inclusionary requirements, no affordable housing. The city just politically wasn’t oriented that way. Now, if we talked to them today – new Council, new staff – I think they would be oriented around wanting some affordable housing… But at the time that we negotiated the deal, that was not a requirement.
Joe Fairless: Okay, I’m on Google Maps, I’m at Westminster, Colorado, Dave & Busters… What do I search on Google to find this place?
Scott Choppin: If you just go straight North from Dave & Busters, you’ll see a parking lot, and then you’ll see a brand new apartment project; you’ll see the freeway on your left, to the West…
Joe Fairless: Yup, yup.
Scott Choppin: …and that was one of the reasons it made it an irreplaceable location – the market window of that 36 Turnpike of people commuting back and forth from Denver to Boulder, or the interlocking corridor, which is a little North of our site, was just perfect, from an apartment ownership standpoint. [unintelligible [00:16:55].08] sign “If you lived here, you’d be home.” I say that jokingly, but that’s exactly why you have that market window, is people can see it… And it was, interestingly enough, far enough away that as you go North, you see the freeway diverges from the edge of the project, so that started to sort of set back — because noise is an issue when you’re right next to the highway.
Joe Fairless: And you mentioned that other developers didn’t have the same vision… So why wouldn’t a developer who wanted some business just go in, talk to city officials and say “Oh, you want this? Okay, I can roll with that…”?
Scott Choppin: It’s a great question… A couple of different answers. One is the companies that were approaching in this interim period would be very large apartment development companies, so not exactly — people like Trammell Crow, Holland Partners, Wolff companies would be an example… And they just had their model. They just said “Look, we build this type of apartment, and maybe we lay it out differently, and these buildings go East, and those buildings go North, and the pools in the middle…”
Westminster and the staff at the time, particularly the Planning Department, was very, very particular about how they wanted the project to be. And in fact, when we went back the second time, they were still insistent that we have a parking structure underneath the buildings, like a (what I call) podium below-grade parking, or at least en-grade with the units stacked on top, like a concrete parking structure… And we had to really fight quite hard to eliminate that, because what that does is it drives the cost structures up of the build. You’re getting more units, but you’re paying a lot more to build the building. So as a developer, it’s always a trade-off between how much density can you get, versus how much it costs to build that density and the rents that are produced from it.
In fact, our new UTH Workforce Housing offer and our math is a good equilibrium point between max density that’s the simplest to build, yet produces the best rental income. So we wanna look for those equilibrium points where you can build a certain product that’s in demand, preferrably into under-supplied markets and under-supplied market segments, and then build it efficiently. That equilibrium is a measure of efficiency of max rent, at lowest cost.
Joe Fairless: In the news, when we read about a new development, the reporter usually says “This is an 85-million-dollar project, or a 100-million-dollar project.” As someone who is not in development, how can we estimate approximately how much the developer is making on a project based on the dollar amounts that is reported for the total project?
Scott Choppin: That’s a great question, Joe, and I’ve never had anybody ask me it that way, but I appreciate it. There’s no standard answer to the question, and that’s why it’s not commonly asked…
Joe Fairless: [laughs]
Scott Choppin: Because it would be the same as when you buy a value-add deal, and whether you’re in Nashville or Columbus or Houston – each are gonna have different cost structures to buy the units, the rents are different, operating expense, NOIs all different. And then you get into this sort of magical zone of how your book says “Hey, buy for cashflow, not appreciation.” Developers have the same sort of thought process, although there’s additional or different metrics that we have to deal with. We still underwrite rents and operating expenses, NOI – that’s sort of category one. Category two is what is the zoning, entitlements, build costs, new construction, rent up process. And then third, which we all in this business aspire to do well, is how do we exit, and when do we exit.
So the difference between value-add and new construction is that second component – the build cost. And that’s really where what I mentioned earlier about that build efficiency is. I’ll give you different examples. If you built a single-family home, you rented it, that’s the lowest cost to build, but lowest rental, maybe on a whole-dollar base as the way to think of it, depending on the square footage. On the opposite end of the spectrum you’ve got a high-rise in San Francisco; it’s getting very high rent, but it’s got exceptionally high development impact fees, and build cost and land are incredibly high.
So the answer of the profitability of it is always inside the deal, and when you put all the variables together, you see that it works or not. That’s why in the development domain running proformas is the early measure of a deal’s potential for success, versus not. And there’s a fair amount of judgments – each variable of rent, and build cost, and land cost are all put into that proforma… But that’s what we have to do and make our decisions based on.
Now, you guys do the same thing in the value-add space, but ours is trickier, because the cost to build from market to market is so different, whereas assessing rents and assessing operating expenses I think is more straightforward, because there’s more historical data; there certainly should be lots of good comps in a major urban metro area.
So the answer to your question is in the development space we really wanna be in the low twenties IRR or above. That’s really the metric that we use. So our job as a developer working with investors is we have to make an offer to investors to invest in our new construction projects that is market superior to whatever other choices they have, as all investors have choices. So we have to recognize that we’re a different offer than a value-add.
I have this conversation all the time. People are like “Hey, I’m looking at five value-add deals and I’m looking at your development deal, and how do they compare.” So a big part of my speaking to different investors, to people like yourself is to sort of highlight the differences between a value-add and a new construction… Because I think new construction is a viable place to invest capital now. It’s not gonna be everywhere, with everyone… Where I think commonly value-add deals – you could probably assess on a market-by-market, compare nationally, demand characteristics, rents, what are the population growth characteristics. For us, we’re always gonna be in Southern California, where the demand is very high, and we’re under-supplied. Politically, getting new projects approved in California and actually building them cost-effectively enough to produce a yield is a pretty high challenge…
Joe Fairless: I bet.
Scott Choppin: …but our offer of UTH is exactly that, to say “Hey look, we’re a unique, uncommon offer. We’re in a niche, contrarian space, being in workforce housing”, and we’ve come up with this three-story townhome model that is different than all your other choices in the new development space… And because of all these variables that come together, we’re regularly producing mid-twenties IRR and above, sometimes as high as 30% or 40%, depending on the timing; of course, IRR is time-sensitive.
So speaking as to address the differential between what investors have as a choice in the marketplace… And we have to do that to be relevant and competitive in that space.
Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?
Scott Choppin: In my space as a developer, we’ve always focused on looking for niches and contrarian spaces. I’ll give you an example… In 2016 we sold off our last set of development deals that were in that high-density, mid-density podium space, and we started to look around… So what we identified was that everybody was building to the millennial and Gen Z marketplace. That cohort is the largest in the history of the United States. It’s the right place to be demographically, if you’re building apartments; lifecycle, big demographic cohort.
We looked at that space and we had just finished a slate of projects that mapped that, but we were early. We started in 2012, and pretty much had sold everything off by 2015-2016. We looked at that and said “That’s a great space to be, but it’s also highly competitive. So the answer I’m giving you is always compete in spaces that are not competitive, and that would be you’re in a new, innovative area, you’re in a new (maybe) micro-trend that even leads the other major trends. We’ve always worked to exploit those niches.
We were urban infill, Joe, before urban infill was even anything anybody talked about. 2000-2001, urban infill – people thought we were a little crazy… So innovating and being ahead of the marketplace is not for everybody, the development marketplace… And I think real estate generally is one of trends, and people following trends. We’ve always looked to exploit new niches and new areas of market drift where everybody else isn’t… So maybe it’s the Warren Buffett methodology or real estate development… And I think people listening to me go “Of course. Why wouldn’t you do that?” The trick is how do you identify those?
Joe Fairless: Right.
Scott Choppin: What practices are you in of economic research and market research, and then just sheer creativity of innovating something new? That’s the space that we’re in. So the bottom line answer is always try to compete where others are not, where there’s strong demand, or under-supply, or a new market trend. For us, that’s multi-generational apartment homes that are built to house families, that are multi-generational. That’s our niche right now.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Scott Choppin: Yeah, let’s do it.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Alright, you mentioned big contrarian investing, and seeing investing where there’s opportunity but others might not see it; what’s a research resource or two that you like to reference?
Scott Choppin: Two quick ones… One is a blog called Calculated Risk. That’s written by a guy named Bill McBride. He is not an economist in the classic way. He’s very housing-centric and has sort of a good, pragmatic, corporate-level executive view of the housing industry. Great resource for seeing the trends.
Then there’s another economic research tool that’s published by a website called EconPi, and they have this bar graph analysis that’s a great economic cycle tracker, and I would recommend anybody go there and look at that.
Joe Fairless: Best ever way you like to give back to the community?
Scott Choppin: Good question. I’m always trying to stay where I have the best skillset, knowledge, and that’s real estate development. So we regularly pro bono advise nonprofits that are looking to develop real estate. That would be in the affordable housing space. We advised a local nonprofit that was trying to build their headquarters, so we went in there and advised them pro bono in the real estate development space, where we could [unintelligible [00:28:36].22] some benefit for them.
Joe Fairless: Best ever deal you’ve done?
Scott Choppin: Best ever was the Westminster deal, the one we talked about before. That was one of the biggest we ever did. The market timing was perfect, Lennar was a great partner, great location… Once-in-a-lifetime deal.
Joe Fairless: And how can the best ever listeners learn more about you and what you and your company is doing?
Scott Choppin: Go to our website, that’s www.urbanpacific.com. Take a look at the resources we have there; investor education. We have a great blog… Sign up for our weekly newsletter, which we are always trying to publish articles that track market trends in the economy related to real estate, advice and insights on the economic cycle etc.
Joe Fairless: Scott, thanks for being on the show, talking about the Westminster deal, the peaks and valleys of that, and getting into the specifics of it. I love that, and I’m sure a lot of Best Ever listeners did as well… Just getting into the details, as well as the emotional (perhaps) rollercoaster; maybe not as much, but still, 200k is 200k, that you had hard… And the recession hits, and it’s like “Ugh… Okay, how do we make this happen?”
So I really appreciate you sharing that, and thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.
Scott Choppin: Yeah, thanks, Joe. I appreciate you as well.Follow Me: