The contrarian developer.

Eve Picker: Hey, everyone, this is Eve Picker, and if you listen to this podcast series, you’re going to learn how to make some change.

Eve Picker: Hi there. Thanks so much for joining me today for the latest episode of Impact Real Estate Investing. My guest today is Scott Choppin. Scott is the founder of the Urban Pacific family of companies, and he likes to describe himself as a contrarian developer. What’s that, you ask? Urban Pacific’s workforce housing projects use private equity, while serving middle-income stable multigenerational families. Their townhouses are generally five bedroom, an anathema in this millennial studio apartment era. That’s why they are contrarian.

Eve Picker: Still, Scott’s projects have historically generated 25-percent-plus investor internal rate of return. Scott points out that multigenerational living is growing in the US. A report from the Pew Research Center shows that 20 percent of adults, or 64 million people, are living with two or more adult generations in a single household.

Eve Picker: Be sure to go to EvePicker.com to find out more about Scott on the show notes page for this episode and be sure to sign up for my newsletter, so you can access information about impact real estate investing and get the latest news about the exciting projects on my crowdfunding platform, Small Change.

Eve Picker: Scott, thanks so much for joining me on this podcast. I’ve been really fascinated to see your e-newsletters arrive in my inbox talking about contrarian development and other things like that. I was hoping you could just tell us a little bit about what you do and what you’re working on today?

Scott Choppin: Sure, sure, absolutely. Thank you, Eve. Happy to be with you here. Let me do this – let me just give the briefest of backgrounds, and this will build background for yourself and your audience about why we are then doing what we’re doing in our development operations today.

Scott Choppin: Scott Choppin, founder, and CEO of the Urban Pacific Group of Companies. Basically, background, probably 30-plus years in various forms of the real estate development business, away from working in the field as a construction worker, all the way up through today, running a development company as the CEO.

Scott Choppin: Two key points in my career really guide what we do today. My first job out of college, I worked for a guy named Mike Costa at a division of company that was called, at the time, Kaufman & Broad; now known as KB Home. Our division that Mike ran and where I worked was called Kaufman & Broad Multi-Housing Group. That was a developer and syndicator of affordable housing communities really throughout the nation.

Scott Choppin: It was a corporate in-house offer, meaning it was KB investing in affordable housing projects, and then it grew into a full syndication shop. My role there was as a project manager on the development side. So, I joined Mike’s team as the really super-green assistant project manager and left there as their most seasoned senior project manager with full P&L responsibility for multiple projects at any given time – all development, all new construction, and all affordable housing.

Scott Choppin: I left there, and I went to work for a couple of different companies, but the most noteworthy one is a group called Sares-Regis Group in Orange County, here in Southern California where we live. I worked there for a period of time, and that gave me exposure on the market rate side. KB was affordable; purely new construction. Sares-Regis was new construction, but market rate.

Scott Choppin: Then I left Sares-Regis Group to found what is now the Urban Pacific Group of Companies. We’re on our 19th year of operations now, and we have always focused on infill development. That’s our specialty. That’s something that we are passionate about. We have done various product types, as you would imagine. We’ve done affordable housing. We’ve done market rate. We’ve done both for sale and rental projects. Over the last few years, let’s say since about 2012, we’ve been entirely focused on rental housing only, and that’s both market rate and affordable, as I said before.

Scott Choppin: Then, in 2016, we started to note that in particular marketplaces where we’re in action on projects, particularly Southern California, it appeared that there was starting to be a pretty big wave of a certain type of project. That was what we describe internally as a podium project, but specifically built and designed to serve the millennial market, meaning a lot of studio, and one-bedroom units.

Scott Choppin: In 2016, we made the conscious decision to exit all the projects that we had that were that type of project. Of course, they were they were the right projects at that time, meaning demographically, the millennial generation is the largest single cohort, demographically, that we’ve ever had in the United States.

Eve Picker: Just to explain to our listeners who may not be real estate developers, a podium project is one that has a first floor that’s retail, or other uses like that, acting as a podium for upper-floor residential, right?

Scott Choppin: Correct. I would only add to that description that it’s … The way I describe it, Eve, is that it’s parking underneath in a concrete parking structure, many times faced with retail on the street, as you describe – mixed use. Then, three, four, five or more stories of stick-built wood-framed apartment or condo construction sitting on top of the parking deck. In other words, you’ve got the podium is the parking garage, and then the units above that, so-

Eve Picker: I think for those of us in the industry, we know what it looks like, but I think for people who are not, they’re going to start realizing how many of those projects [cross talk].

Scott Choppin: Yeah, they’ll start to show up for them … Thank you for asking. I use it commonly, but in the industry it’s- even sometimes, I get people who are investors that may not use that terminology, so thank you for that.

Eve Picker: Oh, that’s okay.

Scott Choppin: Just to completed … Back to the second question, which is what are we doing now, I think relevant to what your podcast subject is – focus on impact investing – in 2016, we were very aware of how much new product was coming into the marketplace in this specific demographic. In other words, a lot of studio and one-bedroom units in these downtown infill locations. Again, a great business plan, but we have always been a company that looked for specialized niche products, or contrarian investment and development type of opportunities.

Scott Choppin: In 2016, we basically sold everything off that was a podium, or studio, and one-bedroom type designs, and we started to look for, very consciously, a new type of product that we could develop that would be different; that would be something that wasn’t mainstream in the marketplace. What we basically settled on, or not even settled on; what started to appear for us was a middle market workforce housing product.

Scott Choppin: As I spoke before, I was in affordable housing, and then I went into market rate housing. You can think of those as two ends of a spectrum. You’ve got true affordable housing on one side – 60 percent and below on median incomes, government-subsidized, using tax credit financing. On the other side of the spectrum is pure market rate – your standard LP market rate equity; pretty mainstream debt products on construction, on-prem loans.

Scott Choppin: We saw a gap in the middle. We can talk more about the middle, but the middle, for us, is really from an income and rental standpoint. We want to serve middle-income families with a rental product that’s purposely designed and built to serve them as a family, and obviously relative to the markets that we’re in, particularly Southern California. We created a new product we call UTH, which stands for urban town house. We’re exclusively focused on that particular product, which is a middle-income, privately financed workforce housing product type, or rental housing offer. Let me stop there, and then see what questions that generates.

Eve Picker: Be sure to go to EvePicker.com and sign up for my free educational newsletter about impact real estate investing. You’ll be among the first to hear about new projects you can invest in. That’s EvePicker.com. Thanks so much.

Eve Picker: The big question is how does that serve the middle market, that particular housing type?

Scott Choppin: The middle market, really, I think of in three ways. The first way is really the most important, which is that this is a middle-income offer. You call it moderate-income housing; call it middle-income housing; call it workforce housing. There’s different definitions of it, and it all depends on the person who’s listening, the definition.

Scott Choppin: From our standpoint, the most important thing that we focus on is being in between those two spectrums that we talked about – true affordable housing, and market rate – right? If you look at, statistically, in the US rental housing markets, what you’re starting to see is a movement of the middle class, or moderate-income families, into a higher level of their incomes going towards rental housing-

Eve Picker: Traditionally, the rule’s been never spend more than a third of your income on your housing needs, right?

Scott Choppin: Exactly [cross talk]

Eve Picker: -seen statistics lately, which are closer to 50 percent.

Scott Choppin: Correct. In fact, I was reading an article today that … I think these are for true lower-income families and individuals. Some people are paying up to 90 percent [cross talk]

Eve Picker: Oh, that’s shocking.

Scott Choppin: -that’s an extreme, and we know that exists, because that’s what the true affordable-housing market serves. I have a graph, which I can share with you as needed, but basically the graph tracks average incomes across the US, and average rents across the US, and graphs those two, relative to each other.

Scott Choppin: What you see, what’s really apparent when you look at it visually, and we know this – incomes are stagnant, or flat, and rents are generally trending up at a good clip. What we’re dealing with, and what we are seeing, and why we created this product type is an ever-widening divergence between the rental rates and median incomes, or average incomes, however you want to describe it.

Scott Choppin: What’s happening, what that does is that moves that middle-income family, or that moderate-income family into a housing distress mode, where traditionally, if you went back 10 years, 20 years, 30, and longer in the history, a average working-class blue-collar moderate-income family could afford to rent. In fact, in many cases, they could afford to buy houses. That’s starting to lessen at a fairly dramatic pace, and our UTH product is there to address that. I’ll stop there … There’s a couple other ways that we talk about it, why it’s middle. I’ll let you guide me as to how we continue on that.

Eve Picker: I know that you’re focused on multigenerational, which is pretty unusual, too. You’ve mentioned before that many of these podium projects were focused on millennials. I’m in Pittsburgh, which sees these trends a little later than on the West Coast, certainly, but I’ve noticed here the abundance of that type of housing-

Scott Choppin: That abundance of the studio, and one-bedroom housing, you mean?

Eve Picker: Yeah.

Scott Choppin: Exactly right. UTH is unique for what we described previously on serving a moderate-income family, and we can talk in more detail later about how the rents work, and what makes them a naturally occurring moderate-income housing offer. The main mechanism of how we produce that benefit to the families … In other words, what is the mechanism, financially, that has a non-covenanted- I mean, no true government rent restriction model- allow it to naturally serve moderate-income families …

Scott Choppin: The way we do this, Eve, is UTH is unique in that all of our units are designed and built to be five-bedroom townhouse units. All the units have five bedrooms, four baths. They’re in a three-story town home model – garage on the ground floor, and a bedroom/bathroom on the ground floor. In fact, that ground-floor bedroom/bathroom is what provides the multigenerational component. Then, we have kitchen, dining, living, and the rest of the bedrooms throughout the two upper floors.

Scott Choppin: Where the multigenerational design component … We didn’t start with that. We actually started, originally, with a four-bedroom product type. As we were developing the business plan of UTH and coming up with a strategy of how this would work, in totality, it sort of showed up for us that we’re serving middle-income families, blue-collar working families in Southern California, because that’s where we’re predominately developing the UTH model. From a demographic standpoint, our main renter profile are Hispanic families in low, and lower-middle-income neighborhoods throughout, let’s say, Southern L.A., and northern Orange County, around where we’re based.

Scott Choppin: What that provided for us with some guidance. We said if we’re going to serve these families- we already knew we were going to do five bedrooms. We know we are renting purposely to larger families. What is the makeup of that family? Typically, you have two to four wage-earners; that might be mom and dad, aunt, or uncle, and then, maybe an adult child or two that are still living with their family. Then you have some number of small kids that are either kids of the parents, or possibly kids of the adult kids. Always, we were seeing grandma, or grandma and grandpa being part of that family group. When we would talk to them when we were renting units, we would see this.

Scott Choppin: Combining with other signals that we were seeing in the marketplace, we said we’ve got to do this ground-floor bedroom/bathroom. That would serve the older generations of that family, where they don’t have to necessarily walk up and down the stairs. We don’t have elevators in these units, in part, to keep them cost-effective, but this is a way that a person can live with their family; even be separated a little bit. For their own privacy, they’re downstairs. This has turned out to be, really, a very primary part of our offer. We now only do five-bedroom town house units with that ground-floor bedroom/bathroom. We’re not doing any units that don’t have that.

Eve Picker: It’s really interesting, because that’s quite contrary to US culture to have many generations living together. Although, I think that’s being forced upon us now with the boomerang kids, right?

Scott Choppin: Yeah. The way we look at it is this, and you make an excellent point … If you look at traditional American ’50s-era nuclear family – mom, and dad, and 2.3 kids; a garage, and two cars in the garage, that kind of thing …. If you look even further back in history, in both American culture, but let’s just say European culture; really, anywhere around the world, the lifestyle of the ’50s-era nuclear family in America was an anomaly.

Scott Choppin: It was an anomaly because, if you look back historically … I did research, and we looked up what was the makeup of the household in the Medieval era in England, as an example. It was interesting because the way they described it is they said the household in that era was multigenerational, already. That existed just inherently, and that was a function of multiple reasons. The two primary reasons and really the main reason was economics. The idea of maybe one, or two wage earners affording a house by themselves was really- it didn’t exist. What that caused people to do is they would have other parts of their family who were also bringing income to the family group to afford this house, or even that described, in older eras, taking on boarders; almost complete strangers.

Scott Choppin: The idea of this nuclear family house is really … If you look at it historically, it’s a blip on the timeline. If you go forward, now – I have a graph which I’m happy to share with you – we’re now in a multigenerational growth cycle in the American housing markets, where one example is the boomerang kids. I think that, for economic reasons, people are starting to live multigenerationally, and we’re at the highest point of that amount of families that are living multigenerationally. At least the stat that I have shows that 64 percent of households in the United States live multigenerationally, and it’s an upward trend on the graph. It’s at its highest point. I think that, again, is an economic function.

Eve Picker: Yeah, I grew up in a multigenerational family, and I think it was way more than economics. There was always an adult around for kids, and it just made life so much easier [cross talk]

Scott Choppin: Great. So, let me add something. The way we think of these tenants, the family profiles, we really think of them in three ways. You’ve triggered me to think about this. The first way that these families live is that they basically share incomes, and they share costs among the larger family group. That’s the economic part of it that I described.

Scott Choppin: Two is that, because of the incomes that they’re at – either low, very low, or moderate incomes – they tend to have a limited number of cars. Cars are a thing in California and designing buildings to house cars – it’s a pretty sensitive subject in some parts of people who are in the business. The reality is, functionally, this is what’s needed, but we don’t see a high car ownership. Your classic suburban house would have a family of four or five, and they’d have like 10 cars. I’m being [cross talk] right? We get this come up as we present this model to cities. The reaction is, “Oh, my gosh, we’re gonna have so many cars.” Functionally, again economics, they don’t own so many cars.

Scott Choppin: The third component- sorry-

Eve Picker: Well, it’s better for the environment, and better for cities, and better on so many levels, right?

Scott Choppin: Absolutely. Agreed. Then, the third component is, just to wrap up, and this is what you alluded to, is because we’re multigenerational, and because we are multi-wage earners, the way we look at it, and the way we’ve seen it actually work is that generally an adult will be at home at all times during the day. That means when kids get home from school, somebody will be there for them. There’s no economics around that.

Scott Choppin: You could maybe say it’s a cultural thing, but, to me, this is when we think about social ethics, and social impact … How do we, as a developer, and how do I, as the CEO, want to present our model to the marketplace? Although investors go, “Maybe that’s important, maybe that’s not.” For me, I go, this is a really important thing that avoids latchkey-kid syndrome. It keeps the family tighter. This is, Eve, in your experience living multigenerationally, is that you’re going to always have an adult; it might be grandma, it might be Uncle Joe, who works the night shift, but it’s a real key component of this model that we very much are encouraged by and even want to do more of.

Eve Picker: I really like it. In a way, it reminds me of the trendier version of this, which we call co-housing, right?

Scott Choppin: Mm-hmm. Co-living, right. Agreed, yeah.

Eve Picker: Co-living, co-housing, which is popping up to serve, I think, probably more millennials, who want to share costs and amenities, so, for a different reason. It’s all kind of this sharing economy, isn’t it?

Scott Choppin: It is, it is. In fact, we think of this in really three ways. In fact, we have a relationship with the folks at Common, which is one of the primary sort of co-living offers that we’ve seen in the marketplace. I actually sat on a panel at a conference with Shana Lee, who was one of their acquisitions folks in California at the time. It was interesting, I hadn’t seen her presentation in full until I sat on the stage with her. It was amazing to me, because as she started to describe their product, she goes, “We build five-bedroom units, or six-bedroom units.” She and I connected after the panel, and we said we should really meet, because clearly what we’re doing and what you guys are doing has a lot of alignment, but for different marketplaces, right?

Eve Picker: Different market, yeah.

Scott Choppin: As you described, this is millennial. This is sharing economy. Very high-end finishes. They want to locate in trendier neighborhoods. Our model, you [cross talk].

Eve Picker: They want yoga.

Scott Choppin: Yeah. Well, they want yoga, and they want rooftop decks, and really high-end kitchen finishes. I mean, the product is beautiful, no doubt. What this did, in this conversation, Eve, is it really opened my eyes that basically our model, UTH, is a co-living model.

Eve Picker: Yes.

Scott Choppin: We just happen to be oriented around single-family groups, or family groups, generally. The economics benefit of the sharing are the same. In other words, if you say I’ve got … Maybe in a co-living for millennials, everybody’s an income generator for each bedroom, so a five-bedroom unit would have five income-earners. Our model is the same, except maybe we have two to four wage-earners. Again, it’s sharing costs and sharing … Well, not really income on the co-living millennial side, but certainly, these families are [cross talk]

Eve Picker: -sharing responsibilities and sharing products. I mean they may not be sharing- there’s cost-sharing, as well.

Scott Choppin: Yeah, true.

Eve Picker: The fact that we were building for 10 vehicles in the suburbs was kind of crazy. How much could you possibly drive one vehicle?

Scott Choppin: Right. Agreed. In fact, just an interesting note, as I was having a conversation with one of our project managers – he’s managing one of our projects in Montebello, up in San Gabriel Valley – he and I were having this conversation about families, who would come to look at the units, would start to have a conversation as he was talking with them, and touring them. They really broke it down into what is the cost per bedroom. They were, of course, looking at the whole-dollar rent, and for our five-bedroom units, were averaging between $,3000 and $3,500 … The families were going, “How much per bedroom? Is it $500, $600, $700 per bedroom?”

Scott Choppin: For them, they were like, “That’s actually affordable.” Now, we know that in the marketplace, on a whole-dollar rent basis, $3,500 a month is not affordable in that context of how people think of it generically, but when you overlay that rent amount, given the total income that’s produced in a family group with four wage-earners, then it actually does drop truly into the 80 to 120 percent of median area income, so our product is a naturally occurring moderate-income housing offer, truly.

Scott Choppin: Now, we don’t put a covenant on it. People, when they look at it, like when I have conversations with affordable housing- pure affordable housing people, they go, “Oh, that’s not really that, because that’s … It’s not restricted, and it doesn’t have a 55-five year covenant.” I go, “True,” and we do have projects that have a certain number of units restricted in them.

But, what I go is, “If you put a covenant on it, then it will change the dynamic of the investment model for raising capital,” and then we go back to, now, this true affordable housing model where I always say that total subsidy to develop a true affordable housing is always going to be finite. There will never be enough subsidy to subsidize enough projects to serve all that very low, and low-income families across the US. There’s not enough capital in the marketplace to do that. There never will be, so I say it’s finite.

Scott Choppin: Our model, then, yes, we don’t have a covenant; yes, there is some potential for rents to rise, but we are serving a family group, at least in the early stages of it, that didn’t have that offer. They couldn’t go rent a five-bedroom unit for $3,500. Their next choice was to rent a five-bedroom house for $4,000, $5,000, depending on the market.

Eve Picker: Yeah. No, no, it’s great. How many of these units have you built?

Scott Choppin: The early stages of the cycle in, let’s say, 2017-2018, we were very careful to keep the project sizes low and the number of projects low in what we call our demonstration phase. We were literally doing three-, four-, five-, seven-unit projects. We did that purposely, because I had three things that I wanted to prove in the demonstration phase.

Scott Choppin: One is that we could rent the units for what we projected; that we truly were going to deliver the rents at the amounts that we thought we should get. Two is that we could build them at the cost that we projected … Rising construction costs, everybody’s dealing with that, and it’s particularly distinct in California. Third and most importantly for us, as a non-affordable housing, or at least development projects that don’t have subsidy and covenants, we have to have a certain value when we get to the end of the project; that it delivers the value or valuation that we intend. We’ve actually closed and completed the demonstration phase. We’ve been able to deliver, on average, about 26 percent internal rate of return to our equity investors [cross talk]

Eve Picker: That’s pretty fabulous.

Scott Choppin: We’ve sold those projects, and now we’re moving into a new phase which I’m calling our production phase, and we’re probably about a year into that. What that has us do is go up in volume, but particularly go up in project size. As an example, we recently won an RFP in a city called El Monte, in Southern California. That’s a little over a five-acre site, and we’ll end up doing somewhere around 53 of these UTH units in a single project. The total unit count is probably no more than about 70 units right now, all told, between what’s in the pipeline and what we’ve built and sold, but I consciously wanted to go in a very disciplined [cross talk]

Eve Picker: You should not apologize for innovating something brand new. 70 units is pretty, pretty fabulous, considering-

Scott Choppin: Well, I appreciate that. I think that one of the reasons why I was attracted to being … I mean, you and I know each other, and we’ve had many conversations, but part of my obligation is I need to get the news about this innovation out into the marketplace, one, to raise more capital, but also, I think this is a solution amongst many that are needed in this new environment of just highly constrained development pipelines and low production of housing. We’re going to need many answers, and this is one of them.

Eve Picker: This is just one of them, yeah. Tell me, how did banks receive this, when you went to finance the earliest project?

Scott Choppin: Sure. We actually used-

Eve Picker: You know that’s a loaded question, right?

Scott Choppin: Yeah, of course, and it’s a valid question. It’s one we considered. We went out and talked to about 10 different banks, and we got a variety of answers, as you would well imagine, right? Everybody looked at it differently. It sort of fell into two categories of reactions. One, to be honest with you, on the commercial banking side, without having a demonstrated pipeline of successful projects and the product being so innovative, and different, and uncommon, we just- we got a lot of … They were nice, but they were like, “Yeah, we don’t think this is for us. This is so unusual. We don’t know the valuation model. We don’t know who buys this.” We were prepared for that. I went into those meetings knowing that that was probably what we were going to hear.

Scott Choppin: The other group of lenders that we talked to were a variety of … We have some private lenders that we have longstanding relationships with, and then we have a small group of, I’ll call, community lending groups [cross talk]

Eve Picker: Institutions, yeah.

Scott Choppin: -or institutions. One of the one of the folks that we’ve had conversations with is Century Housing, which is a local nonprofit in Southern California. They have something called the Century Community Lending Fund, and that’s run by a woman named Tracey Burns, who’s a longtime colleague of mine from the Kaufman & Broad days. We haven’t done a project with them yet, but it very much fits inside what they are after. Their fund is a conglomeration of monies from B of A, Wells, and US Bank. Their business plan, their mandate, is to lend to projects that have unusual characteristics. Maybe they’re true affordable, but maybe they’re just infill in communities that need it, and certainly UTH fits in that well-

Eve Picker: But this is my beef … You’re innovating, and you’re doing it very carefully, and you’re showing that it’s successful. It’s very difficult to find funding for that [cross talk] traditional financing for that innovation. Yet, we all know how much this sort of housing, or any sort of affordable housing is needed. Why on earth should it be so difficult? It’s easy for the podium projects to get financing.

Scott Choppin: Amazingly so, right.

Eve Picker: Yet, we don’t really need them anymore. In fact, quite the reverse; we need them to stop, because they’ve flooded the market.

Scott Choppin: Agreed, yeah.

Eve Picker: I don’t get it [cross talk] change this … Can we really wait five to 10 years, while a bank, or banks, or traditional financial institutions become comfortable enough with a new model?

Scott Choppin: The joke that I would say to the commercial banking guys, and folks that we knew, and these were usually people I already knew and had relationships with … I said, “Hey, look, by the time the model proves itself the way you guys want, this cycle will be over [cross talk] saturated …” That’s maybe why the podium projects are the way you describe. It’s lemmings into the sea. Everybody is going to follow what everybody else is doing.

Scott Choppin: For me, Eve, I’m sort of … I’ve made peace with that process of frustrating bankers, or having them frustrate me, or the projects, because this project and product type is so different that, almost at every turn, city- conversations with council members and planning staff, I know I’m either going to get, “Wow, this is great! I love this,” or, “Wow, holy cow. I don’t even know how to deal with this. In fact, I’m sort of freaked out by the number of bedrooms,” imagining the worst case scenarios.

Scott Choppin: Equity investors have been very polarized. They either get it, and they’re like, “Wow, this is …” but people who know, like particularly what I find is people that are from already existing housing-constrained marketplaces … Let’s say an investor’s from New York, or Southern California, from the Bay Area. They already know this housing constraint story. When this shows up, they go, “Oh, I get it.” Not even a thought about it. I don’t even have to really describe it to them much more.

Scott Choppin: People who are from maybe more non-constrained markets, let’s say somebody’s from Texas, and I don’t have any specific example of anybody who’s done this, but when you can build housing really unfettered from a zoning, or capital-constraint standpoint, well, then you don’t have that issue of  constrained housing and rising costs. I can say any coastal urban market pretty much has this issue, and so, in fact, the larger-

Eve Picker: We have this issue in the Rust Belt cities for different reasons, but I am extremely frustrated by it. You know that’s why I built Small Change. It was really because I had this feeling that innovative projects were really being squashed by our financial institutions-

Scott Choppin: I agree, yeah.

Eve Picker: -yet innovation is the only way we’re going to solve these problems, build better cities, house everyone, and all of the other things we need to do. It’s [cross talk]

Scott Choppin: Agreed. Eve, this is what I love about … Although I’m looking for the right deal to do with you guys, I will tell you, as we have conversations with other groups that are in the same space that you are, everybody is so focused on just whatever is the path of least resistance. Many groups that I’m talking to now are all about value-add apartment acquisition. Even just the development model is anathema to them. Again, I understand that, but they’re so not creative.

Scott Choppin: I think part of what happens, particularly in the crowdfunding space, is I think you get a lot of people who are tech people going into real estate. My opinion, my assessment of it, is they are scared of it. Whereas, you … In fact, I was thinking about it this morning, as I was getting ready to do this interview. You’ve developed your own projects, right, Eve?

Eve Picker: Yes.

Scott Choppin: You’ve gone through the process of doing that. I would say 99 out of 100 people that I talk to in the crowdfunding space, usually they’re very early in their careers, so they haven’t gone through any seasoning, and real estate’s just a product that happens to be combined with tech, in this standpoint. They’re not seasoned in the way that folks like you and I are. I mean that in the best way. It’s just real estate development is a very, very tricky business, and it takes a lot of strategic knowledge to be able to do it competently. That doesn’t happen when you’re in early phases of your career.

Eve Picker: It takes a long time to see the results, too, of your hypothesis, right?

Scott Choppin: Agreed.

Eve Picker: Whatever you take on, it takes a while before you can actually see the results-

Scott Choppin: Correct, and that’s, in fact, why we did the demonstration phase, because I’ve certainly been guilty, as any other developer, of finding what I thought was a great idea and just launching as big as you could. I’ve had some successes in that manner, or methodology, and I’ve had some failures. From that, I just said, “Hey, look, let’s do this very rigorous and disciplined; let’s prove the model …” because we could’ve done the early projects, Eve, and they would’ve failed, or at least- not failed, because any housing you build new in California is pretty much going to have  good value, but does it …

Scott Choppin: My criteria was does it serve the families that we intended in the way we intended, in the way they need, and does it produce sufficient yield to investors for me to compete in the capital-raising process? Those were the two criteria. If either one of those failed, then we were done and go on to do something else.

Eve Picker: I think you described why we called ourselves Small Change. Small change leads to big change, right? [cross talk]

Scott Choppin: Right, right, and I am very encouraged. If anything in new trends – not that crowdfunding is a trend – but we haven’t seen the broad base of different types of offers and different ways of looking at it. I mean, your combination of social impact and crowdfunding is, to me, just amazing. I’m rooting for you guys to grow, to be bigger than-.

Eve Picker: Well, we’re going to talk about that, because you might help us.

Scott Choppin: Okay, great. Looking forward to it.

Eve Picker: Yeah, so I think this is really interesting stuff. You have some investors who took the plunge with you.

Scott Choppin: Right.

Eve Picker: They’re interested in impact, really. I’m wondering what you think the future of real estate impact investing looks like?

Scott Choppin: That’s an excellent question, and I might just answer it in a different way than you had conveyed the question. Our early investors, they recognized the social impact, but I don’t think they were driven by it primarily. Of course, any investor that’s not purely social impact coming from a source of capital that doesn’t need to produce returns, they need to produce returns. They’re looking for me to do that, and that’s primary. I would say they are predominantly oriented around making a profit, and receiving yield back, and getting their money back in the first place.

Scott Choppin: I have had many conversations with … We, in the beginning of UTH, thought social-impact funds, social-impact organizations – this is just right in the right space for them, meaning UTH, naturally occurring moderate income. I personally have found it a little bit of a challenge to get on people’s radars for a couple reasons. This is no complaint; this is just me being my blunt, honest self.

Scott Choppin: One is that, rightly so, most social-impact organizations, housing is low on the priority list and I don’t … Go get it, right? If you’re oriented to making the highest impact with the dollars that you have available to do that, housing may or may not be functionally appropriate for that.

Scott Choppin: Also, what I found was that when I started to talk about moderate-income housing, we didn’t fit the model of what people were looking for in the social-impact space, relative to housing. What I mean by that is that they said, “Look, if we’re going to invest our dollars in projects, we want to invest in neighborhoods and the demographic profile, the renter profile, at 20, 30, 40, certainly below 60 percent of median income, because that’s where the need is highest. That’s where the housing constraint and strain on families is the highest. I completely acknowledge that. My background in affordable housing has me understand that intuitively.

Scott Choppin: Social-impact capital coming into that space will have an impact and, in fact, will arguably … I said earlier, subsidy is finite, right? I was meaning government subsidy, but you could argue social-impact capital appropriately invested could raise that level of finite-ness. I would also say, still, without just a natural market mechanism, I think that we’re going to always have some constraints.

Scott Choppin: Again, no complaint. Just an observation. I saw social impact, at least the groups that I talked to, said … They got it. They said, “We get this, and we see the value and the social-impact value for it, but we’re focused in this 60-percent or below space.” I had a great conversation with the person who runs The Enterprise Group in Southern California. I think it was just like she got it, but I think it was just not where their focus was. They were focused on true affordable housing. When that started to become a theme or regular reaction … I mean, we continue to track social-impact investors, and I think there will be a time when that’s appropriate, or at least somebody has the investment mandate or the criteria, where middle-income families will be part of what they need to point their dollars at.

Scott Choppin: I think there’s almost a little bit of a competitive feeling, like, “Well, if I invest dollar in your project that’s serving working families that takes a dollar away from the homeless project that I need to support.” Again, I don’t dispute the idea. To me, it was almost too … The story is a broader story of that [cross talk] housing constraint and the pressure on families across the income spectrum is happening at all levels. That then, to me, says then solutions need to be at all parts of the spectrum. We just happen to be in this particular moderate-income part of the spectrum.

Eve Picker: Well, this has really been fascinating. I have three final questions that I’d like to ask you, if that’s okay?

Scott Choppin: Sure, absolutely.

Eve Picker: What’s the key factor for you that makes a real estate project impactful?

Scott Choppin: Where I’d go to is neighborhoods and demographics relative to the locations of those neighborhoods, and I’ll tell you what I mean by that. In essence, our UTH model, really … We seek out lower, and lower middle-income neighborhoods that traditionally don’t see much development, because the economic conditions of those neighborhoods don’t suggest to the development marketplace that this is a place to build. Maybe affordable housing, but nothing other than that.

Scott Choppin: As an example, in Fullerton, we’re developing a project in West Fullerton that hasn’t seen any new housing developed in that neighborhood, let’s say in a few blocks’ radius from our site, in probably 40 or 50 years, which is amazing to me. We’re in probably the most constrained marketplace in United States, and this neighborhood is untouched, right?

Eve Picker: Right.

Scott Choppin: There’s different reasons for that – zoning, economics, and that kind of thing. I’m encouraged to be able to go into a neighborhood and say we can create this new housing opportunity for families that, by the way, already live there. The families that rent our units are already in this neighborhood, or they’re a couple neighborhoods over, but they’re already living in this neighborhood, except that they may be living in two two-bedrooms, side by side, or one part of the family lives in this unit, and the other part of family is a couple blocks over. We’re just giving them a space to come together.

Scott Choppin: The other part of it that I see as impactful is that, naturally, because of the neighborhoods that we select, and because of where the folks who rent our units already live, this naturally has them be closer to the important things in their lives. In fact, I describe this tenant profile as sticky. What I mean by that is that they have things that exist for them already, where they live, and where our new units are located that have them be very stable and families that basically stay. Social networks is that the main way to describe that. That’s churches, community, community work or involvement in the community that they have; that’s schools. Their kids go to school …

Scott Choppin: Most importantly is that these units, because of their infill locations, are generally closer to the jobs these folks work at, which, as you would imagine, are more blue collar, or service worker jobs where … None of our families who we’ve rented to or in our units now, none of them commute- do this hour or two-hour commute each way. They just don’t do it. What they do is they look for the unit that is close by to their work, and that’s … They don’t do it in a way that we think, where a millennial person might say, “Look, I really want to live close to my job, because I want to ride my bike, or I want to ride and train.”

Scott Choppin: These families make the same decisions, but for different logic. One is, “I don’t want to drive my car that much because maybe it’s not a great car. It still runs good. Gets me to work, but I can’t drive it two hours back and forth.” Plus, I think just naturally, they understand the trade-off of that. Because the way they share rents and incomes, it gives them the capacity to stay in infill locations. By sharing more costs amongst the bigger group, that allows them now to stay …

Scott Choppin: In one of our downtown Long Beach projects – we have actually two – we say that, just generally, our tenant profile is the dad is a truck driver at the Port of Los Angeles, or Port of Long Beach. That’s where his job is. He goes there. Then, our two new communities that are in downtown Long Beach are between 10 and 15 minutes away from that job on surface streets. Doesn’t get on the freeway; drives to his job. That job probably produces $50,000 or $60,000 a year; maybe less, maybe more, depending on the person. When that’s combined with the other incomes for the families, now they can afford that $3,000 or $3,500 a month rent at 30 percent of their income, because [cross talk] jointly, they’re making $100,000, $110,000, $120,000 a year.

Eve Picker: The next question I have is it that you can raise money through equity crowdfunding. Is there another reason to use it, to involve investors through crowdfunding that you can think of?

Scott Choppin: Well, there is. It’s a great question. I haven’t thought of it this way, but I think … Look, I think, as any developer, our job is to raise capital. If I look at my primary responsibility, I’d say I have to always be raising capital. I see crowdfunding in a couple different ways that way.

Scott Choppin: One, it’s a new technology, or it’s a new process of raising capital. I’m always- just naturally, how I am as a learner, and a person of business, I’m always looking for that more effective, more technologically efficient way to manage our business. I see crowdfunding as having … It gives us the capability to have a wider audience for our product offer. A project goes out, and now we can see where … I have my network of investors, and I’m always expanding that network. I am building networks of networks to produce new capital opportunities, new investors. But crowdfunding is like that, on steroids, right?

Eve Picker: Yeah.

Scott Choppin: We have technological platforms. Obviously, crowdfunding groups like yours have their own investor base, so I’m able to broaden the reach of our offer, but also, yours is a separate new network [cross talk] so that is a capability to access that.

Eve Picker: This is a big question, but if you could do one thing to improve real estate development in the US, what would that be?

Scott Choppin: Yeah, so, [cross talk] easy question. I would … There’s a lot of dialogue on the social media platforms about zoning reform. If you look at your standard American city, almost any major urban metro, in the ’50s, and ’60s, and ’70s, many cities converted what was historically neighborhoods or zoning areas that allowed apartments, or more dense housing. They down-zoned almost consistently across major urban metros in the States.

Scott Choppin: We are seeing the very cutting edge of that right now. Oregon is working on removing single-family zoning entirely. I want to say it was Minnesota, or Wisconsin, I can’t remember which, they are starting to say, “Look, we are eliminating single-family zoning.” That, as a zoning tool, or at least that type of zoning is-

Eve Picker: That’s interesting.

Scott Choppin: -very ineffective in solving housing constraint. In fact, it’s the reason for housing constraint; in my mind, the primary reason. Also, if we’re going to meet our environmental greenhouse gas emissions standards, we cannot continue to build, nor can we allow single-family neighborhoods to exist as they are, because basically, when we build dense housing, it’s proven by research, that type of lifestyle reduces vehicle trips; has people use more transportation that’s alternate to cars.

Scott Choppin: In fact, in California, there’s a new … I don’t know if it was a report, or an article that basically said California will not meet its greenhouse emissions gas levels by just having cars be better at producing less smog. Their claim – I believe it, and I think it was based on real research – said the only way we’re going to get there is that we need to reform zoning, and we need to basically build more dense.

Eve Picker: Yeah. Well, look, thank you very much. This was really fascinating. I feel like I learned a lot [cross talk] and I want to talk to you a little bit more about it off the air, but I really appreciate the time you’ve taken with me today. It was a really interesting conversation.

Scott Choppin: Thanks Eve. Appreciate the invite, and I enjoyed the conversation, as well. Thank you so much.

Eve Picker: I really enjoyed talking to Scott today, and I learned a lot. I hope you did, too. Scott reminded us all that subsidy is finite, so building market rate solutions for the housing crisis is an imperative. He noted that the ’50s-era household in the US – a suburban home with mom, dad, 2.3 kids, and five cars – was an anomaly. We need to get over it. I love that he has shown a much needed, and affordable housing model can be financed through private equity.

Eve Picker: To find out more about impact real estate investing and to get access to the show notes for today’s episode, please go to EvePicker.com, where you can also sign up for my newsletter to find out more about how to make money in real estate, while doing good for society at the same time. Thanks so much for spending your time with me today, and thank you, Scott, for sharing your thoughts. We’ll talk again soon, but for now, this is Eve Picker signing off to go make some change.