BIGGEST RISK with Scott Choppin

But if you're willing, I'd like to ask you, Scott choppin. What is the BIGGEST RISK?

 

Scott Choppin  57:16  

Yeah, no, great question. You know, like I mentioned, when we before we began the interview, like real estate development, and you could say a real estate investment really is entirely a risk mitigation, you call that minimize? So I'd say squarely in the in the middle there. Really, at the end of the day, you know, investing and development are a risk you like there require risk to be taken to produce these returns that we're describing. Right?

 

Always the trade off. And so really where I've arrived in my career, where I am now, is to be risk mitigating everywhere we can and so like, I'm not, I'll fill in the answer some more. But, you know, there's many, many places that we've mitigate risk. But here's, here's my answer. Is it really around a philosophy and a style and approach to how you mitigate risk? And I'll give you an example what I mean. And by the way, this like this risk mitigation is a fundamental tenet of our business. In fact, I would say it's probably the most important one because we have so many different exposures to risk in so many different areas, right? market demand with tenants, interest rates with like, debt, return here six with, with investors, governmental agencies who oversee us, right? talked about California, right, that's a that's an increased risk. So when I was a young project manager, I worked for my costs. And basically, part of my job, the way I work with Mike and the way he had his project management team structures, as a project manager, you basically were responsible for the full life of a project, from finding the land all the way through to completing it and handing it over to the asset management team after his lease. Right. And that was very unusual. You know, maybe call it cradle to grave, you know, beginning to end have your describe it. So what that did is that threw me as a young project manager into, like, you didn't have to find new deals if you didn't want to, but I was, like, incredibly ambitious, to, to grow my knowledge. You know, I knew I wanted to be a developer, you know, running and forming my own company, like I knew that, you know, to have the wave, you know, since I was 18. And but what I remember was looking at land, and I had good teachers. But when I would look at stuff, it was everything, I couldn't make it work. There was no project that I looked at that I couldn't figure out or thought I couldn't figure out how to problem solve, right? There's no deal. I can't figure out the hairiest deals with environmental issues, tough neighborhoods, tough cities, whatever, right? I go, Oh, I could go in there. I could figure out a way how to do it. Right. And what I figured out dawned on me years later, is that by having that approach, I took on an incredible amount of additional risks now when I worked for the company was their risk. And of course, they were smart about it and only gave me so much, you know, rope to hang myself on a deal. But when I got out on my own, you know, I continue to learn these lessons. And now it's, in fact exactly the opposite. There's almost no deal that makes it through the underwriting, right? And I'm, in fact very fast. And we can talk to our internal teams who bring us deals, people, partners, people bring the like, I'll No, no, no, no. And why that's important is because it's a philosophy, philosophical approach to mitigating risk, meaning, acknowledgement of a risk and a willingness to mitigate it. And I'm willingness to say no, if it's unmitigated, right, that's up for us, there's some risk that can't be transferred. Right, the construction risk, under a personal guarantee to a lender is not, I can't shift it to anybody else. In fact, it's funny, in the old days, we was used third party GC is right to construct our buildings. And then in 2005, the market was really peaking and we had a hard time getting GCS. And we brought all of our construction operations in house, like our project managers are superintendents, they'll work for us, you know, we were the, you know, became the default builder, if you will. And I remember a headhunter does to you don't do that, you have to shift the risk to the GC. And this is what I told them. I said, at the end of the day, I hired the GC as the developer and I give the bank a personal guarantee, I sit in between those two people, or those two companies. And if the GC screws it up, I still own the risk. I mean, it may look like I shifted it to him. And contractually, I did shift the obligations of building a building. But if he screwed up enough, or in the, you know, time or money, like it's gonna flow back to me. So where I told this headhunters I go, look, yes, I'm bringing some of these risks in house, but it also allows me to control and get direct access to the field, to the subcontractors to the owners of the subcontractors, because the GC that sat in between me, he had his own agenda, he had his own profit to increase, he had his own stories that he told the subs, you know, and, you know, sometimes that was good, but if the person didn't have good ethics, or they were trying to, you know, manipulate which people do in that business, I mean, all business suppose, I found it to be incredibly like it was I took on more risk that I could then not even control, or I had to, like, go through people to try to control it. And of course, when they have their own agenda, they're not gonna let me control it if it's against their agenda. So this is a way for us to can control really minimize that risk, we still took on risk. But by having that direct access, we minimize that. So if you take that story, and then you apply it to every possible facet of the real estate development process, at every time we underwrite, every time we buy land, we build the building, we rent units, we're looking to constantly always look at it from the standpoint of what if this fails, what if the spread doesn't achieve what we think it's going to achieve? Maybe we better look at it at a lower rate to be more comfortable that we've mitigated that risk. And why save that way is because people who are entrepreneurs are naturally risk takers. And you're, in most cases, your own worst enemy. And that, you know, in other words, you're a risk taker, you're built to take risks, and you do take risks, then the job becomes how to take risks that don't blow you up. And that's your own learning. That's, in fact, networks of people around me that I use that my teams internally, like, I encourage people like, dude, you got to tell me, no, more of the famous saying, I'm as I'm a great problem solver, I cannot solve a problem I don't know about, bring me all the problems, don't hide anything, don't cover it up or try to mean you know, if I can help solve, you solve a great, I'll do that. But I want everything fleshed out. Because you know, when you then get all the full picture, it's then I mean, my job, our job as a company is to problem solve and mitigate risk. And we do that 1000s of 1000 times in a deal to every day, you know, over you know, the two or three year lifecycle of that development project. So I know that was a really long and winded answer, but it's really like, it's like having a mental model of how you approach risk and you do it, you know, every day in your business, you know, as you know, your insurance and underwriting risk. But I would always advise, particularly people who are coming new into the business to like, you know, hear these words. And you know, a lot of times go here and they go, Well, I'm different, I can do better. I'm a better problem solver than these guys. And that's fine. But like know that that risk doesn't go away just because you think that way. In fact, arguably you increase your risk because there's stuff you don't see. You can't admit to yourself that you have blind spots and need help from others to go dude, you miss that thing. Better watch out for that right and, you know, got all kinds of betters around me that you know, I'm like, dude, tell me like, donate it. You know, I don't like bad news. I don't like surprises. But you know, what I like worse is, you know, bad news and surprises that now I'm late to the game on.