Silicon Valley Opportunity Zone Update, With Erik Hayden


Erik Hayden, founder and CEO of Urban Catalyst, returns to the show to provide updates on Silicon Valley Opportunity Zones and what funds are currently proving attractive investment opportunities. Silicon Valley and surrounding communities have witnessed an investment case for ground-up development and redevelopment within the OZ space. Urban Catalyst is the largest developer of Opportunity Zone real estate in Silicon Valley.

Click the play button above to listen to our conversation with Erik.

Episode Highlights

  • What separates Urban Catalyst from other Opportunity Zone funds.
  • Urban Catalyst’s status as both the fund manager and the developer, and how this relates to the criteria that seek in any project they undertake.
  • Details of Urban Catalyst’s downtown San Jose OZ projects.
  • A fund manager’s perspective on what may happen with OZ legislation.
  • Some best practices for identifying the right opportunity zone investments.
  • Benefits of attending the upcoming OZ Pitch Day, live and online on March 29th, 2022.

Featured On This Episode

Industry Spotlight: Urban Catalyst

Founded by Chris Loeffler in 2009 in the wake of the financial crisis, Scottsdale, AZ-based Caliber is an asset management and real estate services firm with over $750 million in assets under management and development in commercial, residential, and hospitality real estate in Alaska, Arizona, Colorado, Nevada, Texas, and Utah. Their $500 million Tax Advantaged Opportunity Zone Fund LP was among the first of its kind launched last year.

Learn more about Urban Catalyst

About The Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to The Opportunity Zones podcast. I’m your host, Jimmy Atkinson. And all this month on this podcast, I have been previewing OZ Pitch Day, our upcoming live online event that showcases several Qualified Opportunity Funds. Today is our fourth and final episode in this installment. Joining me on today’s episode is Urban Catalyst founder, Erik Hayden. Urban Catalyst is a real estate equity fund manager focused on ground-up development in Opportunity Zones located in Downtown San Jose. And that is exactly where Erik joins us from today. Erik, welcome to the show.

Erik: Thank you, Jimmy. Always a pleasure to be talking with you.

Jimmy: Absolutely. Erik, you’re no stranger to the show. You’ve been on a handful of times already. It’s always great talking with you. And thank you for your continued participation on my OZ Pitch Day events. We are looking for a really good one coming up here next week on March 29th. We’re going to talk about your Fund II that you’re going to be presenting during that event in a minute, but first, let’s get a recap of Fund I. It was a multi-asset fund that Urban Catalyst closed at the very end of 2020. So, it’s been a little more than a year now since it closed. How are the projects progressing from that first OZ Fund?

Erik: Yeah, Jimmy, the projects are progressing great. And a little bit of background on our first fund. You know, we created our first fund towards the end of 2018, right when the Opportunity Zone program was created. And back then the rules weren’t as clear. They hadn’t come out with all the clarifications. And so we started fundraising in 2019, and it was really… You know, this whole program was getting started. We had a couple of very successful years of fundraising, and we closed the fund in December of 2020. And we’d raised $131 million. The six projects that we have in that fund, as you said, it’s a diversified portfolio of assets. All of them are located in Downtown San Jose. And we started construction on the first of those projects towards the end of last year. And right now we’re finalizing our plans for several other projects to start here in the next few months. So, really, everything is on schedule, and we’re just excited to get started.

Jimmy: Excellent, Erik. You had a lot of success raising, as you mentioned, you were oversubscribed on that fund. Can you give us some detail on one or two of the projects that you have in the works there? I know there’s either six, as you just mentioned.

Erik: Sure. So, the six projects, two of them are 100,000 square-foot Mixed-Use Office Development. One is an extended stay business hotel, it’s a Marriott TownePlace Suite. We also have a senior living facility, and more specifically, it is assisted living and memory care. And then we have a student housing high-rise. And then finally, we have just a traditional 200-unit multifamily apartment building. So, those are the six assets. And to focus on one, really the one that’s under construction, of course, is the most exciting right now. And that’s our Paseo project. It’s right in the heart of Downtown San Jose. It’s on the Paseo de San Antonio that connects César Chávez Plaza to San Jose State University. And it’s a former building, what used to be a movie theater, it’s called Hammer 12. It was a three-story movie theater. And we’re converting it into 75,000 square feet of office and 20,000 square feet of retail. And what’s most exciting about it is that we’ve now almost completely leased the ground floor retail. It’s a great little retail strip. In fact, several really prominent San Jose restaurants have recently relocated right onto this strip. It’s really creating a, we like to call it a restaurant room.

And we’ve added to that by signing a lease with a group called Urban Putt. They’re a miniature golf course full-service bar and restaurant, but they’re a lot more than that. They have locations in San Francisco, and they have one in Denver, Colorado. And you got to kind of think miniature golf meets Disneyland, meets Las Vegas, meets Burning Man because they go over the top with their miniature golf. It is really something to see. We also signed a lease with a group called Unofficial Logging. They’re out of Bend, Oregon, and they’re an ax-throwing place. You know, you go get some beers and some food and you throw axes. I thought it was really great, you know, it’s so close to San Jose State definitely gonna get a lot of action from San Jose State students. And we met with the president of San Jose State recently, and the president said, “Are you guys really putting in an ax-throwing place right next to my university?” But I’m sure it was a little bit tongue in cheek there. They’re excited that there’s such great activity happening, you know, right down the street from campus. And then we’re just about to announce, so I can’t quite announce it yet, two additional restaurants that are going to be located on our ground floor to complete all of the retail in that project.

Jimmy: Well, that sounds like a lot of fun, the mini-golf and the ax-throwing, in particular. Good luck with both those and hope nobody gets hurt there. Well, let’s…

Erik: They have great safety records, I think they’ll be fine.

Jimmy: I’m sure. Well, let’s turn our attention now to Fund II. You guys just opened this, I think toward the beginning of last year. You’re going to be presenting this particular investment opportunity at the OpportunityDb OZ Pitch Day event on March 29th. And by the way, for those listening, if you haven’t registered yet for OZ Pitch Day, you can do so now at ozpitchday.com. It’s free to attend for investors, and you get to hear from a bunch of funds, and especially get to hear from Erik Hayden at Urban Catalyst. Erik, for those who aren’t familiar with your platform, can you give us some background on what you’re doing with Urban Catalyst OZ Fund II?

Erik: Sure, and really just taking a step back, Jimmy, I want to mention to everyone listening that we’re huge fans of Jimmy’s Opportunity Zone Fund Pitch Day. We participated in it multiple times, and it’s been a great experience for us. So, definitely, something to take a listen to. Fund II, you know, it’s our current offering. And while we were identifying our projects and raising money in Fund I, we also identified this project. It’s really two projects in Downtown San Jose for our second fund. So, when we opened Fund II in January of 2021, we already had all of our projects identified. And the really nice thing about Fund II is we managed to acquire almost half of an entire Downtown San Jose city block. So, it’s a big chunk of real estate. It’s on Santa Clara Street. And for those of you not familiar with Downtown San Jose, Santa Clara Street’s really the main drag of the central business district. I decided to cross the street from City Hall.

And BART, which is the largest mass transportation system here in the Bay Area, it is now fully funded to come through Downtown San Jose and connect into Diridon Station, which is our big train station. So, it goes right underneath Santa Clara Street, and the new station is right next to our project. So, really the epitome of transit-oriented development. So, fantastic location. And the projects that we have in this fund, we have a 500,000 square foot office building, and we have a 389-unit multifamily building. And those are the only two projects that we plan to include in this fund. So, investors that invest with us, that’s what they’re investing in to.

Jimmy: Good. And could you tell us a little more about the projects, what are they, what are they called, and how are they progressing?

Erik: Sure. So, the office portion of our project is called Icon, and the multifamily portion is called Echo. So, it’s Icon and Echo. The projects are progressing great, you know, we plan to start construction, really, even before we close the offering for this fund, it’s a $200 million fundraise. We plan to start construction in mid-2023 on the residential component, Echo. And we have nine projects going on here in Downtown San Jose. So, the pre-construction process has been extremely easygoing for us, mainly because, I mean, we’re at the point now where we have monthly meetings with the Head of the Planning Department, Head of Public Works, the mayor’s office where the whole discussion in these meetings is, how are your projects going? And how can we help you get them to the finish line of building permits and starting construction? It’s really a level of service from a city that I’ve never experienced before, but then, again, I’ve never had the volume where I’m doing so many projects in a certain location.

Jimmy: So, you mentioned office and multifamily, the two product types that you’re raising capital for and you’re building there on the big city block in Downtown San Jose’s Opportunity Zone. Why did you decide to build those two types of product there?

Erik: You know, that’s a great question, Jimmy, and really, we wanted to have a diversified portfolio. And even though it’s only two different product types, it’s still, you know, more than one. And office and multifamily are the two most common types of real estate here in the Valley. So, it made sense to choose those. And both of these product types have just a lot of demand. And I like to talk about the demand. It’s kind of a no-brainer for the multifamily. I mean, we have a housing crisis here in California. It’s especially true here in Silicon Valley, where we’ve created 6 jobs for every housing unit that we’ve built for over 30 years straight. And that’s one of the reasons we have some of the most expensive housing both for sale and for rent in the entire country, if not the entire world.

Interesting statistic came out recently that I think is very telling as far as supply and demand for multifamily in Silicon Valley, and that is, in order for supply to equal demand, we would have to build around 150,000 housing units. And we’ve never built more than 5,000 housing units in a single year in history. So, it’s definitely something we’re not gonna be able to build our way out of. Sometimes I like to say, Jimmy, #every unit counts, because building more residential definitely helps out our society. And while this is a big problem for society, it’s actually kind of, you know, something that developers like to hear, “We’re going to have tenants that are going to pay high rents, and we’re going to have, you know, great occupancy.” So, that is kinda the demand, in a nutshell, like I said.

Jimmy: You’re gonna have demand forever for multifamily in California, in particular.

Erik: In fact, right across the street from our project another developer recently completed a 630-unit apartment complex called Miro. And it’s two high-rise towers. And they are currently leasing up with very high rents, and they’re leasing up at 35 units a month because they are new housing, and new housing just gets gobbled up around here.

Jimmy: And so, what about office? What’s the demand looking like for office? Is the workforce returning to the office? I know California is a little bit behind some other parts of the country. And there’s this movement toward, or there’s this perceived movement toward working from home. What are your thoughts there?

Erik: Sure. So, this is one of the questions that we get a lot from our potential investors, and that is, you know, the pandemic allowed people to understand that they could work from home. And although a lot of the big companies have announced that people will be returning to work here very shortly, we still think there’ll be a large chunk of folks that do work remotely. But the demand for office in Silicon Valley, not only has that remained strong throughout the pandemic, it’s almost gotten stronger. And we’ve seen that in really the velocity of transactions of existing office space. We’ve just seen a bunch of buyers come into Silicon Valley, and scoop up all these properties, these existing office buildings for, like, new record pricing. It was almost getting a little bit ridiculous there as far as the prices they’re paying for existing office.

And then as the pandemic somewhat started easing before Omicron, we saw Apple take a giant lease of 700,000 square feet in the city of Sunnyvale. And then we saw Facebook come in and do 1.2 million square feet of new leases in the city of Santa Clara. And this is just what we’ve been hearing across the board from all these big tech companies is that during pandemic, their businesses have fared very well. And they have been on a hiring spree. And in fact, they’re hiring so fast and cannibalizing each other for new employees that we’ve seen tech salaries increase by 30% in the last 12 months. And all this hiring is going on and on and on. And there hasn’t been a ton of leasing activity because people have been working from home. Managers just haven’t been faced with the reality that even if they come back for three days a week with a partial staff, in the beginning, they’re still going to be getting close to running out of office space. So, we anticipate now that folks are coming back to the office, there is this large pent-up demand. We’re going to start seeing a lot more of these leases come out. So, as far as the demand for office, we think the demand is strong.

However, there’s also, you know, when you talk about demand, you also talk about supply. And there is a lot of supply of new office here in Downtown San Jose. We take that into account, obviously, because we want to make sure that we’re not flooding the market with new office that won’t be absorbed in a reasonable timeframe. But Downtown San Jose should be absorbed around a million square feet a year of new office space every year. And we have around 11 million square feet in our pipeline in the downtown core that’s not including Google, who’s going to lease all of their own space. But if that 11 million square feet is absorbed, say over the next 10 years, it’s about a million square feet a year. So, it’s about right. And our project really is designed to be one of the better projects in the downtown area, not only because of our fantastic location and being right next to mass transit, but also just the way that we’ve designed the building with the right amount of parking. We have these 40,000 square foot floor plates, almost an acre of net square footage per floor. And we’re designing the building with 14-foot floor to floor heights, floor-to-ceiling windows. And we’re also utilizing a ton of indoor-outdoor space like balconies, exterior staircases, rooftop decks, all the things that make a building really attractive to, you know, a top-quality tenant.

Jimmy: That’s fantastic. What about fundraising for Fund II so far? When are you aiming to close the Fund, and what progress have you made so far?

Erik: Sure. So, thank you for asking. Jimmy, it’s a three-year fundraise. The total fund will be a $200 million fund. And we really set that three-year fundraising timeline based upon our first fund where on average, we raised around $65 million a year. You know, you do that for three years. You get real close to that $200 million mark. And we started off really strong. We’ve already raised 40% of the fund. So, we had a great first year in fundraising. We’re looking to continue that here in 2022.

Jimmy: And now turning toward the future, beyond OZ Fund II, Erik, what is Urban Catalyst’s vision? Do you anticipate that you’ll launch more Opportunity Zone funds in the future, maybe after you close at the end of 2023, maybe there’d be a OZ Fund III that might come out in 2024? Or are there any other types of funds that Urban Catalyst is looking to launch?

Erik: Sure. So, what really separates us from most other Opportunity Zone funds is that we’re not just fund managers, we’re also developers of all the projects that are in our portfolios. And we’re experts at doing ground-up development here in Downtown San Jose. It would make a lot of sense that when we close Fund II that we have an Opportunity Zone Fund III available for investors, which would include ground-up development projects here in, you know, our favorite place, Downtown San Jose. Now, we don’t have any projects identified. We haven’t started creating that fund, but logically that is in our future. We also plan on expanding our fund platform into a variety of different alternative asset classes. And two that are coming up here quick for us, the first is we plan on coming out with really a series of Delaware Statutory Trust investment opportunities. So, you can look for those from us towards the end of this year. We also have recently launched a bridge fund, which is a lot like a debt-equity fund that funds the acquisition of properties that go into our Delaware statutory trust. So, branching out into a couple of different types of fund platforms, really, so that we’re able to give our investors more of a variety of investment options.

Jimmy: You know, the DST one, in particular, is really interesting to me, because so often Opportunity Zones, the benefits associated with Opportunity Zone investing is compared with Section 1031 and DST-type products. When, in your mind, Erik, does it make sense for someone to do a DST investment versus an Opportunity Zone investment? Do have any thoughts on that?

Erik: I sure do. You know, we see it every day, right? The three most common types of capital gains events that folks have is the sale of stock, the sale of a business, and the sale of real estate. So, whenever we run into folks that have the sale of real estate, our first question is, do you plan on investing into an Opportunity Zone fund, or do you plan on investing into, you know, another property through the 1031 exchange? And by the way, for everyone listening, a Delaware Statutory Trust is really the equivalent of a 1031 exchange syndicate, where a bunch of folks can invest into a fund-owned property, get the returns very similar to owning property. And they also are able to achieve a 1031 exchange and the tax benefits associated with that by investing into a Delaware Statutory Trust. So, when we see the comparison, what we find is, most folks know right away if they want to be purchasing existing property, and getting the returns associated with that, which, in general, like, for the market are lower than the returns associated with Opportunity Zone funds. But, in general Opportunity Zone funds do ground-up development, which has more risk than owning existing real estate.

So, it’s really more of a, we see folks put money into both. You know, a lot of times, especially when we see larger capital gains events from the sale of real estate, investors diversify their portfolios into a variety of different funds and asset classes. And so that really makes a lot of sense to us. We don’t necessarily go out there and say, “Here’s why Opportunity Zone funds are better than 1031s,” because 1031s have been around for, you know, 50-plus years. Opportunity Zone funds, you know, the final regs to clarify the program came out in December of 2019. So, a lot of folks just feel a lot more comfortable about 1031s because they’ve been around a long time. It’s a very stable program. There you go. Do you want higher returns at a little more risk? Do you want lower returns with a very stable program? Do you want both? That’s how we look at it.

Jimmy: That’s a good way to look at it. What about if I ask you to look into your crystal ball real quick, Erik, to kind of help us wrap things up today. I oftentimes ask my guest this, what do you think will happen with Opportunity Zones in the future? They currently scheduled the sunset for any gains realized after December 31, 2026. So, I guess that kind of takes us into mid to Q3 of 2027, is the last opportunity for investors to roll over capital gains into Opportunity Zone funds. Do you think that deadline might ever get extended, or what are your other thoughts on what the future might bring for Opportunity Zones?

Erik: You know, Jimmy, my partner, Sean, is on the national working group that advises the treasury and the IRS on ongoing clarifications to the program. And they discuss a lot of these issues, especially things that are being floated around the House or the Senate as far as changes to the program. Some of them positive, some of them negative, some of them neutral. And we haven’t seen a whole lot of activity in any given direction at all. There’s been a lot of talk, and then nothing ever comes of it. Now, I’ve been watching the federal government, just like everybody else trying to pass legislation that they feel is important to their political agenda. And they haven’t been that successful with it at the federal level over the last couple of years. And I don’t necessarily know how the next election cycle is going to be turning out. But if Opportunity Zones and changing the Opportunity Zone legislation to extend the program is a lower agenda item for them, I don’t know if I see them moving on it to change it in any given direction. So, I’m gonna say the program more than likely will stay the same. And it will sunset, and maybe it gets revived, or maybe they start feeling that it should be a higher priority, as we get closer to the 2026 deadline. But for now, it’s status quo.

Jimmy: And who knows who may be in the White House when that deadline gets closer anyway, right? So, long way to go still. We’re looking forward to what the future may bring. Well, Erik, it’s been a pleasure speaking with you. As always, thanks for giving our listeners a sneak preview of what you’re going to be presenting at OZ Pitch Day regarding Urban Catalyst OZ Fund II. I know you’ve got a lot more to say about it on March 29th. And it’ll be a video presentation, you’ll have some presentation to share some renderings perhaps to share on Icon and Echo. So, I’m looking forward to that. And again, our listeners can head to ozpitchday.com to learn more about OZ Pitch Day and to register for the event. Before we go, Erik, where can our listeners go to learn more about you and Urban Catalyst?

Erik: You can visit us at urbancatalyst.com.

Jimmy: Urbancatalyst.com, that’s easy. All right, thank you. And for our listeners out there, as always, of course, I’ll put together some show notes for this episode on the Opportunity Zones database website. You can find those show notes at opportunitydb.com/podcast. And there you’ll find links to all of the resources that Erik and I discussed on today’s show. Erik, again, thanks so much for joining me.

Erik: Thank you again, Jimmy.





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