Erik Hayden is the founder of Urban Catalyst, a real estate equity fund focused on ground-up development projects in downtown San Jose.
In today’s episode, Doug and Erik talk about the types of projects in which Urban Catalyst gets involved, and how they choose them. They also discuss:
- Opportunity zones and opportunity zone funds
- How Urban Catalyst is more than just a fund manager – they are the developer on all their projects
- Why they chose to focus on San Jose
- How their process works from inception to completion
- How they work within the tax laws to pay out dividends to investors
- What the future may bring for Urban Catalyst
downtown san jose, build, fund, catalyst, san jose, projects, tax benefits, urban, office, opportunity, google, investors, plan, silicon valley, netflix, bay area, palo alto, developers, capital gains, largest
Douglas Heikkinen, Erik Hayden
Douglas Heikkinen 00:01
Hello, and welcome to the podcast. Please welcome Erik Hayden, the founder of urban catalyst. Eric is responsible for developing more than $3. . .
Erik Hayden 00:25
Hey, Doug, great to talk with you.
Douglas Heikkinen 00:27
What is urban catalyst? Where did you get the name? What is it and what are you doing?
Erik Hayden 00:32
Sure. So urban Catalyst. We are a real estate equity fund, we are focused on doing ground up real estate development projects in downtown San Jose, California. We're also an opportunity zone fund that allows us of course, to give the opportunity zone tax benefits to our investors, and the name urban catalyst. I mean, we're creating these urban infill projects, and really building a city through revitalization. And so urban catalyst was a very fitting name.
Douglas Heikkinen 00:59
I remember hearing a lot more about opportunity zones and opportunity's own funds. What are they? And why did they pique your interest to build a company around them? Sure. So
Erik Hayden 01:09
opportunity's own funds, they were created as a part of the 2017 tax cuts and Jobs Act. And what they did is they designated certain census tracts across America as opportunity zones, opportunity zones. And if you create an opportunity zone fund than you do, primarily real estate development in these areas, you're able to give specific tax benefits to your investors. You know, primarily if an investor has a capital gains event, which is the sale of stock, the sale of real estate or the sale of a business, and they invest into an opportunity zone fund within 180 days of that capital gains event, the tax benefits are pretty great. The first is you're able to defer paying taxes on that initial capital gains event until 2027. The second is when you pay your taxes in 2027. On that initial capital gains event, you get a 10% reduction. So for every $100 that you would have owed in taxes, you only have to pay $90. And then the third benefit, which is by far the best benefit after an investor's money season's in our fund for 10 years, all of the profits from the fund itself are tax free from a federal capital gains perspective.
Douglas Heikkinen 02:17
What kind of projects deserve a catalyst do
Erik Hayden 02:20
So we do all sorts of different kinds of projects we're currently offering our second fund, we're raising a $200 million fund. And the projects that we're doing in this fund include a 420,000 square foot office, high rise, and a 300 plus unit multifamily high rise. They're both located right next to each other in a great location in downtown San Jose.
Douglas Heikkinen 02:42
What makes urban catalyst different? Or do you do that special?
Erik Hayden 02:46
So here at Urban catalyst, what really separates us from other opportunity's own funds is that we're not just fund managers, but we're the developers of all of our projects. And we've been doing development in the Bay Area for our entire careers. And a ton of that development has been in downtown San Jose. In fact, when I initially formed urban catalyst, my plan was really to create an all star team of downtown San Jose developers, and I did that by bringing on several of my partners. But the opportunity's own program in general as to you know, why I formed a company around it is, I started off wanting to do a real estate equity fund. I wanted to focus on downtown San Jose because of the overall macro economic trends throughout Silicon Valley, all pointing towards downtown as the next place to do development on a large scale. And it was only after I formed urban catalyst that I learned about the opportunity's own program. And that everywhere that I was planning on building these buildings was already located in zone. And I thought, well, wouldn't it be great to be able to give my investors these additional tax benefits associated with this program? So that's how we became an opportunity zone fund.
Douglas Heikkinen 03:51
And why San Jose?
Erik Hayden 03:53
Well, you know, when I talk about those overall macroeconomic trends, it's really tech migration. And throughout Silicon Valley, you know, what makes Silicon Valley a lot different now than it was say, like during the.com, is we now have, you know, three of the five largest companies in America located in Silicon Valley, these huge companies. And as these companies have continued to expand, you know, over the last 20 years, like Google's a great example, they've opened offices all over the world all over the country. But here in the valley, we've seen the slow migration southward from Palo Alto and Mountain View down into Sunnyvale, you know, to give you kind of an idea of the scope of this. Google right now in the city of Mountain View, occupies 95% of the office space in the entire city. Very similarly, apple in the city of Cupertino occupies 85% of the office space. And now in Sunnyvale, Google and Apple combined have more than 50% of the office space. And now that Sunnyvale is almost completely built out, I mean, development there has been going gangbusters for decades. Really, the next logical step is In this migration is downtown San Jose. And we've already seen that because Microsoft and Apple have taken large land holdings. Amazon has had an office downtown for about five years. And Google has been the biggest story. Their massive amount of acquisitions in downtown San Jose, it's almost unprecedented. They've spent almost a half a billion dollars acquiring 80 acres of property. And they're planning on building around 7 million square feet of office and 6000 residential units. That's what they had approved City Council earlier this year. And at build out, this will be Google's largest campus on Earth. Right in the heart of downtown. And if you think right now, downtown San Jose has about 100,000 people in it. Google itself, this new campus will bring its estimated between 40 and 60,000 additional people to downtown San Jose every day
Douglas Heikkinen 05:51
Is that a good thing for San Jose and the traffic?
Erik Hayden 05:54
Well, it absolutely is because Google is building one of the most transit oriented developments in history. They're building it right around diridon station, which is a massive train station slated to be the largest train station on the West Coast. And Bart, which is the largest mass transportation system in the Bay Area is now funded to come through downtown and connect into diridon. Station. So as far as traffic, right now, the traffic is a lot of the employees live in San Jose, because I mean, it sounds kind of crazy. But the average home price in San Jose is 1.4 million, which is significantly less than Palo Alto, which average home price is 2.8 million. So right now the traffic pattern is they live in San Jose, and they drive north 15 miles to Mountain View in Palo Alto. And that's like an hour to an hour and a half commute 15 miles.
Douglas Heikkinen 06:39
The fang companies are not exiting California, to Texas where we are right now. But they're going south to San Jose.
Erik Hayden 06:46
So they are expanding everywhere, right? So we see him expanding. But Tesla is a great example. Tesla has been in the news, of course, they move their headquarters to Texas. On their way out, they just happen to continue to expand their million square foot Gigafactory and Stockton, which is in California, they took 70,000 square feet of office in San Jose, and they took 325,000 square feet of office in Palo Alto. So on their way out, just did a massive expansion in the Bay Area.
Douglas Heikkinen 07:15
When you decide to do a project, what's interesting to to come up with the idea, think about the project, get the funding and then do the project. And then you see it's done. So take me through that whole thing.
Erik Hayden 07:28
Sure. So I mean, it always starts with land acquisition. And really this is our strategic advantage in San Jose's we've been doing business in San Jose for so long. We know all the property owners all the properties. And really our whole plan when we formed urban catalysts was, we saw this wave of development coming to downtown San Jose. And we wanted to get it on the ground floor and acquire properties before they're scooped up by all the big developers and big tech companies, which is really exactly what we did with the acquisition to our fund one and fund two projects. Now we acquire the land, of course, we have to understand all of the regulations as far as what you can build on these sites, which of course, we're experts in from doing business in downtown for so many years. And then we build, you know, perform models understand, you know, the highest and best use, we design buildings that fit into the community and really return, you know, appropriate returns to our investors. And that's kind of our win win, right? I mean, the opportunity Zone program itself was created to, you know, build this positive social and economic benefit in these lower income areas. And we're doing that with the creation of our projects. But then at the same time, obviously, we have to be able to raise the money to build the capital stacks and build the buildings. So we have to have the appropriate returns. And so that's when I say that when when we're able to do both.
Douglas Heikkinen 08:46
Does somebody have to hold the Opportunity Fund for 10 years to get the tax benefits, because that we something?
Erik Hayden 08:54
Yeah, so you have to wait 10 years to get the tax free profits, we do plan on making distributions, you know, a lot sooner than 10 years. In fact, the first time in our second fund that we plan on making distributions is in 2026. So we'll be able to refinance our stabilized assets after they're built in 2026. Take those refinance proceeds, we pay off the construction loans that we use to build the buildings and then any excess refinance proceeds, we're able to pass those through to our investors. And that's a tax free distribution. After that, we'll have stabilized assets, they'll have net operating income, we plan on passing that through to our investors throughout the duration of the remainder of the holding period, before we sell the assets, and really when we sell them after that 10 year hold. That's the big win, right, you get the majority of the profits and those profits are tax free from a federal capital gains perspective.
Douglas Heikkinen 09:40
Okay, what makes you guys different from everybody else that's out there.
Erik Hayden 09:43
So, you know, most other opportunity's own funds, you know, their whole plan is to go out and raise a ton of money. And then, you know, look all over the country to find developers that have projects in opportunity zones that they can partner with. What makes urban catalyst different is that We are the developers of all of our projects. You know, we understand the real estate and the real estate is really what matters the most. Because I mean, if the biggest tax benefit that you're getting is you're getting tax free profits after 10 years, you know, there better be profits after 10 years, really, what's the point of the whole program? So having local developers that understand the real estate, understanding the real estate market, Silicon Valley, great market, and then understanding the asset classes, that's what really matters when you think about investing into an opportunity zone fund, and really what separates us from the rest?
Douglas Heikkinen 10:33
You're making San Jose, stand up and be noticed. And to its big brother up north?
Erik Hayden 10:41
Yeah, you know, it's always funny. The Big Brother up north San Francisco, San Jose, with a population of a million people is the 10th largest city in America. And it's significantly larger than San Francisco was 750,000 people.
Douglas Heikkinen 10:54
What's new, what's coming for urban catalyst? What are you excited about in the next year or
Erik Hayden 10:58
so, you know, the thing I'm most excited about is watching the return to office. I mean, we're building a big office building in this fund. And we understand the demand for office, and it's pretty strong in Silicon Valley. But I get a lot of questions from potential investors where they're always saying, Well, you know, I'm concerned about Office and the hybrid work, and how is this going to work? What we're excited to see. And what we're already seeing is, we're seeing the big tech tenants start to take leases, again, starting to lease new buildings. And we're also expecting in q1, to have most of the big Fang companies, you know, Facebook, Amazon, Apple, Netflix, and Google, come out with requirements for new office space. And, really, that's exciting. But it's also somewhat expected, these companies have been doing great throughout the pandemic. In fact, they've been hiring so fast, they can't even find employees, they're hiring so fast. And they've hired so many employees during the pandemic, that even with a hybrid work schedule, they still don't have enough office space to fit all of their employees. And so that's why we're seeing this trend.
Douglas Heikkinen 12:03
Isn't that crazy? What's always crazy to me is you get on Facebook, or you you use Google or something. And it's easy for us. And they keep hiring people. And I have no idea what they do.
Erik Hayden 12:18
You know, a great story. We, we had an investor come to us, he worked at Netflix. And he said, you know, Eric, I'm worried about the future of office because Netflix just told me that I need to work from home and definitely, and that kind of worried me too. So I called my friend over at Netflix. And I said he works in the HR department. I said, Are you guys, you know, forcing people to work from home. And this guy's like, yeah, Netflix sent me a box with all of my stuff in it and told me I can't come back in. So I asked my friend and my friend says, oh, yeah, we are making people work from home. And definitely certain people says, We've hired so many people during the pandemic, Eric, that our office space, we can't fit everybody back in. So we've identified individuals we think can successfully work from home, and we're forcing them to work from home and definitely until we get more space.
Douglas Heikkinen 13:06
That's amazing. Eric, this is fascinating. Great for San Jose, thank you so much for joining us today.
Erik Hayden 13:13
Douglas Heikkinen 13:14
You can learn more about urban catalyst, please visit urban catalyst.com Please visit us for all the latest updates on Twitter, LinkedIn, and Facebook all at Advisorpedia. For everybody at Advisorpedia our producer Jakie Beard and the Power Your Advice podcast team. This is Doug Heikkinen