OZ Pitch Day - March 23rd
The Unique OZ Opportunity In San Jose, With Urban Catalyst
Erik Hayden of Urban Catalyst discusses his firm’s second OZ fund, which will include a ground-up development project featuring 300+ units of multifamily housing and 420,000 square feet of office space in downtown San Jose, CA.
Interested In Learning More About This Opportunity?
You can visit the Official OpportunityDb Partner Page for Urban Catalyst Fund II to:
- View beautiful high-resolution images.
- Learn key details about fund and related projects.
- Request more information from the fund sponsor.
- An overview of Urban Catalyst, a firm uniquely focused on Opportunity Zone investing in San Jose, CA.
- An overview of the Opportunity Zone program including its history, the tax advantages, and the most common types of capital gains.
- The macroeconomic trends that point towards San Jose as a premier destination for real estate development, including tech migration among the MFANG companies (Microsoft, Facebook, Apple, Netflix, Google).
- The three criteria Urban Catalyst looks for in a real estate project.
- How Google’s plans to build 7 million square feet of office space and 6,000 residential units will impact the local San Jose economy.
- Plans to develop the Icon/Echo properties in downtown San Jose, including:
- Icon: 420,000 square feet of office space designed to attract high quality tenants.
- Echo: 300+ multifamily building that features an infinity pool and rooftop dining area.
- The factors that have led to a housing crisis in Silicon Valley, and the opportunity that creates for developers.
- How Urban Catalyst’s “Project First” approach differentiates this firm.
- The importance of performing due diligence on developers, markets, and asset classes prior to making an Opportunity Zone investment.
- Overview of the timeline for Urban Catalyst’s Fund II projects, including a refinance and distribution program in 2026.
- The fourth, seldom-discussed tax benefit that some Opportunity Zone funds can deliver to investors.
Featured On This Webinar
Industry Spotlight: Urban Catalyst
Urban Catalyst is a real estate equity fund focused on ground-up development projects in downtown San Jose. Urban Catalyst closed its successful Fund I in December 2020; that fund was a multi-asset real estate fund focused on ground-up developments consisting of office, mixed-use, student housing, senior housing and a hotel.
Learn More About Urban Catalyst
- Visit UrbanCatalyst.com
- See Fund II Projects
- Read about the Urban Catalyst team
Jimmy: Erik Hayden’s firm Urban Catalyst successfully closed their Opportunity Zone Fund I after raising $131 million. And now they’re going out raising, I think it’s $200 million. Is that right, Erik?
Erik: That is correct. Good to see you, Jimmy.
Jimmy: Good to see you as well, Erik. I was hanging out with you in San Jose last week. You gave me a site tour, really impressive what you have going on over there in the Silicon Valley. I’ll turn it over to you. You got 30 minutes. And then just for everyone else’s sake, you’re going to be in a fund breakout session after this in a separate adjacent session, and we’ll provide the link and some instructions on how to join you in that room when you are finished with your formal presentation here. If you have any one-on-one questions that you want to ask Erik, or if you want to talk with him one-on-one, that would be a good time to do so, but that’ll be a half an hour from now. Erik, go ahead.
Erik: All right. No, I’m looking forward to talking with everyone in the breakout session after my presentation. All right. So I’m going to share my screen. I’m gonna tell you a little bit about Urban Catalyst. Jimmy gave us a great introduction, but I definitely want to go through it all. So, Urban Catalyst, we are structured very similar to a traditional real estate equity fund. We’re focused on doing ground-up real estate development projects in Downtown San Jose, and we’re also an Opportunity Zone fund. And that allows us to give the Opportunity Zone tax benefits to our investors. As Jimmy mentioned, we’re currently raising a $200 million fund. Just to kick us off, we’ve been featured pretty prominently in the news over the last couple of years. Just a lot of positive buzz about what we’re doing here in Downtown San Jose. We’ve had over 200 news articles written about us, but probably most important of those, we were named by “Forbes” magazine as one of the top 20 Opportunity Zone funds in the country. And you know, it’s nice to get that national validation from “Forbes” that we’re doing things the right way here.
Jimmy mentioned the Opportunity Zone 101. So, I’ll give you just my brief 101 before you get to your 11:00 session, that is in order to get the tax benefits associated with the Opportunity Zone program, you have to have a capital gains event. Here are the three most common ways that people have capital gains events. In our fund, we have found that the sale of stock is the most common type of capital gains event that folks have. And, you know, it makes a lot of sense because there really has never been a safe harbor for investors to shelter their capital gains from the sale of stock before this program was created. Then, of course, just to remind everyone, when you have that capital gains event, you have 180 days to invest into a Qualified Opportunity Zone fund in order to get those tax benefits. We don’t want anyone to miss their deadline and, you know, miss out on the program if they’re interested.
And then here are the three main tax benefits that you get as a part of this program. The first is you’re able to defer paying capital gains taxes on that capital gains event until 2027. The next is when you pay your taxes in 2027, you get to reduce those taxes by 10%. So you get a 10% reduction. For every $100 that you would have owed in taxes, you only have to pay $90. And these are great, but it’s really the third benefit that is the biggest benefit. And that is after investors’ money seasons in our fund for 10 years, all of the profits from the fund itself are tax free from a federal capital gains perspective. So here at Urban Catalyst, what our plan is is to build these ground-up development projects, and then hold them until we get to that 10-year mark. And then we plan to sell those assets, liquidate the fund. And that’s when we returned the majority of the benefits or the majority of the profits to our investors.
It was great hearing from John about the overall program. I’ll give you just a little bit of brief history about the program, of course, it was created as a part of the 2017 Tax Cuts and Jobs Act. When it came out, the Treasury and the IRS said that there would be three rounds of clarifications. You can see here those dates of those three rounds of clarifications. We had our attorneys put together how clear they thought the program was after each round. So, you can see the program itself wasn’t really finalized until December of 2019. This is a graph of investments into Opportunity Zone funds nationwide. You can see before those April guidelines came out, not a whole lot of investment in the Opportunity Zone funds, but once the final regulations came out in December of 2019, you know, we saw that increase in velocity. Just taking a step back here in the Bay Area, these are the Opportunity Zones in green.
For this fund, we are focused on San Jose, and even more specifically, we’re focused on Downtown San Jose. You can see that there are four census tracks that cover all of Downtown or most of it. You know, it’s interesting here at Urban Catalyst, when I formed Urban Catalyst, my plan was just to create a real estate equity fund to focus on doing ground-up development in the Downtown area. It was mainly because of the overall macroeconomic trends throughout Silicon Valley, all pointing towards Downtown San Jose as the next place to do development on a large scale. And it was only after I started forming Urban Catalyst that I learned about the Opportunity Zone program and that everywhere that I was planning on building these buildings was already located in the zone. So, I thought, boy, wouldn’t it be nice to be able to give my investors these additional tax benefits associated with this program? And that’s how we became an Opportunity Zone fund.
When we talk about those overall macroeconomic trends in Silicon Valley, what I’m really talking about is tech migration. I mean, everyone knows there’s a lot of big tech companies here in the Valley. Here are just some of them are on the screen. But for this example, I’m specifically going to focus on what we call the MFAANG companies, and that’s Microsoft, Facebook, Amazon, Apple, Netflix, and Google. You know, 20 years ago, at the time of the .com, Google was just a startup. And now, it has more office space than any other company here in Silicon Valley. As these companies have just grown and grown and grown, and, you know, you think Palo Alto and Mountain View are kind of the center of the Silicon Valley universe. They’re very small cities. So as these companies have grown, they’ve been looking for additional space, not only have they, you know, expanded all over the world and all over the country, but here in Silicon Valley, they’ve made some big moves.
We’ve seen over the last 10 years them really going into the city of Sunnyvale. Let me give you some statistics that give you an idea of really, you know, how large this is. Right now in the city of Mountain View, Google owns or leases 95% of the office space in the entire city. Very similar here in Cupertino, Apple owns or leases 85% of the office space in that city. And now, in the city of Sunnyvale, Google and Apple combined, they own at least more than 50% of the office space in that city. So, Sunnyvale had room to grow over the last decade. Development has just been going gangbusters there, but now it’s completely built out. And it really begs the question, well, now that this is built out, where will these companies continue to expand? And the answer is simple. It’s into Downtown San Jose. Amazon has had a toe hold here in the Downtown area for a number of years. Microsoft and Apple have just made major land purchases here in San Jose. And Google is really the big story, the massive mega-campus that they’re planning here right in the Downtown area. And I’ll get to that in a little bit.
But what has happened in Downtown San Jose, you know, because of this migration, and this is from the view or the lens of an office perspective, we’ve seen office rents double in the last 10 years. We’ve also seen vacancy rates that historically were above 25% drop to below 10%. And 10% is really that line where it changes over from, call it, tenant market to a landlord market, and when you start to see ground-up development occur. We’ve been developers for quite some time here at Urban Catalyst, and we’ve done development projects all over the Bay Area. When we do development anywhere, there are three things that we want to see. The first is we want to make sure that there’s a demand for all of our projects. And by the way, Downtown San Jose has all three of these things. The demand for projects in Downtown is really driven by the Silicon Valley job engine. We want to make sure that transit and physical infrastructure is already in place. San Jose in the Downtown area is really the only true urban environment in Silicon Valley. Diridon Station slated to be the largest train station on the West Coast. It already has a variety of mass transit options that connect to it, including Caltrain and now BART.
BART is planning to come through Downtown and connect into Diridon Station. BART, for those of you that don’t know is the largest mass transportation system here in the Bay Area. And then San Jose State University, you know, with 35,000 students, it’s the second-largest university in the Bay Area, and it’s right here in the heart of Downtown. We also want to do business in a place where the local government wants to see development happen. Throughout most of California, that is not the case. It’s very challenging to get your building permits, but it’s almost the opposite here in Downtown San Jose. They want to see development happen. This is a picture of my partner, Josh and I with the mayor of San Jose, Sam Liccardo. Sam has been the mayor for seven years. And before that, he was the council member representing Downtown for eight years. And it’s really the policies that he has put into place that has streamlined that pre-construction process and made it so much easier for developers, and really attracted developers to the Downtown.
These are my before and after slides, just to give everyone an idea of the revitalization that’s occurring here in Downtown San Jose. This is the current skyline in San Jose. If all of the projects that are currently in the planning process are built over the next 10 years, Downtown San Jose will triple in size. You can see all of the future planned development, and Opportunity Zones couldn’t have come at a better time to help spur this revitalization. You can see Urban Catalyst projects in both Fund I and Fund II in red. Here’s my two dimensional map of Downtown just to continue talking about what’s happening down here. This black line represents the Opportunity Zone. Urban Catalyst, our headquarters are right here. So we’re right in the zone…we’re right next door to Adobe’s World Headquarters and Zoom’s World Headquarters. San Jose State University that I mentioned is right here.
And then that new BART line is running underneath Santa Clara Street, station Downtown, and then connecting into Diridon Station, that big train station. Now the big news here in Downtown over the last couple of years really has been Google’s massive purchase of land. Google over the last four years has spent about $450 million on the acquisition of over 80 acres. The plans that they recently had approved at city council show them building roughly 7 million square feet of office and 6,000 residential units. At build-out, this will be Google’s largest campus on earth. They plan to start construction in about 18 months and we’re excited to have them. Of course, here’s a rendering of what their future campus looks like. We call it the mega-campus. I’m sure that’s not their marketing name, but it’s a good name for now.
Besides Google, we’ve seen just a ton of other developers coming into Downtown in recent years. Two notable ones, Jay Paul and Westbank combined, they’ve spent almost a billion dollars on land acquisition. They’re planning millions of square feet of new product. Here’s an example of what their projects look like, just to kind of give you a flavor of what is happening down here. Of course, you know, we saw this wave of development coming to Downtown here at Urban Catalyst. And our plan was to really get it on the ground floor, acquire properties before they were scooped up by big tech companies and other developers and, you know, that’s exactly what we did with the acquisition of our Fund I and Fund II projects. In blue here, you can see our Fund I projects. We had six in that fund. As Jimmy mentioned, we raised $131 million for those projects. We closed the fundraising last December. We started fundraising for Fund II in January of this year.
Here’s what those six projects look like. We start construction on all of these in the next eight months. This one will be our first one when we start construction on this next week. Pretty exciting for us here at Urban Catalyst. We have 2 100,000 square foot mixed-use office buildings in this fund. We have an extended-stay business hotel. We have a senior living facility. This is 184-unit multifamily project, and then an 800-bed student housing high-rise right next to San Jose State. So this was Fund I, and now we are here with Fund II. Fund II is here in orange. You can see we’ve managed to acquire almost half of an entire Downtown San Jose City block. We’re right across the street from City Hall. We’re right next to that future mass transit station. Santa Clara Street is really the main drag of the central business district here in Downtown San Jose. So just a fantastic location for new development. And this is what Fund II looks like. We have two projects, Icon and Echo.
Icon is there on the left. It’s a 420,000 square foot office high-rise. On the right, Echo is a 300-plus unit multifamily high-rise. Here’s a different perspective of our projects. You know, when I talk about these projects, what I like to talk about is the demand. And demand for multifamily is always interesting here in the Valley because, obviously, throughout the state of California, we have what people call a housing crisis. It’s especially true here in Silicon Valley. We’ve created six jobs for every housing unit that we’ve built for over 30 years straight. And that has led to some of the most expensive housing, both for sale and for rent in the entire world. A little statistic, if we wanted supply and demand to hit equilibrium here in Silicon Valley, we’d have to build 150,000 housing units in a single year. In history, we’ve never built more than 5,000 in a single year. So it’s like we’re never gonna get there, we literally can’t build multifamily fast enough to meet the demand. At Urban Catalyst, when we build multifamily, we like to do it the right way with a lot of amenities for our residents. Here is a visual of what our podium pool deck looks like. We have an infinity pool, an indoor-outdoor fitness center, two-story common areas for our residents where they can hang out, you know, pool tables, shuffleboard. We’re even thinking maybe pickleball on the deck, which would be kind of exciting.
Up on the roof of Echo, and, of course, this is the multifamily project, we have an office area for our residents. It doubles as a dining room in the evening. There are some fire pits, really taking advantage of the views from the top of this building. Now onto our Icon office project, this would be a view if you were say on the eighth floor of City Hall looking across the street. You know, when we build office, the demand is a little bit different than the demand for multifamily because even though Silicon Valley does have a strong demand to build new office space, we can build it fast enough to meet the demand. So whenever we build ground-up office, there are really three things that we have to have to be successful to attract, you know, that quality tenant and compete with other new office coming on the market. The first thing is location. We talked a little bit about the location, you know, next to the mass transit station. I mean, building high-density development next to mass transit, I mean, that really is development 101, urban planning 101, really.
We also, you know, when we’re building in Downtown San Jose, we compete with all of Silicon Valley. Downtown is a fantastic location from a price point perspective against the rest of the Valley. So from a location perspective, we really like this project. Fantastic location. Second thing we want to see is what I call functionality. And that is eventually, we’re going to be turning over a cold shell to our future tenants for build-out, and they’re going to want to see everything perfect. So that means we have the correct parking ratios, which this project has, we have the big fat boy floor plates, and we’re planning on having 40,000 square feet per floor, and that’s almost an acre of net square footage per floor. And that’s really what the big tech companies are looking for these days. We also have 14-foot floor-to-floor heights. So you have that big open, airy office feeling. We’re utilizing a lot of indoor-outdoor space. You can see on the exterior, we have some exterior staircases, we have balconies. A couple of slides back here you can see we have some rooftop decks on the very top, and then at different levels.
This is really to take advantage of the 300 days a year of sunshine we have here in Downtown San Jose. It’s some of the best weather in the world. The last thing that we wanna see to have a successful development project is we want to have a project that really looks nice. I call it architectural aesthetic beauty. We’re utilizing WRNS as our architect for this project. They’re one of the premier office architects here in Silicon Valley. They just finished doing Microsoft’s campus up in Mountain View. And they’ve designed this building. They call it Lanterns for the big two-story lit-up areas. And I’m really pleased with how their design has turned out. Here’s another rendering of one of our office rooftop decks. Now, what makes Urban Catalyst different than other Opportunity Zone funds is, you know, most other Opportunity Zone funds, they’re big funds, they’re are great at raising money, their plan is to just raise a ton of cash, go out, scramble around the country and look for developers that have projects located in Opportunity Zones. Of course, here in Silicon Valley, we look at Steve Jobs and Steve Wozniak and we think, “Did these guys go out, raise a bunch of money, and then hired someone to build them a computer?” And the answer is no, of course, not. They built a computer and then they took it out to the market.
And that’s exactly what we’re doing here at Urban Catalyst. We’re not just the fund managers, but we’re also the developers of all of our projects. And, of course, we have development projects in our portfolio, and now we’re taking those projects out to the market to finance. Also, another thing that I just can’t stress enough whenever I talk with any potential investors is, you know, when you hear about Opportunity Zone funds, you hear about the tax benefits. Don’t get me wrong, great tax benefits, we’re big fans of them here at Urban Catalyst, but what really matters is the underlying real estate. Because if the biggest tax benefit that you get is after 10 years you get tax-free profits, you know, there better be profits after 10 years, or what’s really the point of the program from an investment perspective? So, understanding who are the developers? You know, what is their track record and experience? What are the projects? What are the asset classes? That’s what really matters. And so here at Urban Catalyst, we see ourselves as a solid, fundamental real estate equity fund and development company. And we see the Opportunity Zone tax benefits really as just the icing on the cake for our investors.
A little bit about me. I’ve been a developer my entire career. I’ve done several billion dollars worth of projects here in the Bay Area. In general, I build institutional quality and scale projects. What that means is I really just build big projects with a typical exit strategy of selling to publicly traded REITs to large institutional equity groups. Here at Urban Catalyst, I have five partners. And really my plan, when I started Urban Catalyst, was to build an all-star team of Downtown San Jose developers. I did that by bringing on Josh and Paul. Josh is our chief operating officer. For 12 years prior to joining Urban Catalyst, he worked for a company called Barry Swenson Builder. They’re huge landowners here in Downtown San Jose. While Josh was there, he got to experience building a variety of different asset classes as he was the lead developer and managed their entire Downtown portfolio.
Paul Ring, Paul for 15 years prior to joining Urban Catalyst was the head developer at The Core Companies. He specialized in multifamily and below-market-rate housing here in Downtown San Jose. And I had the great experience about 10 years ago working as a joint venture partner with Paul. I got to watch him manage his team, and I really liked his style. Now, Paul manages our team of 14 development and construction professionals that we have working here at Urban Catalyst building our projects. Of course, we’re not just developers, we’re also fund managers. Morgan Mackles, I’ve known Morgan for way over 25 years. He and I went to high school together. We’ve been very close friends for many, many years. Morgan is our head of investor relations. He has spent his career building scalable and repeatable sales processes. He’s done it for big and small companies, startups all the way up to Fortune 500, and he is the primary reason why we were so successful raising $131 million in our first fund.
Sean Raft, Sean is our chief administrative officer, and now our general counsel. He’s an attorney. Sean manages all of our financial consultants, our legal team, our accountants that do our tax and audit. Sean also does all of our compliance with the SEC and with the Opportunity Zone rules and regulations. Sean’s on the National Working Group that advises the Treasury and the IRS on any ongoing clarifications to the Opportunity Zone program. Just a really easy way to say it is Sean really dots the I’s and crosses the T’s here at Urban Catalyst. So these are the five partners. Combined, we’ve done over $5 billion worth of ground-up real estate development here in Silicon Valley. You can see the heavy concentration of projects that we’ve done in Downtown San Jose.
And now I’m going to switch gears and talk about our timeline a little bit. You know, every Opportunity Zone fund is created just a little different. So I want to tell you how Urban Catalyst is structured and really what our plan is over the next 10 years. So, imagine we’re raising $200 million. Our minimum investment size is $250,000. Our average investment size in both Fund I and Fund II is a little over $350,000. We raise money we’re anticipating for three years, and we base this on the fact that we raised on average $65 million a year in Fund I. So to get to that $200 million, it should take us three years or so. Just for everybody’s reference, here’s where you pay your taxes in 2027, and here’s where Urban Catalyst is planning on selling our assets and returning all of those profits to our investors after 10 years, after the 10-year-hold.
Now, the first time that we plan to give money back to our investors through a distribution is through our Refinance and Distribute program. The way that this works, and this is very common and we do this quite a bit in development, we are starting construction here in early 2023. Our projects will be built in 2025. We will lease them up and stabilize them, then we’ll go out and we’ll get permanent financing. We take that permanent financing and we pay back the construction loans that we use to build the buildings, and then any excess refinance proceeds, we plan on passing those through to our investors, and that’s tax-free. Right now, we are targeting distributing roughly 65% of our investors’ initial investment back to them in 2026. And the goal, of course, would be that we’re distributing enough money for our investors to pay their taxes in 2027. Obviously, nothing is guaranteed with investment into a fund like ours, and you have to read our private placement memorandum in order to understand all of the risks associated with investing into Urban Catalyst. But it’s always good to describe our business plan.
After the refinance event, you know, we have stabilized assets, those assets will be cash flowing really for the rest of the duration of the 10-year hold until we sell the properties for the big win in 2034. This is also where I like to talk about what I call the fourth hidden benefit of the Opportunity Zone program. You know, we went through the first three, which were deferred paying taxes till 2027, 10% discount when you pay your taxes in 2027, and then tax-free profits after 10 years. But the fourth benefit really is an interesting one, and it’s only for Opportunity Zone funds that are structured as an LLC, as Urban Catalyst is. And that is, you know, as an LLC, we’re able to pass through losses to our investors. And this is really important because as anyone knows that owns real estate, typically real estate owners depreciate their assets on their tax returns every year. That’s no different here at Urban Catalyst, we just have these big buildings, but we’ll be depreciating those assets and then we’re able to pass through that depreciation to our investors. And it’s very significant we anticipate that on a million-dollar investment, we’ll have roughly $600,000 in passive losses that we pass through to our investors over the course of the fund.
Now, here’s where that extra benefit comes in. Typically, real estate owners when they sell their assets and they sell it for a higher price, they have to pay back all of that depreciation that they’ve claimed, however long they’ve owned the asset. They call that depreciation recapture. Noone likes depreciation recapture. For Opportunity Zone funds, there is no depreciation recapture. So all of those passive losses that you’ve accumulated over the course of the fund, you can either use them to offset other passive income. And if you can’t, you can just roll them forward forever. When we sell these assets, no depreciation recapture. So not only tax-free profits, but you don’t have to pay back the depreciation. In fact, what happens to that depreciation is really interesting. When we sell the assets, it converts from passive losses to active losses and can offset things like ordinary income, which folks love that because ordinary income is typically a much higher tax rate. So here’s everything put together as far as our timeline. One last thing I wanted to share with you is our bonus units program we have your Urban Catalyst.
I’ll just explain this really quickly. When you invest into Urban Catalyst, you’re buying units in our fund, we have one class of shares. We have three different ways in which we give bonus units. The first is our Time Incentive Credit. This is to reward investors for earlier investment. For example, we’re here at the end of July, but if you’re to invest in July, you get 7.25% bonus units. That means if you bought $100 worth of our units, we will give you $107.25 worth of our units. Second way we give bonus units is our Multiple Ventures Program. This is for investors in our first fund. We’re rewarding them for investing again into our second fund. And then finally, our Volume Incentive Program, the more money in which you invest, the more bonus units that you receive. Of course, this is cumulative. We do have a lot of add-on investors. So, you can start with the minimum and then add on and receive bonus units for your entire amount at a later date.
These things add together. So, let’s say you invested $300,000 this month, you would get your 7.25% plus your 1% for a total of 8.25% bonus units. And that’s how our program works. Of course, to learn more about Urban Catalyst, please visit urbancatalyst.com. We would love to talk with anyone who is interested in participating in our program. And Jimmy, with that, I will stop sharing and turn it back to you.
Jimmy: Fantastic. Well, thank you, Erik. Very well done again. A lot of excitement happening in that area of Silicon Valley, Downtown San Jose, in particular, seems ripe for revitalization. We’ve got several questions here. And just to reiterate what I said at the top of Erik’s presentation, he’s going to be in a dedicated fund breakout session, which will be starting in about five more minutes. I’m gonna post the link for that in the chat right now. And we’re going to head on over there in a few minutes here. So there’s actually going to be concurrent tracks going. You can stay here in the main session for our educational panel, starting at 11:00 a.m. That’s in five minutes on tax policy and Opportunity Zones. But if you want to get with a group of investors like you and chat with Erik for another half hour or so, you can get in this separate Zoom meeting with Erik. You can even turn on your camera, turn on your microphone, you can actually talk to him like a person one-on-one. So head on over there in a few minutes, but let’s get to some Q&A here. We’ve got a few good questions from the audience. Dane asks, “Erik, is Urban Catalyst able to receive any California state tax credits or incentives that can be layered into the OZ fund?”
Erik: So, the answer is we probably could, but we are not utilizing any additional incentives. Really the three main incentives that we’re giving are the benefits associated with investing into real estate, all the benefits associated with having an LLC pass-through entity, and then all of the benefits associated with the federal Opportunity Zone program.
Jimmy: Good. Vicky asks is an important question. “Can we get a recording of this later?” And the answer is yes. I’m recording all these sessions and the recordings will be made available later this week. Rick asks, “Erik, can you address the California tax for closeout and annual payouts?” Excuse me.
Erik: Sure. So the majority of the distributions that we make over the course of the 10-year period should be tax-free, both federally and state, and that is our refinance and distribute. And the majority of that cash flow after you pay your taxes in 2027 is [inaudible 00:31:15]. That is paying back your initial investment so it is non-taxable. At the end of the 10-year period, obviously, California does not conform with the federal program. So California state taxes will be due when we sell the assets after 10 years, but in the overall program, it’s a very minor inconvenience when it comes to our overall returns.
Jimmy: Terrific. Brad asks, “What is the pref that Urban Catalyst is paying? And what fees are you charging, development fees, property management fees, leasing fees, sales fees, acquisition fees, etc.?”
Erik: Sure. So to learn all about our fees, please read our private placement memorandum. It goes into a ton of detail. But a high-level overview, we charge developer fees, and then we charge fund manager fees. From a fund manager perspective, we’re pretty standard, we’re at 2% and 20%. Two percent management fees per year. And then at the end, when we sell all of our assets, after our investors receive their money back, plus a 6% return per year, which could be called the pref, but it’s a little bit different, after they receive all their money plus a 6% return per year, there’s an 80/20 split of the profits, where the 20% go to Urban Catalyst. That’s really to incentivize us to have just amazing projects that have lots of profits. From a development fee perspective, we have pretty standard fees there as well. We have an acquisition fee, disposition fee, developer fee, and a financing fee. Those are our major fees. We have some other smaller ones, but those are kind of the big ones.
Jimmy: Paul points out that Silicon Valley is one of the wealthiest counties in the United States and the residence of many billionaires. He wants to know how much of your capital is raised from local investors in Silicon Valley that are probably most familiar with what’s happening in San Jose.
Erik: Sure. So, we raise about 70% of our funds, at least in our first fund, 70% of our investors were here in the Bay Area. As far as billionaires, I don’t think we have any billionaires in the fund. The majority of our investors are just regular folks. There are a lot of tech employees who…you know, a pretty typical investor would be a tech employee. They have a ton of money tied up in the company that they work for, you know, maybe Facebook, Google, Uber, you know, Amazon and, you know, majority of their assets are either tied up in that or their primary residence. And they’re always looking to diversify their portfolio, but they never wanted to take the tax hit selling their stock. Now that Opportunity Zone funds have been created, they feel that they can diversify their portfolio with the tax advantage and they’re taking advantage of that.
Jimmy: Terrific. Well, time has run out here for Erik in the main session. Erik, thank you for participating, thank you for joining us today, thank you for your time. Great presentation as always. And just one more final reminder, Erik’s gonna head over into the Zoom breakout session. Now, it’s a separate Zoom meeting where you’ll be able to turn on your microphone and actually talk with Erik one-on-one with a group of other investors. I’m gonna paste that link in the chat right now. So click the little chat icon at the bottom of your Zoom app if you want to pull up that link. Erik, I’ll let you go. You should head over there before people start showing up.
Erik: All right. Thank you so much, Jimmy. Take care.
Jimmy: All right. Thank you, Erik.