The Opportunity Zones Podcast is now on YouTube!
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.
- The migration taking place within Silicon Valley, as tech companies outgrow the office space available in Mountain View and Cupertino.
- 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.
- The importance of working in a location where local government wants development to happen, and how San Jose is unique from most of California in that regard.
- The potential for San Jose to triple in size over the nest decade if all projects currently slated for development are completed.
- The acquisitions and development that other top tier developers are taking on in San Jose.
- An overview of the six projects in Urban Catalyst’s Fund I, which closed in December 2020.
- 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.
- Factors that are driving demand for multifamily in San Jose, as jobs created have far outpaced the number of housing units build.
- The importance of a “project first” approach when developing in Opportunity Zones.
- The investment timeline for Urban Catalyst’s Fund II, including fund raise targets and planned distributions.
- The fourth hidden benefit of Opportunity Zone investing that applies to funds structured as an LLC.
- Live Q&A with webinar attendees.
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
Jimmy: There he is.
Erik: Hello, Jimmy.
Jimmy: Erik, how you doing?
Erik: Doing great.
Jimmy: Good to see you.
Erik: Good to see you too.
Jimmy: Yeah. This is becoming routine, isn’t it?
Erik: It is. It’s a lot of fun doing this presentation.
Jimmy: Good. You are a longtime OZ Pitch Day partner with us, and we appreciate that.
Erik: All right. So here at Urban Catalyst, we’re raising money in our second fund. It’s structured as a pre-traditional real estate equity fund. It’s focused on doing ground up real estate development projects in downtown San Jose. And it’s also an Opportunity Zone Fund. And that allows us to give the Opportunity Zone tax benefits to our investors. And just to kick us off, we’ve been featured pretty prominently in the news here in San Jose over the last few years. We’ve had over 200 news articles written about us. Really just a lot of positive buzz about what we’re doing here in downtown San Jose. Probably most important of these, we are named by Forbes Magazine as one of the top 20 Opportunity Zone Funds in the country. So there’s nothing like getting a little national validation from Forbes that we’re doing things the right way.
So a little bit about the program itself, in order to get the tax benefits, you have to have a capital gains event. Here are the three most common ways that folks have capital gains events. It’s interesting here at Urban Catalysts, the sale of stock, that’s our most common way that our investors have capital gains. And over 70% of our investors, that was their event. You know, it makes a lot of sense, folks. I’ve never really had a way to shelter paying those taxes from the sale of stock before Opportunity Zone Funds were created. And now that they have that safe harbor, they’re really looking into our program. So if you have a capital gains event and it has happened in the last 180 days and you invest into an Opportunity Zone Fund, that’s how you get those tax benefits. We throw this 180 days slide up here, just to remind everyone, so no one’s caught off guard, you have 180 days from that event to invest.
And then if you do invest, there are three primary tax benefits that you get from the program. The first is you’re able to defer paying taxes on that initial capital gains event until you pay your taxes in 2027. The second is, when you pay your taxes in 2027, you get a 10% reduction. So for every $100 that you would devote 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 an investor’s 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 everyone likes tax free profits. Here at Urban Catalysts, our plan is to build these buildings, lease them up, stabilize them, wait till we get to that 10-year mark, then sell the assets and liquidate the fund. And that’s when we return the majority of the profits to our investors.
Also one last thing to mention, and this 10% reduction right here, that goes away at the end of this year. So anyone out there that is interested in investing into Opportunity Zone Funds, definitely this is the year before that second benefit goes away. A little bit of history on the program itself, it was created as a part of the 2017 Tax Cuts and Jobs Act. And when it came out, the IRS and the Treasury said they were going to do three rounds of clarifications. Here are the dates that those three rounds came out. We had our attorneys put together how clear they thought the program was after each round. You can see the percentages here. And really the meaning of this is the program wasn’t 100% finalized until December of 2018 but now it is final.
Over here on the right-hand side, this is investments into Opportunity Zone Funds across the country. You can see before those April guidelines came out almost no investment. Once the December guidelines came out, the final ones you can see that increase in investment philosophy. So now we’ve got a clear program, which is great. But take a little bit of a step back here are the Opportunity Zones in the San Francisco Bay area. For this fund, obviously, we’re focused on San Jose and even more specifically, downtown San Jose. You can see that there are four Opportunity Zones that cover almost all of downtown. And you know, it’s interesting when I formed Urban Catalysts, my plan was to create a real estate equity fund focused on doing ground up development projects in downtown San Jose. And that was because it’s really all about the 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 started forming Urban Catalysts that I learned about the Opportunity Zone program, and that everywhere that I was planning on building these buildings was already located really in the zone. I thought, “Well, would it be nice to get my investors these additional tax benefits associated with this program?” So that’s how we became an Opportunity Zone Fund. And when I talk about the macroeconomic trends in Silicon Valley, I’m really talking about tech migration. I mean, here are a bunch of the big tech companies located in Silicon Valley. I mean, everybody knows lots of tech in the valley. For this specific example, I’m gonna talk about, really, the five largest companies in America by market cap. Three of them have their headquarters here in the Valley, which is Facebook, Google, and Apple. And really, as these companies have just grown to be enormous over like the last 20 years, they’ve expanded their office footprints, you know, all over the world, all over the country.
But here in the valley, we’ve seen a slow migration, Southwark. If Palo Alto and Mountain View are kind of the centers of the technology universe, they’re not very big cities. So we’ve seen especially in the last 10 years, a huge migration into the city of Sunnyvale. To give everyone an idea of kind of the scale of this, currently here in the city of Mountain View, Google occupies 95% of the office space in the entire city. Here in the City of Cupertino, very similar, Apple occupies 85% of the office space. And now in the City of Sunnyvale, Google and Apple combined have more than 50% of the office space. Sunnyvale has been really the beneficiary of this recently. I mean, gangbusters development has been happening for 10-plus years. And now the city is almost completely built out. And it was interesting, when I first started Urban Catalyst it was, I would say…I chose slide and I’d say, “And where will these companies continue to go? Now there’s no space left in Sunnyvale?” And the answer is downtown San Jose.
But now I can just say, “And all these companies have moved into San Jose because Microsoft and Apple have taken large land holdings in San Jose. Amazon has an office here downtown.” And really the big story has been Google. And we’ll talk a little bit more about that. But because of this tech migration, we’ve seen office rents in downtown San Jose more than double in the last decade. At the same time, we’ve seen vacancy rates that downtown hovered between 20% and 25% for decades now drop down below 10%. Now, here at Urban Catalyst, we’re not just fund managers, but we’re also the developers of all of our projects. We’ve done development all over the Bay Area. Three things that we want to see when we do development anywhere, and downtown San Jose has all three, the first is we want to make sure there’s a demand for all the different types of projects we’re building. That demand in downtown is really driven by the Silicon Valley job edge.
We want to see transit and physical infrastructure already in place. And downtown San Jose really is the only true urban environment in Silicon Valley. Diridon Station, slated to be the largest train station on the West Coast, has a variety of mass transit options that connect to it including Caltrain which can get you to San Francisco in about an hour. And now, BART, which is fully funded to connect through downtown into Diridon Station. And for those of you that don’t know, BART is the largest mass transportation system here in the Bay. It circles the entire Bay. Then, of course, last but not least, San Jose State University, you know, right in the heart of downtown with 35,000 students, it’s the second largest university in the Bay Area behind Cal Berkeley.
We also want to do business in a place where the local government wants to see development happen. You know, that is not the case in most Bay Area cities. But it’s absolutely the case here downtown. This is a picture of my partner Josh and I with Sam Liccardo, the mayor of San Jose. He’s 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’s put into place that have streamlined the preconstruction process and just made it so much easier for developers like us to do business in the downtown core. To give everyone an idea of just the massive revitalization that’s occurring here in downtown, I want to show this before and after slide.
This is the current skyline of San Jose. If all of the projects that are currently in the planning process are built out, say, over the next 10 years, downtown San Jose should triple in size. You can see Urban Catalyst Fund I and Fund II projects in red. Here’s my two-dimensional map to keep talking about the San Jose real estate market. This black line, this represents the Opportunity Zone. Our headquarters is right here. So Urban Catalyst, we’re located right in the heart of the zone. We’re right next to Adobe’s world headquarters and Zoom’s world headquarters. Here San Jose State University. This red dash line, this is where that new BART line’s going to run underneath Santa Clara Street. It’s got a station downtown and then connects into Diridon Station, that big train Station.
And as I mentioned, the big story over the last couple of years in downtown San Jose has been Google’s massive amount of acquisitions. To give you guys the cliffnotes, in the last five years, Google has spent almost half a billion dollars on land acquisition. They’ve acquired over 80 acres of property. And the plans that they had approved at city council earlier this year show them building small, roughly 7 million square feet of office and 6,000 residential units. At Buildout, this will be Google’s largest campus on Earth. So it’s pretty exciting stuff. Of course, Google is not the only story in town. We’ve also seen a lot of really big developers flood into the downtown in recent years. Three notable ones, Boston Properties, Jay Paul, and West Bank, combine these three groups have spent over a billion dollars acquiring property.
They’re planning on doing millions of square feet of new product here in the downtown to give everyone an idea of some of the really cool architecture that these groups are planning on to show this slide so you can see some of their renderings. But, you know, here at Urban Catalyst, you know, we saw this wave of development coming to downtown. You know, we started in 2018 and it was obvious that this was happening and our plan was to really get in on the ground floor and acquire properties before they were scooped up by all the other big developers and big tech companies. And that’s exactly what we did with the acquisition of our Fund I and Fund II projects. Here you can see our Fund I projects in blue. Six projects in Fund I. As Jimmy mentioned, we raised $131 million in Fund I. We raised money for two years. We closed fundraising for that fund in December of last year.
Here’s what those six projects look like, a variety of different asset classes. We started construction on Paseo earlier this year and we plan on starting construction on all of these projects, you know, in the next 10 months. The next project we’ll start in Madeira, Keystone and Delmas. Paseo and Fountain Alley, these are both 100,000 square foot mixed use office buildings. The Keystone is 175-key extended stay business hotel. It’s a Marriott town place suites. Delmas, this is senior living facility. Madera is an apartment project. And then The Mark is an 800-bed student housing high rise. So these were our projects and Fund I. But of course, today we’re here to talk about Fund II. Fund II is located right here in Orange. It’s just a fantastic location for new development. You can see we managed to acquire almost half of an entire downtown San Jose city block. And it’s right on Santa Clara Street.
Santa Clara is really the main drag of the central business district. It’s across the street from City Hall. It’s right next to that future BART station. So really the epitome of transit-oriented development. We really like this location. And this is what Fund II looks like. Fund II is two buildings, Icon and Echo. Icon there on the left is a 420,000-square foot office building and Echo on the right, that’s a 300-unit multifamily project. These are the two projects that are in Fund II. Here’s a different view of the projects. And you know, when I talk about these projects, so what I like to talk about is the demand, you know, why did we choose to build these type of buildings in this location. First, I’ll talk about multifamily demand. And this is kind of a no-brainer.
Here in California, you know, we have what’s called a housing crisis. It’s especially true here in Silicon Valley where we’ve created six jobs for every housing unit that we’ve built for over 30 years straight. And that has caused us to have some of the most expensive housing both for sale and for rent in the entire country. We literally can’t build multifamily fast enough to meet the demand. Interesting statistic that recently came out, if we wanted to build enough housing here in Silicon Valley to have an equilibrium of supply and demand, we’d have to build around 150,000 housing units. We’ve never built more than 5,000 housing units in a single year in history. That’s why I say we are gonna have a real hard time building our way out of this.
Whenever we build multifamily here at Urban Catalyst, and we’d like to put in a lot of just fantastic amenities for our tenants, this is our eighth floor podium deck. We have an infinity pool. You can see these cabanas. This is a two-storey amenity space that wraps the podium deck with an indoor and outdoor fitness facility. This has of course a dining room lounge area, movie room, game room. And then out here on the grass, we have some barbecue areas. Up on the 27th floor, this is our rooftop lounge, really to take advantage those views from the top of the building. Also, on the interior here, this is our office space for our residents. And this is the conference room. Of course, it doubles as a dining room in the evening. So that is the Echo project or multifamily.
And this is Icon. Icon is our office portion. And the difference in demand between multifamily and office here in Silicon Valley is there’s still a strong demand for office. It’s just that developers here in the Valley, we can build the office fast enough to meet the demand. So whenever we build new office, we know we’re going to be competing for those top quality tenants. And there are certain aspects of the project that are must haves in order to be successful. And this project, of course, has all of those things or else we wouldn’t be doing it. The first is, you know, the old mantra, location, location, location. We talked about the project’s fantastic location in the downtown core of San Jose. But, you know, San Jose competes with all Silicon Valley when it comes to the office market. And so how does downtown San Jose compete? And it really competes because it’s one of the only places you can get space at scale because there’s room to build larger projects. And rents are around 50% of what they are in the city of, say, Palo Alto. So you can get space more cost effectively.
Second thing that we want to see is what I call functionality. Functionality means that we have the right amount of parking, which we have for this building. We have these huge floor plates, so it’s almost 40,000-square feet per floor. I mean, that’s almost an acre of net square footage per floor. That’s really what all the big tech companies want to see these days that come the big fat boy floor plates. We also have 14-foot floor to floor heights. So we have that open airy office feeling and utilizes a lot of indoor outdoor space to really take advantage of the 300 days a year of sunshine that we have here in San Jose. You can see some of our exterior staircases, balconies, and back in this rendering, you can see some of the rooftop decks that we’re putting onto our buildings.
And then the last thing that we have to have when it comes to new office is what I call architectural aesthetic beauty. And we have to have a good looking project. For this project we’re utilizing WR and SSR architect. They’re one of the premier architects for new office in Silicon Valley. They just finished doing Microsoft’s campus up in Mountain View. And they have designed this project. I’m really pleased with how the design has turned out. So those are the two projects in Fund II. What makes Urban Catalyst different than other Opportunity Zone Funds is, you know, we’re not just fund managers, we’re also developers. You know, most other fund managers, that’s what they are. They’re fund managers. And their plan is to go out, you know, raise a ton of money and look all over the country to find developers that have projects located in Opportunity Zones.
You know, of course, here in the Valley, we look at Steve Jobs and Steve Wozniak and we think “These guys go out, you know, raise a bunch of money and hire 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. That’s exactly what we’re doing here at Urban Catalyst. We are the developers of all of our projects. And we have projects in our portfolio and now we’re taking them out to the market. Another thing that’s important that I like to talk about with any potential investor is, you know, when you hear about Opportunity Zone Funds, and the first thing you hear about is the tax benefits. You know, don’t get me wrong. We got great tax benefits associated with the program. But, you know, 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 or really what’s the point of the entire program. So understanding the overall real estate market, the asset classes that are being built, and who the developers are that are building the projects. That really matters.
Here at Urban Catalysts, we see ourselves as a solid fundamental real estate equity fund and ground up 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’m the founder. 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. I don’t know what that means. I’ve build large income-producing assets. Typical exit strategy is to sell to a publicly-traded REIT or a large institutional equity group. There are five partners in total at Urban Catalyst. So when I first started Urban Catalyst, I knew we’d be doing ground up development in downtown San Jose. So really wanted to build an all-star team of downtown San Jose developers, and I did that by bringing on Josh Burrows and Paul Ring.
I’ve known both Josh and Paul for over a decade. Josh is our chief operating officer for nine years. Before he joined Urban Catalyst, he was the lead developer at Barry Swenson Builder. They have a massive downtown San Jose portfolio of properties and Josh managed that entire portfolio. He did a lot of ground up development. He’s experienced building a variety of different asset classes and project types. Paul Ring for 15 years before he joined Urban Catalyst, Paul was the lead developer at the core companies focused on multifamily and below market rate housing here in the downtown core. Paul, you know, I had the unique experience of working as a joint venture partner with Paul about a decade ago on two apartment buildings here in San Jose, and really like Paul’s style. So we brought him on as a partner and he manages our 15-person team of development and construction professionals that build all of our buildings.
Of course, we’re not just developers, we’re also fund managers. Morgan Mackles. Morgan is very close friend of mine and we’ve been friends since w were in high schools so we’ve known each other for 25-plus years. Morgan has spent his career building scalable and repeatable sales processes. He’s done it for big and small companies, Fortune 500, all the way down to startups. And he’s the primary reason why we are so successful or we’re so successful in our Fund I fundraising and why we’re off to such a great start here in Fund II. And then Shawn Raft. Sean is our chief operating officer, or excuse me, he’s our chief administrative officer and general counsel. So Sean is an attorney. He manages our financial consultants, our legal team, our accountants that do our tax and audit. He also manages our fund administrators and he does all of our compliance with the SEC and with the Opportunity Zone rules and regulations.
So these are the five partners at Urban Catalyst. Combined, we’ve done over $5 billion worth of ground-up real estate development here in Silicon Valley. And you can see the heavy concentration of projects in downtown San Jose.
Now, I’m going to switch gears a little bit now and talk about our projected investment timeline. This is something that all of our investors always want to know about, you know, every Opportunity Zone fund, a little bit different. So for this fund, we’re raising $200 million. Minimum investment size, $250,000. We plan on a three-year fundraise. We base those three years on…you know, in Fund I, we average raising $65 million a year. So put that together for 3 years, that’s our $200 million. Just so we all remember, here’s where you have to pay your taxes on your initial capital gains event in 2027. And then after that 10-year holding period here in 2034, that’s when we plan to sell the properties. And that’s, of course, again, when we return the majority of profits. But we do plan on making distributions prior to the end of that 10-year holding period, the first time being in 2026.
And this is through what I call our refinance and distribute program. This is really developer 101 because this is something that we do quite often. And that is we’re going to start construction on these buildings here in 2023. They’ll be completed in 2025. We’ll have been leased up and stabilized in 2026. And when that happens, we go out and we get permanent financing. We take the permanent financing, we use it to pay off the construction loans, and then any excess refinance proceeds, we plan on passing those through to our investors. And that is a tax-free distribution. You know, our overall goal is to be able to distribute enough money from these funds that our investors can use that money to pay their taxes in 2027. Right now, we are targeting a distribution of 65% of our investors’ initial investment back to them in 2026 as a part of this program.
Of course, there are no guarantees associated with investing into Urban Catalyst. You have to read our private placement memorandum to understand all the risks associated with investment. But I did want to show you what our business plan is. By the way, my attorneys always loved me to say that so there you go. After our refinance event, we have these stabilized assets. Those assets will cash flow for the remainder of the whole period before we sell the assets in 2034. And this is also where I like to talk about, you know, what I call the fourth hidden benefit of the Opportunity Zone program. And it’s specifically for Opportunity Zone Funds that are structured like Urban Catalyst as an LLC. The way that this works is we plan on passing through losses as a part of this fund. I mean, obviously, as an LLC, we have that ability. And that’s great.
You know, our investors will get a K1. It will show losses almost every year through the duration of the fund. And that’s fantastic. They can use those losses to offset other passive income. A lot of those losses come from depreciation, and I’ll explain depreciation a little bit. You know, anyone that owns real estate typically takes depreciation on their tax returns every year. It’s no different. Here at Urban Catalyst, we just have bigger buildings and what we do with that depreciation is we pass it through to our investors as passive losses. And as I mentioned, they can use it to offset other passive income or if they can’t, that’s fine too, because that depreciation that’ll accrue over time, carry forward and carries forward forever. So you can always use it in the future.
Now, here’s where that fourth hidden benefit comes in. And that is, typically when an investor owns real estate and they sell that real estate asset, a government makes some payback all of that depreciation. Specifically, for Opportunity Zone Funds, you don’t have to pay back that depreciation. There is no depreciation we capture. So all those passive losses that you’ve accumulated over time, you get to keep them, at least the ones from depreciation. And also, what happens when we sell the asset is those passive losses convert to active losses. And so moving forward, investors are able to use those active losses to offset things like ordinary income, which is great because ordinary income, typically a much higher tax rate.
So here’s how all of this is put together. Just to give you a little bit of a, you know, recap. Vesting period is three years. Here’s where we make tax-free distributions from our refinance event. After that we have cash flow, which is tax free because it’s a return of capital once you get basis here in 2027. And then, of course, when we sell the assets, not only is there no depreciation recapture, but there’s no taxes on federal capital gains. So just overall, a well-rounded program. Last thing I want to talk about, here at Urban Catalyst we have a bonus units program. This was really popular in our first fund. So we continued it here into our second fund. The way that this works, if you invest in Urban Catalyst, what you’re doing is you’re buying our units. Of course, you’re paid out based upon the number of units that you own.
We do this in three ways. The first is our time incentive credit. Time incentive credit, this is to reward investors for earlier investment. You can see here we are in November, 6.25% Bonus units. You can save those down every month throughout the fundraising period. And what this means is if you bought, say, $100 worth of our units today, we’d give you $106.25 worth of our units. Second way we get bonus units, this is our multiple Ventures Program. This is if you are an investor in our first fund where it’s a loyalty reward’s program for investing into our second fund. And then finally, our volume incentive program. This is to reward investors for more investment. You can see our minimum at $250,000, 0%. Start getting bonus units at $300,000 and going all the way up to $1.9 million.
Of course, these three add together to calculate your total amount of bonus units. Also another nice thing, our volume incentive program, you know, over 10% of our investors that invested in our first fund invested more than one time. So for example, if you did $500,000, you know, now you get 2%. Let’s say next year, you have another capital gains, and then you do another $500,000, that would bring all of your units is 4.5% in the volume center program. So it’s cumulative. Really, that’s the end of my presentation, Jimmy. So I’ll stop sharing my screen and we can get to chatting.
Jimmy: Yeah. A little tremendous job, Erik. I feel like you’ve given that presentation at least once or twice before. Very well done, thank you.
Erik: Maybe so.
Jimmy: Thanks for joining. Once again, we’ve got a lot of questions actually. I do want to get you over into your breakout session in a few minutes here. But let’s see if we can run through some of the questions here right now. If we don’t get to your question, don’t worry. The main session here is going to close down for a lunch break for about a half an hour. Erik is going to head over into the breakout session. I would encourage you to join him over there if you have any questions. Or you can kind of hang out here and watch my screensaver go by for 30 minutes. It’s up to you. So several questions here. Let’s start with the first one here from Chris. Chris asks, “Hey, Erik, are you open to doing OZ development deals in Oakland as well? Lots of great opportunities to share.”
Erik: So, by the way, I love the City of Oakland. Prior to starting Urban Catalyst, I was the president of Zash in America. We’re a joint venture partners on the Brooklyn basin Master Plan, which is a 3,100-unit development on the Oakland waterfront, 64 acres of property. Love that project. That whole project is in the Opportunity Zone. That was before Opportunity Zone really were a thing. But big fan of Oakland. This fund, we’re really just focused on downtown San Jose. So we’re not planning on expanding in Oakland.
Jimmy: All right. I got a similar question from Matthew and from Jennifer. They ask, “With more people working remotely, is there going to be a demand for more office space,” Jennifer worded it as, “With the trend toward hybrid work environments emerging, have you taken into account the reduced demand for office space? How has that affected your projections?” What are your thoughts there?
Erik: Sure. So, you know, lots of statistics out there showing that we don’t really have a reduced demand for office. I mean, there was somewhat of a pause during the heart of COVID but we’re not St. Louis and market share to sublease space anymore here in the valley. If I did want to talk about it, I could go on and on. But I think a personal story is probably better. We had an investor who contacted us from Netflix. And this is when he was, you know, thinking about investment before he invested. And he said, “Erik, I’m worried about office space, you know, hybrid work. And Netflix just told me that I’m going to be working from home indefinitely. In fact, they send me a box with all of my stuff in it. And that worries me.” And frankly, kind of worried me a little bit, too. I mean, Netflix has come out publicly. They want everybody back in the office as soon as possible companies.
And so I called my friend who works over in HR at Netflix, and I said, “Hey, are you guys forcing people to work from home? Are you going to be subleasing space or not releasing? Or what’s going on?” And he said, “Well, yes, we are forcing people to work from home. But no, we’re not, you know, getting rid of space. We’ve hired so many people during the pandemic that even bring people back on a hybrid work schedule, we’re not going to have enough space for everybody. So we’ve identified folks that we think can successfully work from home. And we’re going to force them to work from home really until we get more office space to bring them in.” And so we’ve seen that happen at a number of different companies. You see it once and it might be a coincidence. We’ve seen it several times and it’s kind of more of a trend.
Jimmy: Gotcha. All right. Well, what about Terrence here? We’ll get to his question. Terrence asks, “Have any of your past projects or do you have any future projects at Urban Catalysts that are focused on affordable housing?”
Erik: So the answer is we build affordable housing into our some of our projects based upon, you know, the requirements of the City of San Jose. We also pay, you know, fees to the city and pretty significant ones for the creation of below market rate housing, but we are not below market rate housing developers in general. And although there are a couple of Opportunity Zone Funds that have, you know, done some twists and turns to be able to build below market rate housing, the two programs don’t really overlap a whole lot. I mean, our biggest benefit is we give tax free profits. The creation of below market rate housing intentionally has no profits. So don’t quite go together.
Jimmy: Yeah, they do get conflated, oftentimes, affordable and with OZs, but they are two separate programs. What do we got in time here? Let’s go a couple more minutes here and then we’ll get you off into your breakout session. Let’s see. An anonymous attendee asks, “What are the fees of the fund?” What’s your fee structure look like, Erik?
Erik: And so we have a pretty standard fee structure at the fund level. We have a 2 and 20. So 2% management fees, an 80/20 split of profits really on the back end after our investors receive all of their money back plus a 6% return per year. We also have pretty typical developer fees. You know, I mentioned we’re not just fund managers but also the developers. It’s also kind of nice, you know, the transparency, you get to see what our development fees are. You know, most of the time you invest in other funds, and they’re paying developer fees, but you don’t know what they are. One of the big benefits from our fees is what I call the no-double promote. Typically, when a fund invests into a project, the developer of that project is going to be getting, you know, a promote sort of like our 80/20 split at the fund level, the developer is going to be getting that at the project level. We have no promote the project level, only at the fund level. So no double for now.
Jimmy: Okay, that’s good to know. George asks, and I think he’s referring to the Icon, Echo project, “What is the average apartment rental rate?”
Erik: Sure. So for Class A apartments here in downtown San Jose, it’s somewhat of a range between $3.75 in net square foot per month and $4.25 in net square foot per month.
Jimmy: Let’s see, anonymous attendee, and we’ll wrap up here after this question. “If the property was already acquired, what is the price to fund two investors for the land? Is the fund making a profit or is it contributed at cost?”
Erik: So the answer is it’s contributed at cost. And we have acquired two of the four parcels associated with the project. We’re in contract on the other two. We closed escrow on the third property next month, and we’ll close escrow on the fourth property in December of next year. You know, obviously, as developers, we prefer long-term option contracts to close on property because we don’t have to allocate fund dollars for the closing until a later date.
Jimmy: Fantastic. Well, we’ll wrap it up there. I’m going to head into a lunch break. The main session is going to be in a lunch break here for the next 30 minutes or so. In the meantime, please do head over to the breakout session. I’ve just posted a link to that breakout session in the chat. So if you click the chat icon at the bottom of your Zoom toolbar down there, you’ll have it pop up. It’s the most recent please sent message. That link right there. Erik, you should head over there now. I know Chris Cooley has it open and he’s ready for you. And I’ll see you on the other side, Erik. Thanks again for participating and have a good day.
Erik: Always a pleasure participating in great program and good to see you.
Jimmy: All right. Thanks, Erik. Take care.