OZ Investing In An Economic Downturn, With Erik Hayden

The stock market is down more than 20% year to date. Interest rates are on the rise to tackle the highest inflation rate in 40 years, but this may inevitably lead to a recession. How are Opportunity Zones potentially being impacted by these turbulent macroeconomic conditions?

Erik Hayden, founder and CEO of Urban Catalyst, joins the show to discuss inflation, the market downturn, cap rate compression, and rising interest rates, and what effect these trends are having on Opportunity Zone fundraising and capital deployment.

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Episode Highlights

  • A brief preview of OZ Pitch Day, OpportunityDb’s live event on July 28th.
  • Are we currently in a recession or heading into one?
  • How turbulent market conditions have changed Opportunity Zone fundraising, and specifically the capital base at Urban Catalyst.
  • Why a downturn in 1031 exchange volume, coupled with real estate investors’ search for cash on cash return may lead to more Opportunity Zone fundraising from investors with capital gains from real estate sales.
  • Why rising interest rates may soon lead to an increase in cap rates, after a long period of cap rate compression.
  • How inflation and fears of a recession may or may not be affecting OZ fundraising and capital deployment.
  • The state of office as a property type, and trends to watch.
  • Urban Catalyst’s big $100 million milestone, and their plans beyond Opportunity Zone Fund II.
  • How the Opportunity Zone reform legislation may have a negative impact on San Jose’s Opportunity Zone status.

Today’s Guest: Erik Hayden, Urban Catalyst

Erik Hayden on the Opportunity Zones Podcast

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.

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Show Transcript

Jimmy Atkinson: Welcome to the opportunities on the podcast i’m Jimmy Atkinson and today we’re talking about opportunities own investing during a market downturn joining me today on the show is Eric Hayden, Founder and CEO of Urban Catalyst, a premier Silicon Valley Opportunity Zone fund. Urban Catalyst is also the title partner on our upcoming Uzi pitch day that will be taking place on Thursday, July 28.

If you’re an investor who’s looking to learn more about Qualified Opportunity Funds and if you’d like to learn more about Urban Catalyst in particular, you can register for free at OZ Pitch Day dot Com that’s OZ pitch day dot com please sign up and join us on July 28 for our big live online event.

We’re getting back to our show for today here with Eric and Eric you’re joining us today from urban catalyst headquarters in downtown San Jose California, welcome to the show how you doing.

Erik Hayden: Jimmy it is such a pleasure to be on your show, and yes, I am in downtown San Jose where we have another day of beautiful sunshine.

Jimmy Atkinson: Fantastic we’ve got a lot of sunshine here in Fort Worth Texas, but it’s a 105 degrees outside here right now so.

Little, little warm here.

probably a little better weather out there in San Jose I would hope but let’s let’s dive into the episode today Eric really anxious to chat with you, we we speak.

A few times a year you’re always one of our big partners on the pitch day, as I mentioned, and we do two or three podcast interviews per year, you were last on my show last March, prior to our spring.

Uzi pitch day event and a lot has happened just in the last few months in terms of macroeconomic conditions and and the market.

You know, inflation is at 40 year highs it’s currently running at eight and a half percent or more.

The market is down more than 20% year to date now it’s actually the worst first half of the year, since 1970 we’re recording this episode, the first week of July, so we just got those numbers from the first half of the year.

Interest rates are on the rise, to help combat inflation, but that might end up making recession and inevitability Eric, what do you think about all these turbulent economic conditions and are we in a recession are we heading into one.

Erik Hayden: mean it’s so so interesting to think about that, because so much has happened since the last time we talked Jimmy and.

In general it hasn’t been the most positive news mean obviously 2021 was like a banner year here in Silicon Valley, especially but I saw an interesting statistic.

Just this week, said going into the recession of 2008 2009 40% of economists thought they were in a recession.

And just recently, we have nationwide 40% of economists think that we’re going into recession, so I think when we hit that 40% that’s when we’re pretty sure we’re going to have recession but.

You know overall recession fears or recession fears long term investments like opportunities own funds where we’re looking at over a 10 year horizon.

Definitely not as impacted, but in some cases we’ve seen some changes to our fundraising that’s.


Jimmy Atkinson: Well, so let’s talk about that how has your capital base changed over the last three to six months, I know I know you guys were always used to getting a lot of investors who had capital gains from stock invested in your Fund has that changed over time and, if so, how.

Erik Hayden: You know, it has changed, and you know just a little bit of a recap, you know, in order to get the tax benefits for opportunities own funds, it has to be a capital gains.

vested in the three most common capital gains events are the sale of stock the sale of real estate in the sale of a business, you know we’re located here in Silicon Valley.

And a lot of our investors, you know work at tech companies and the sale of stock was their capital gains event.

Since the stock market has gone down pretty significantly over the last couple of months, the number of investors that have invested with us from the sale of stock has significantly decreased.

kind of makes a lot of sense right, I mean these investors had their portfolio is really high, and now they see it, a much lower and they think well, we can just wait to sell Intel.

You know it rebounds it goes back up again and also Jimmy This is exactly what we saw right at the beginning of coven when the stock market went down.

There was about four or five months there were stock investment just really wasn’t happening.

Now what’s a little bit different this time around, is that we’re seeing the sale of real estate as an investment type really pick up.

And that has a lot to do with just real estate valuations in general i’m talking about commercial real estate.

Because interest rates have gone up to combat inflation and we haven’t quite seen the market correct.

As far as CAP rates increasing to make better deals or which I say sales prices decreasing so that investors can get that cash on cash return they’re looking for.

And because of that folks that already sold the property or somewhere in there hundred a day period, you know, perhaps they’re looking to do a 1031 exchange.

they’re looking out into the market, but seeing high interest rates for their loans that they want to take out.

And they’re seeing CAP rates that don’t reflect the current market, as in the sale prices are too high.

And they’re saying to themselves, this isn’t a good deal for me what other types of tax advantage, things can I do to shelter this capital gains.

And so obviously opportunities own funds comes to the surface, so, in fact, even though we’ve been having kind of a rough quarter and half a year to date.

Our fundraising velocity has remained about the same in fact we’re a little bit ahead of where we anticipated being up you know really when we set our goals at the beginning of the year.

Jimmy Atkinson: Now that’s interesting so you’ve seen far fewer stock gains come in through your platform, but, but the real estate activities picked up quite a bit.

Erik Hayden: that’s exactly right.

Jimmy Atkinson: yeah and there’s so there’s a lag in some cases, because a lot of your investors are doing 1030 ones at first and then what happens what causes them to shift away from doing a 1031 exchange oftentimes.

Erik Hayden: Well, you know, the main reason why people sell real estate, is what I call top of the market means they’re going to get the highest price they’ve never been able to get for their property.

So they sell their property here, maybe their property was getting a certain you know return they’re getting a cash on cash return or maybe like a call it like a five.

And they’re happy with that five, but now they can get this amazing price, so they sell their building and now they need to do at 1031 exchange, at least in their mind.

So they’re going out and they’re looking for a replacement property and what they’re seeing is because the interest rates are higher.

And because CAP rates haven’t adjusted to reflect the higher interest rates they’re not seeing that same cash on cash return they’re getting before they’re seeing lower.

And so to them they’re saying Well, this is a horrible market I can’t find any deals out there that pencil and make sense to me.

i’m not going to make a bad investment i’d rather pay the taxes, then make a bad investment.

And they go Oh, but there are these opportunities out funds it’s a little bit different you know it’s not exactly.

A 1031 exchange tax benefits scenario, but you do get some tax benefits and they are pretty interesting maybe we’ll check that out so that’s what we’re seeing is those folks are coming to us.

And they’re coming to us in a larger volume and we’re having a larger volume of them invest with us.

Jimmy Atkinson: hmm okay that’s a really interesting so correct me if i’m wrong, but I think I got this straight and when you’re doing a section 1031 exchange.

You you have 180 days to complete the transaction much like you do with an opportunities on investment, you have 180 days from when you trigger the gain.

To roll it over into an opportunity zone fun, but the difference, one of the differences there’s a lot of differences.

Between the two programs one difference is when you are doing a section 1031 exchange.

You only have 45 days to identify replacement properties, is that what is happening here is investors are taking that 45 day period and they’re realizing there’s nothing good out there and then while you still do the blow through the 45 day, but at least they’ve got 135 days left.

Erik Hayden: know so, then they what they do is they identify their properties usually.

And then they work on the properties and they start putting together their loan packages and start doing they’re closing up this isn’t worth and they call the seller and they say.

I need a price reduction of a million dollars for this deal doesn’t work for me the seller goes give us I just won’t sell I don’t need to sell it for that kind of price i’m song, because the top of the market, and then the buyer saying, but it’s not top of the market anymore.

they’re correcting and they’re saying well, maybe we don’t have a deal and so now they’re going well, what am I going to do now, if I can’t make a good deal.

Opportunities on funds are still a good deal, you know our returns haven’t changed because interest rates are up or down and it’s because of more of the longer term aspects of what we do versus what they’re.

Jimmy Atkinson: I gotcha that makes sense, you mentioned CAP rates, a moment ago they’ve been compressing for years, and you mentioned interest rates are going up.

So you’re anticipating CAP rates are going to increase as well, can you go into the the math of of why that works out that way, why do rising interest rates, typically lead to rising CAP rates.

Erik Hayden: Sure there’s there’s a definite correlation between the two, and it goes like this.

An investor who wants to invest in by you know, an existing building they’re looking at what is the risk versus return threshold that makes sense for that.

So, for example, say they want to buy a building and what they’re really looking for is a certain cash on cash, but as an easy example let’s say it’s 100 million dollar bill.

And the building has a five CAP so CAP rates are really what people look at when they’re looking at the acquisition.

CAP rates a CAP rate is equal to net operating income divided by sales price.

So I went out and had a five cap on a building I was buying and I bought an all cash that’s $100 million building i’d end up getting $5 million a year, as my cash on cash return now your cash on cash return is kind of the end all be all for buying existing.

Existing assets and a lot of folks are also going to look at what markets will appreciate, over time, but in the short term, you got to make sure your cash on cash return is acceptable.

So here i’m looking at my 5% cash on cash return with an all cash purchase.

Now, using leverage to buy real estate, is a very common practice as long as you don’t use too much leverage, so if I was to use leverage in this exact scenario.

let’s pretend i’m going to use 50% lever so 50% loan to value now I have 100 million in cash so now, instead of buying one building like by two buildings let’s pretend they’re identical buildings, each of them have five caps.

So I put $50 million of cash into each one and $50 million debt into each one now.

back before they started raising interest rates let’s pretend interest rates were 3%.

Now, this would make a lot of sense to me as the investor, because now i’ve got these two buildings, they generate $10 million a year in net operating income.

And this interest only loan at 3% that i’ve got i’ve paid debt service on it, but the debt service is only $3 million a year.

So now, instead of getting $5 million during my all cash purchase i’m getting $7 million a year by using leverage, and that is my cash on cash return.

Now that’s that risk versus return them i’m talking about so an investor who bought this building prior to interest rates going up was really looking for a 7% cash on cash.

So they looked at five CAP knew they could use leverage and boost that twist cetera.

But now the interest rates are up if we did the same scenario let’s pretend interest rates are 6%.

So now you’ve got your $10 million in net operating income on your two buildings but you’re paying $6 million a year in debt service on your 6% interest only loan.

And now you’re only netting $4 million here that’s a 4% cash on cash that’s lower, so the investor saying, well, I mean I could get an all cash building I could get a 5% using leverage actually hurts me so.

I really didn’t want to buy this building unless it was a seven cash on cash return hey property seller decrease the purchase price, so that the CAP rate is a 7% and i’ll buy this building.

And the sellers are saying no i’m selling at the top of the market, this is not what I signed up to you, I can just hold the property.

And the buyers are saying Well, this is a bad deal i’m not going to make this deal.

And what other alternatives do I have as far as tax advantaged you know things I can do, then opportunities own funds are great option so that’s why we’re seeing more of that is because they can’t find that that type of cash on cash that they’re looking for as a risk adjusted return.

Jimmy Atkinson: yeah great great explainer there on CAP rates and how interest rates can affect CAP rates thanks for that Eric so as a result of that are we seeing transaction volume slow down and what’s what’s happening with the commercial real estate market right now.

Erik Hayden: We haven’t.

we’ve seen it start to slow down, but it hasn’t slowed down a ton yet, but we think that it will you know, towards the end of the year, but we’re also seeing.

Property evaluations, you know we’re seeing that correction happen so a lot of properties that were in contract they fell out of contract and they’re now back on the market at a higher CAP, so the market is correcting itself that shouldn’t be too much of an issue over time.

Jimmy Atkinson: Alright, so I want to return to what we were talking about a little bit at the beginning of our episode.

The fact that we may already be in a recession or possibly we’re heading into a recession in any event.

there’s a lot of negative sentiment from investors about a recession looming potentially is that affecting your fundraising at all, or is it affecting your capital deployment at all as as you go to deploy the capital we’ve already raised.

Erik Hayden: So it’s not affecting our fundraising at all well not significantly anyway, I mean Besides the fact that we have more real estate transactions and the sale of stock and you know, looking at how the stock market has behaved.

You know in previous times when the Fed has raised interest rates, overall, the stock market typically does fine throughout the interest rates going up.

At you know here in in the beginning, usually, when they start raising interest rates every kind of freaks out it’s a consumer sentiment in the stock market So you see a little bit more volatility.

But if history has shown us it’s shown us that the stock market will continue to go up, and this is somewhat of a dip so this shouldn’t be the end all be all what what really is is that.

We probably are in a recession and if we are in a recession, it may affect you know how investors invest their money.

But investors still are going to be making money there’s so many places, to put it still going to have capital gains events, and so we think that tax advantaged funds will really do fine throughout this portion of the economy.

Jimmy Atkinson: And what about inflation, I also mentioned at the top of the show that we’re experiencing you know.

Once in a generation inflation levels it’s the highest level of annualized inflation that we’ve seen in I think about 40 years since the early 80s.

we’re at about eight and a half percent now over the last couple months here year over year.

What impact if any is inflation having on your operations at urban catalyst Eric it does it had does it have any impact on on fundraising does it have any impact on your operating costs or how you deploy your capital.

Erik Hayden: So, inflation is something we’re always paying attention to and, in general, inflation is a positive thing for us.

And it kind of sounds funny that it’s a positive thing, because you know we’re looking at building these buildings, you know we have eight buildings between our two funds.

And a couple of those are under construction, but you know a lot of them, we still need to lock in our construction financing, so we do worry about inflation when it comes to construction costs.

Now that being said, there are a lot more factors that go into construction costs and concept construction costs inflation than just regular inflation.

The primary driver of construction costs, inflation is the supply and demand for Labor here in the Bay area we don’t have enough workers that live here to build our buildings.

So we’ve already built in pretty significant construction costs inflation contingencies into our models kind of what we’re expecting to happen, based on you know historical data.

And so I don’t see inflation changing those numbers significantly, but where inflation really changes things is it almost directly correlates to market rate rents, especially for multifamily, but it also is true for office industrial hotels senior living.

And let’s pretend in any of our models that construction costs go up at the same exact percentage as market rate rents.

And what we find is we have positive return so increase returns, because it matters more what the rents are than what the construction costs are and so yeah we’re seeing inflation is a good thing for our returns.

Jimmy Atkinson: yeah and it’s it’s leading the rent increases well what kind of rent rate increases, have you seen over the last year or so and and are those rent rate increases increases are they sustainable.

Are they keeping pace, are they out flagging wage increases.

Erik Hayden: So.

office is kind of an easy story right office has these long term leases 10 to 15 years we haven’t seen a whole lot of change in office rate rents they’re kind of stable.

multifamily has changed significantly during coven rents in San Jose went down about 15% I just read a reason for it, so they went down total 80% and.

As of just this quarter rents, are now back above pre coated levels 3% above you know early 2020.

that’s a really good sign for our mark is that we knew they’re coming back we’ve seen you know the callers and care and numark reports that rents were going to go up 10% this year and we’re seeing it happen now, is it.

going too fast, are we seeing it outstrip you know inflation and wage increases and all those things the to call it most common ways that you correlate.

Market rate apartment rents, one is to compensation to employees and two is to the price of single family homes and what your monthly mortgage payments are.

We have seen wages here in Silicon Valley for our tech employees, which are our primary renters increase over 30% in the past 18 months so that has been very significant.

we’ve also seen home prices go through the roof, for the last two and a half years the median home price in San Jose is now $1.4 million making San Jose the fourth most expensive city it’s a major metropolitan to live in in the entire world so.

we’ve also has that goes on, we see an interest rates creep up with the only increase mortgage payments, so the delta between what you pay in rent and what you pay in a mortgage payment is now extremely significant.

In fact, there is an article in the paper that came out just today, that said, if you rented versus bought the same home home in Silicon Valley, you would save $150,000 over a five year period.

So it’s renting is now significantly more affordable than home ownership, if anything is happening because of this.

You know inflationary pressure it’s these wage increases.

it’s affecting urban catalyst that as we go to hire new employees we’re having a much more challenge the time finding employees, just because there’s such a high demand for the employees here right now and their salaries are so high.

Jimmy Atkinson: And there’s not enough housing as, as you mentioned, which is one reason why you’re building more housing, but it’s expensive to build housing because there isn’t enough housing so it’s kind of a chicken and egg problem there but.

Erik Hayden: It sure is, we have a hashtag we like hashtag every unit counts.

Jimmy Atkinson: yeah I think that’s a that’s a good one and and very true as well well let’s uh let’s shift gears a little bit and talk about.

fun one and fun to from urban catalyst your first to qualified opportunity funds.

fund one closed, I think, a couple years ago now, and and you, you have construction underway on some of the projects within fun one it was a multi asset.

fund that invested in about a half dozen different real estate projects all located in downtown San Jose what are some updates, you can give us on on your fund one projects to date carrick.

Erik Hayden: So fun one we raised 130 $1 million, it was a two year fundraise we close the fundraising period in December of 2020.

Other six projects in that fund we’ve started construction on per sale we’re actually almost done with construction that’s 100,000 square foot mixed use office building.

And we’ve broken ground on different place, which is our senior living facility and we’re making great progress on the other projects we plan we plan to break ground on two additional projects.

Before the end of this year and then two more projects in q1 and q2 of next year, so that’s exciting it’s also exciting in our first fund Jimmy that three of our projects are about.

300 yards away from google’s future mega campus and they’ve announced they’ll be breaking ground before the end of this year.

You know their first phase is right next to our projects, and they also have come out and said that their project which is around 6000 housing units and 7 million square feet of office will be a 10 year $19 billion build out just an enormous thing happening there, but.

What i’m really excited to talk about right now is our presale project, the one that did construction is almost complete.

That project 75,000 square feet of office on two floors and then we have a ground floor, which is retail on a new restaurant row and we’re putting in for ground floor retail tenants.

we’ve signed leases on three of the four spaces, we have a group called urban putt coming in this will be their third location there a miniature golf full service bar and restaurant.

And I can kind of, say, urban putt to me is burning man meets Las Vegas meets like a theme park, it is the coolest putting you’ve ever seen.

So they’re taking a huge amount of our space or ground floor retail space has 35 foot Florida ceiling heights so it’s really an enormous space, you can do a lot.

Our second tenants called unofficial login they are an x their own place this is their second location their first location is in bend Oregon you can think eating French Fries hamburgers fried Pickles drinking some beer and throwing some access so that’s fun.

Our last group that we just signed up as a group called paper plane there downtown San Jose bar and restaurant group they have three of the coolest bars and restaurants here in downtown and they’re opening this.

will be their fourth location and they’re planning on doing a brunch concept which is really exciting.

i’ll be able to announce our fourth tenant here shortly, but we haven’t signed the contract yet, but you can think coffee.

Jimmy Atkinson: Okay, well, good luck with that i’m thinking coffee right now.

So, and then above those ground floor.

tenants there’s office above there in presale Are you concerned about the current.

Back to work climate in the Bay area in Silicon Valley in San Jose what what’s what’s the current status of office or people going back what’s what’s going on there, what does downtown San Jose look like these days in terms of office tenants.

Erik Hayden: And you know i’ll tell you that has been the question i’ve gotten probably most consistently over the last couple years I think Jimmy you and you and i’ve talked about it.

Jimmy Atkinson: yeah i’ve I think i’ve asked you about it, every time you’re on the podcast and I think it’s getting better and better but, but what are we, what are we looking at right now.

Erik Hayden: Well, the bay area still has the lowest return to work of anywhere in the country, Texas, where you’re at Jimmy is leading the way.

You know it’s kind of funny before the pandemic everybody looked at occupancy rates is how to judge how many people are in the office and now they’re actually not counting the number of people.

In the home so interesting statistic prior to cove ID on average 65% of workers were in the office, every day, that was the number.

Texas right now is between 60 and 70%.

They lead the nation.

Here in Silicon Valley, where stirrups thought about 35% which means we’re at about 50% or so so about half the people are back in the Office now but.

kind of fun that’s happening here in downtown you know we’re right next door to zoom’s world headquarters and we share a parking garage resume.

about a month ago, all of my employees were complaining that there is nowhere to park because zoom was back in the office, and you know.

You think of anybody who is going to drink the you know work from home forever Kool aid, it had to be zoom right, and they are back in the office another exciting thing that we were seeing it was recently announced adobe has had their world headquarters here for over 25 years.

they’re just about finishing their cold Shell improvements on their new million square foot office high rise and they had announced during coven that they did not plan on occupy and building out the tenant.

And just last week, they announced they’re starting the tenant improvements and they will be moving 3000 employees into that office building almost doubling their footprint of employees here in downtown San Jose so it’ll be nice to have some new neighbors.

Jimmy Atkinson: yeah that’ll be nice it sounds like downtown San Jose is coming back to life, a little slower than then we’re coming back to life here in Texas, but, but surely enough, and certainly.

with Google building that mega campus they’re building, I think the long term trend there I can’t imagine they build that canvas then have nobody come into it so.

I think you’re asking me anyway, probably like you’re heading in the right direction, but maybe a little slower than you’d like well, what about fun to Eric.

fun to you started raising capital for shortly after you closed fund one you are raising capital for the ground up construction of two buildings on a single city block icon and ECHO.

an office building and the multifamily building you just surpassed 100 million dollars raised so congrats there what’s the status of iconic oh what, what can you tell our listeners and our viewers about it.

Erik Hayden: Sure, so I kind of core are two projects and fun to and fun to as a $200 million fundraise we plan on continuing to raise funds through the end of next year.

So, having the halfway point of 100 million, you know, we had a big celebration, it was a lot of fun.

I caught an ECHO making just a ton of progress as a part of the assemblage of property, we have almost half of the entire downtown city city block, as you mentioned.

And we’ve acquired three of the four properties so we’ve closed escrow on those we’re in a binding option contract to purchase that fourth property.

And we plan on purchasing it here in November of this year, so coming up here shortly will own all four properties for the project.

Also, you know we’re also making a lot of progress with the city as far as our building permits, we expect to have our building permits by mid next year.

Our first building permits, however, will have in November of this year, so we’ll start doing some demolition and some of the off site utility work, which is why we’re able to close escrow now last property, because it was closed escrow a building permit very exciting.

Jimmy Atkinson: feel break ground before the end of this year that’s the that’s the current timeline.

Erik Hayden: yeah we’re going to start doing some of the preliminary work from the DEMO some of the groundbreaking and then we’ll start vertical construction activities on one of the two phases mid next year.

Jimmy Atkinson: And then, when will you top off the buildings and complete the project ultimately.

What her timeline look like they’re.

Erik Hayden: Both buildings take about two years.

Okay, starting in 2023 they’ll be done.

And will leave them up and stabilize them and that’s really the big thing for our investors as a lot of opportunities own fund investors, want to see is.

They want to see the fun make distributions prior to that 2027 day when that’s pay taxes on that initial capital gains event, so our plan here during catalyst build the buildings least them up stabilize them.

Get that permanent financing pay off the construction loan and then any excess refinance proceeds distribute those to our investors, so that they can pay their taxes in 2027.

Obviously Jimmy.

No guarantees, but definitely want to share the business.

Jimmy Atkinson: Now that’s huge yeah I think a lot of funds are planning something similar taking some refinance proceeds and distributed them out to their.

Opportunities own equity investors, so that they can pay that tax bill when it does come do.

In April of 2027 I think that’s that’s smart and, of course, you know you’d like you mentioned not guaranteed, anything can happen here in the next few years, but that’s the plan at least I think it’s smart that you build that in.

Erik Hayden: You know one nice thing Jimmy that we’re seeing is right across the street from our project icon an ECHO is a brand new 630 unit multifamily project is too high rise buildings that’s called mural.

And it is currently leasing up at 35 units, a month, and it has the highest multifamily rents in the city.

And so, seeing that happen right across the street it’s really good sign for downtown San Jose and for our overall market it’s Nice that the rents, that we have in our models are lower than the rents that they’re leasing up today across the street.

Jimmy Atkinson: that’s great now that’s great news for for you and for downtown San Jose for sure, and what about.

Beyond fun to looking into the future, a little bit here Eric what are your plans and urban catalysts plans after you’re done with fun to will there be a nosy fun three or perhaps other types of real estate investment funds, what are you thinking there.

Erik Hayden: Sure, I mean if the current legislation holds up more than likely we will have an opportunity zone fun three it would start in 2024.

Beef you know focus on downtown San Jose that’s where we are developers, you know really what sets us apart from most other opportunities own funds is.

Where the developers, not just the fund managers and we’ve been doing business here in San Jose for our entire career, so this is kind of more of the same for us a lot of successful projects for this funding it in a different way.

However, of course, i’m sure you’re very aware, as are a lot of your listeners that the new legislation that’s been proposed surrounding opportunities own funds and that might change our plans.

Jimmy Atkinson: Because of the current legislation arm sorry the the the pending legislation I should say, or the legislation that has not been passed, yet, but was.

introduced into both Houses of Congress both the House and the Senate back in April of this year would call for several improvements to the opportunities own tax incentives.

But it would also disqualify early certain high income census tracts What impact would that have on on San jose’s opportunity zones where you are developing Eric.

Erik Hayden: Sure, so.

You know, overall I think it’s great legislation and i’m really hoping that it passes, because it would be a huge benefit for our investors, you know we have over 750 investors now.

and two of the huge benefits number one, no one has paid their taxes on that initial capital gains event 2027 they get an extension to pay in 2020.

So an additional couple years that’s always nice yeah The second thing is there were some incentives as a part of the program that i’ve Since you know.

ceased, and one of the big ones was when you pay those capital gains taxes.

On that initial capital gains of it, you got a 15% discount then it was a 10% discount now it’s zero.

This would retroactively give everybody that has invested in the opportunities on program that 15% discount when they pay their taxes now in 2029.

And you get that discount throughout the rest of this year and then next year it’s 10% so kind of get to rewind the clock, a little bit on that one which would be nice.

Love those two benefits in fact i’ve gone on record saying, if that legislation passes, I will sponsor a fireworks show over downtown San Jose for our investors, because it’s so exciting.

Now that being said.

to other you know kind of significant aspects of the legislation, one is reporting requirements.

that’s not really that challenging I mean it’s just some additional paperwork.

kind of gives us here at urban catalyst reason to brag a little bit, we like to think of ourselves, like the shining example of what an opportunity zone fund is supposed to be doing for the local community.

In you know what was the overall intend to the program and is it being met, we like to think that we are exactly what the program intended and we are meeting it so that’ll be kind of fun.

The last one, is what you mentioned, which is certain opportunities own funds will no longer in the future be opportunities and funds because their median income levels are higher than, say.

National average you know statistics, it would in fact get rid of three of the four downtown San Jose opportunities and friends, including all of the.

Jimmy Atkinson: tracks, I think I just.

Erik Hayden: tracks, including the tracks, where all of our projects are located.

Now our first two funds would be fine were grandfathered in we’re not even just grandfathered in there’s like five criteria that grandfather you and we check all five boxes so it’s kind of that’s that’s an easy one, but.

Jimmy Atkinson: To be clear, your existing investors have.

Erik Hayden: nothing to worry about.

Jimmy Atkinson: that’s correct.

Erik Hayden: I guys, we have nothing to worry about.

But as far as starting future opportunities own funds they wouldn’t be grandfathered in so we wouldn’t be able to do business in San Jose San Jose is where we do business.

And I mean it may be that we decide, yes, we can go to oakland i’ve done a lot of work in oakland they have great opportunity zones in oakland but.

it’s going to be something we’re gonna have to think about in the meantime Jimmy we’re looking at other types of funds.

We do have a couple of funds on the horizon, one is an interval fund and another is a Delaware statutory trust they’ll architectural trusts pretty interesting, it should be coming out here.

Mid to late August and it’ll be our first Delaware statuary tresor DST and they’ve been very popular in the market is a really a tax advantage for the sale of real estate.

Jimmy Atkinson: is essentially a fractionalized 1031 exchange for for lack of better phrasing, I think, is that right.

Erik Hayden: I like to call it a syndicated.


Jimmy Atkinson: There you go.

There you go.

Erik Hayden: Yes, fractionalized kind of makes sense, this is a bunch of investors pull their money together and invest into a fund and they get all the tax benefits of a 1031 exchange and they get property that is you know institutional quality and scale with institutional quality managers.

Jimmy Atkinson: That they might not otherwise be able to reach on their own, but.

got a million bucks you can invest in a DST maybe access $50 million 100 million dollar property and in in a fractionalized ownership group is that right.

Erik Hayden: that’s right and then DST is you know, in general, they make monthly payments, we like to call that mailbox money because you don’t have to manage the property you’re not unclog in a toilet all you’re doing is going your mailbox getting your check.

Jimmy Atkinson: yeah that’s exactly right it’s a lot different than oC investing which is more opportunistic there’s no there’s no stabilized asset at the beginning of a nosy investment oftentimes takes a few years to.

Get that property built up or the project substantially improve before it starts cash flowing but but DST so it’s cash flowing from day one, and in a lot of cases.

Erik Hayden: that’s exactly right, you know jenna sometimes like to break up real estate into three categories as far as you know, the types of investment it’s.

You can buy stabilized assets that are income producing you can buy assets that are income producing that you’re going to do some value add you know getting some improvements to them.

And then you know you can do ground up development, the majority of opportunities on funds are either ground up development or pretty significant improvements.

Because there is additional risk you got to have higher returns so.

In general, opportunities on funds have a higher return threshold, then you know buying existing stabilized assets, but there’s a market for all of it so.

You know everyone’s portfolio needs some real estate and having a variety of types of real estate would be a good thing from a diversity perspective.

Jimmy Atkinson: Absolutely it’s exciting to hear that you guys are getting into the DST game i’m.

Looking forward to speaking with you and your team more about that in the coming months as you get closer to launching that product type well Eric.

As always a pleasure speaking with you today you’re a great guest, as always, I think you’re one of the more prolific guests, I have ever had on.

The opportunity zones podcast I don’t even know which episode number, this is for you on here, but you got to be up at like five or six or something like that.

You know, to me it’s just because I like talking to you so much.

I think that’s it I think that’s it and, of course, we appreciate having you guys as our title partner.

on the pitch day and again, you can head to oC pitch day calm to learn more about our upcoming event on Thursday July 28.

But Eric before I let you go today where can our listeners and viewers go to learn more about you and urban catalyst if they’re interested in learning more about what you have to offer your investment offerings your qualified opportunity fund or your upcoming DST.

Erik Hayden: Sure visit us at urban catalyst calm.

Jimmy Atkinson: Urban catalyst calm that’s easy enough and, as always, of course, for our listeners and viewers out there today I will have show notes available on the opportunity db website.

At opportunity db.com slash podcast and they’re all have links to all of the resources that Eric and I discussed on today’s show and.

Also, please be sure to subscribe to us on YouTube or your favorite podcast listening platform to always get the latest episodes Eric thanks again really appreciate your time today.

Erik Hayden: Thank you Jimmy take care.


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OZ Pitch Day

June 13, 2024