OZ Pitch Day - March 23rd
The Epitome Of Transit-Oriented Development, With Urban Catalyst
In this webinar, Erik Hayden reviews many of the projects from Urban Catalyst’s first OZ fund, and the Icon / Echo project in its second OZ fund.
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 the fund and related projects.
- Request more information from the fund sponsor.
- How the trends in “tech migration” position San Jose to thrive;
- Urban Catalyst’s checklist for attractive markets, including engines of job growth, transit infrastructure, and supportive government policies and agencies;
- Projections for the massive development expected to take place in San Jose over the next decade;
- An update on back-to-office trends in San Jose;
- Drivers of the prolonged housing crisis in California and particularly in San Jose;
- Updates on apartment rental and occupancy rates in San Jose;
- Review of renderings for the Icon and Echo projects in Fund II;
- Erik’s background as a developer and the backgrounds of his executive team;
- Review of the timeline for the Fund II projects, including tax deadlines and anticipated sale;
- How Urban Catalyst utilizes depreciation passthroughs to minimize tax liabilities for investors;
- Urban Catalyst’s bonus units program, a unique feature of its OZ fund;
- 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
- Visit UrbanCatalyst.com
- See Fund II Projects
- Read about the Urban Catalyst team
Jimmy: Erik, here he comes. Hey, there he is. How are you doing, Erik? Good to see you.
Erik: Hey, Jimmy, great to see you. How are you?
Jimmy: Fantastic. As always, great to have you partnered with us on today’s event as our title partner once again on OZ Pitch Day, this being the summer 2022 edition. Erik, you’ve got 30 minutes to run us through Urban Catalyst Opportunity Zone Fund II.
Erik: So, Urban Catalyst Fund II, we’re structured a lot like a traditional real estate equity fund. We’re focused on doing ground-up real estate development projects in Downtown San Jose, California. And, of course, we’re also an Opportunity Zone, allows us to give the Opportunity Zone tax benefits to our investors.
Just to, you know, kick us off, we’ve been featured pretty prominently in the news over the last few years, really just a lot of positive buzz about what we’re doing here in Downtown San Jose. And we’ve had over 250 news articles written about us. Probably most important of these, we were named by “Forbes” magazine as one of the top 20 Opportunity Zone Funds in the country. Nothing like getting a little national validation from “Forbes” that we’re doing things the right way.
Of course, a little bit about the program itself. And I’m sure most of you folks know about the Opportunity Zone program, but just a quick reminder, of course, in order to get the tax benefits associated with our program, you have to have a capital gains event. Here are the three most common ways that people have capital gains events. Also, once you have that capital gains event, you have 180 days to invest into a Qualified Opportunity Zone Fund. And we just put up this slide to make sure that nobody misses out on that opportunity.
There are two major tax benefits associated with our program, the first is you’re able to defer paying capital gains taxes on that initial capital gains event until you pay your taxes in 2027. The second is after an investor’s money seasons in our fund for 10 years, all of the profits from the fund are tax-free from a federal capital gains perspective.
So, here at Urban Catalyst, our plan is to build these buildings, lease them up, stabilize them, hold them until we get to the end of that 10-year mark, and then liquidate the fund selling the assets, and that’s when we return the majority of the profits to our investors.
Taking a step back, here are the Opportunity Zones in the Bay Area in green. Obviously, for this fund, we’re focused on Downtown San Jose. You can see there are four zones that cover almost all of Downtown. And, you know, it’s interesting, when I first formed Urban Catalyst, you know, my whole plan was to create a real estate equity fund, focus on doing ground-up development in the Downtown area mainly because of the overall macro-economic trends throughout Silicon Valley are pointing towards Downtown San Jose as the next place to do development on a large scale.
And, you know, when I talk about that, what I’m really talking about is tech migration. Tech migration, you know, everybody knows there’s a lot of big tech companies here in the Valley. For this example, I’m just going to talk about these five companies which are now the five largest companies in the United States by market cap. They all have a huge presence here in the Valley. Some of them have their headquarters here. As these companies have grown over the last 20 years, you know, they’ve expanded their office footprint all over the world, all over the country. But here in Silicon Valley, we’ve seen a slow migration southward. That’s because really Mountain View, Palo Alto, and Menlo Park, this is the center of the Silicon Valley universe. But these are, you know, very large cities. And so as these companies have grown, they’ve really made a big move in the last decade into the city of Sunnyvale.
And to give everyone an idea of just the scale of this, currently, in the city of Mountain View, Google occupies 95% of the office space in the entire city. Very similar here in Cupertino, 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.
So, Sunnyvale, really the beneficiary of this, they’ve… you know, development has been going gangbusters there for over 10 years. Now, the city is completely built out. And it’s kind of fun, right, when I first started Urban Catalyst, I’d show this slide and I’d say, “And where’s the next place these companies are going to move? Obviously, they’re going to move down into Downtown San Jose.” But now I can just say…and we’ve seen these companies move to San Jose because Microsoft and Apple have taken big land holdings. Amazon has an office in Downtown.
The biggest story in the last five years has been Google, and I’ll talk a little bit more about what they’ve been up to. And then Facebook hasn’t quite made it to Downtown San Jose, but just in Q4 of last year, they took 1.2 million square feet of new office in Santa Clara, about 5 miles outside of Downtown. So definitely following this tech migration trend.
Now, we’ve been developers for a long time here in the Bay Area. And whenever we do development, there are certain things that we want to see in an area, and really Downtown San Jose has all of those things. The first is we want to make sure that there’s a demand for all of the different types of projects that were building. That demand at Downtown San Jose is really driven by the Silicon Valley job engine.
We want transit, and physical infrastructure should already be in place. And Downtown San Jose really is the only true urban environment in Silicon Valley. Diridon Station is 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, which will get you up to San Francisco in about an hour. And now BART, which is the largest mass transportation system here in the Bay Area, it’s finally fully funded to connect through Downtown San Jose into Diridon Station.
And then San Jose State University, often overlooked, but it shouldn’t be because it’s the second largest university in the Bay Area behind Cal Berkeley with over 35,000 students. That’s right in the heart of Downtown.
And last but not least, you know, we 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 California cities. Most California cities are somewhat anti-development, but it’s almost the complete opposite in Downtown San Jose. They want to see development, they want it to be high density, and they want to see development now.
This is a picture of my partner Josh and I with Sam Liccardo, the mayor of San Jose. Sam has been the mayor for eight years. And before that, he was the council member that represented Downtown San Jose for eight years. And it’s really the policies that he’s put into place that streamlined that pre-construction process, and just made it so much easier for developers like us to do business.
To really show everyone just the massive revitalization that’s going on here in Downtown San Jose, I like showing this before and after slide. So here is the current skyline in Downtown 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 projects, both are Fund I and Fund II projects there in red.
To continue talking about the Downtown San Jose market, sometimes a two-dimensional map is good to go through. So here’s Downtown, this black line. This represents the Opportunity Zone. Our headquarters is right here, so we’re located right in the zone. We’re right next to Adobe’s world headquarters and Zoom’s world headquarters.
Interesting little side note, we share a parking garage with Zoom. And about a month and a half ago, all of my employees were complaining that there was nowhere to park because Zoom was back in the office. And, you know, I thought if anybody was gonna drink that work-from-home forever Kool-Aid, it definitely would be Zoom, but apparently not. They’re back in the office.
Here’s San Jose State University. This red dash line, this is Santa Clara Street. This is where that new BART line is running. We have stations Downtown connecting into Diridon Station, that really large train station.
And I mentioned that I talk a little bit more about Google because, over the last five years, they really have been the biggest story here in town. They’ve spent more than $0.5 billion acquiring property, they’ve acquired over 80 acres, and their plans that were approved at City Council last year show them building roughly 7 million square feet of new office and 6000 residential units. At buildout, this will be Google’s largest campus on earth. They’re planning on spending $19 billion on this buildout and they’re planning on starting construction in Q4 of this year.
To give everyone an idea of really the scale of what this means to San Jose, you know, San Jose is the 10th largest city in America with just over a million people. And the Downtown area has about 100,000 people. This campus alone is expected to bring between 40,000 and 60,000 additional people to Downtown San Jose every day. So it really is a game changer for the Downtown.
But, you know, Google is not the only story in town. We’ve also seen other, you know, major developers move into Downtown over the last few years. A couple of notable ones, Boston Properties, Jay Paul, and West Bank. Combined, these three groups have spent more than $1 billion acquiring property. And they’re planning on building millions of square feet of new development projects. Here’s some examples of what they’re building.
Jay Paul is about halfway done with this million-square-foot office high-rise. Boston properties is well underway with this million square feet of office, and West Bank just last month broke ground on this 1.2 million-square-foot high-rise. So we’re seeing all of these buildings come, you know, to fruition.
And, you know, when we first started Urban Catalyst, we saw this wave of development coming to Downtown San Jose, and our whole plan was to get in on the ground floor and acquire properties before they were scooped up by all the other developers and big tech companies. And really that’s exactly what we did with the acquisition of our Fund I and Fund II projects.
A little bit of a recap on our first fund. Six projects in our first fund. You can see them there in blue with a variety of different asset classes. A couple of mixed-use office buildings and hotel, multi-family student housing, senior living. We’re making great progress on these projects. We’re middle of construction on Paseo. We just broke ground on Gifford Place. We plan on starting Keystone and TMBR before the end of this year. So definitely got some positive momentum going.
But, of course, today we’re here to talk about our current offering, which is Fund II. Fund II is located right here in orange. You can see we managed to acquire almost half an entire Downtown San Jose city block. It’s right on Santa Clara Street, which is really the main drag of the central business district. It’s across the street from City Hall, and it’s right next to that future BART station, really making it the epitome of transit-oriented development.
And here’s what Fund II looks like. There are two projects in Fund II. On the left is Icon. Icon is a 500,000-square-foot office building. And on the right is Echo. Echo is just about 400 units of multi-family. Here’s a different view of these projects.
And, you know, when I talk about these projects, what I like to talk about is the demand. So I’ll start here with Echo, our multi-family project. You know, the demand for multifamily and housing, in general, here in Silicon Valley is somewhat of a no-brainer. California, we have a housing crisis. It’s especially true here because, in Silicon Valley, we’ve created six jobs for every housing unit that we built for over 30 years straight. And that has caused us to have some of the most expensive housing prices in the entire world.
Right now the average home in San Jose cost $1.5 million. And while that’s overall not so great for our society, it is kind of nice for apartment developers because it means we’ll have high rents and high occupancy rates. And I thought the most eye-opening statistic that came out recently was, you know, if we wanted to build enough housing to have supply equal demand, we’d have to build really 150,000 housing units here in Silicon Valley. And we’ve never built more than 5,000 units in a single year in history. So that’s really how far behind we are.
And then, of course, in other exciting news, as of this month, apartment rents in Silicon Valley are now higher than pre-pandemic levels. We’re now 3% higher, and depending on which report you read, rents for multi-family went down between 15% and 18% here in San Jose. We’re now back to those pre-pandemic levels, in fact, just a little bit higher. And all of the big agencies, you know, Colliers, CBRE, they’re all projecting huge rent increases here in Silicon Valley over the next 12 months.
Of course, whenever we build multi-family, we like to put in just fantastic amenities for our future tenants. This is our sixth-floor podium pool deck. We have an infinity pool with cabanas. This is a two-story amenity space for our residents that wraps the pool deck. This is our indoor/outdoor fitness facility. In here we have a dining room, full bar, and kitchen, game room, and movie room. Out on the lawn, we have some barbecue areas. And then up on the 26th floor, this is our rooftop lounge with couches and fire pits. Interior here, this is an office area for our residents. This is their conference room that doubles as a dining room in the evening.
Now on to Icon. Icon again is our office project. You know, the demand for office here in Silicon Valley has been relatively strong throughout the pandemic. A little bit different than the rest of the country, mainly due to the success of a lot of the tech companies here in the Valley over the last couple of years. But kind of the difference in demand for us as developers is we can build office fast enough to meet the demand.
So, whenever we build new office, there are several criteria that we have to have in order to really attract that top-quality tenant. And this project has all those things. The first is we have the old mantra, “location, location, location.” We have a fantastic location here in Downtown. And then Downtown San Jose, you know, it competes with all of Silicon Valley as its competitive market area. And the way that Downtown competes, it’s really in two ways. The first is rents for office in Downtown San Jose are about 50% of what rents are, say in Mountain View. So it’s a lot less expensive to lease here in Downtown. Also, it’s one of the only places that you can get space at scale. If you wanted to get 500,000 square feet of office, you know, in Palo Alto, you might be in like 10 or 12 different buildings. So if you want to locate your headquarters in one location, this Downtown San Jose is a great spot for that.
The second is what I call functionality, you know. Functionality, we have to have the right amount of parking. We have an eight-story parking garage right here. And then we also have these huge floor plates. So every single floor is more than 40,000 square feet. So that’s almost an acre of net square footage per floor.
We also have 14-foot floor-to-floor heights with floor-to-ceiling windows for that open, airy office feeling. And we have a lot of exterior amenities. You can see these exterior staircases, we have some balconies, we have rooftop gardens, really just to take advantage of the 300 days a year of sunshine we have here in San Jose.
And then the last thing is what I call architectural aesthetic beauty. That’s just a fancy way of saying you have to have a good-looking building. We’ve utilized WRNS as our architect for this project. They’re one of the premier office architects here in Silicon Valley. They’re fresh off completing Microsoft’s new campus up in Mountain View. And we’re really pleased with how this design has turned out.
You know, most other Opportunity Zone Funds out there, you know, their whole plan is to go out, raise a ton of money, and then look for projects all over the country so they can find developers that have these projects in Opportunity Zones, then they can form these partnerships.
Of course, here in Silicon Valley, we like to look at Steve Jobs and Steve Wozniak and we think, “These guys go out, you know, raise a ton of money, and then hire someone to build them a computer?” The answer is, of course, not. They built a computer, and then they took it out to the market. Really, 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 we have projects in our portfolio, and now we’re taking those projects out to the market.
Another thing that I like to talk about with all of our potential investors is, you know, when you hear about Opportunity Zone Funds, you know, you hear about the tax benefits. And, you know, don’t get me wrong, we’re big fans of the tax benefits here at Urban Catalyst. But if the biggest tax benefit you’re getting is you’re getting tax-free profits after 10 years, you know, there better be profits after 10 years. Really what’s the point of the entire program? So, understanding the local market, understanding who the developers are that are building your buildings, and really what asset classes they are and how they fit into the market, that’s what matters.
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, it’s just the icing on the cake for our investors.
A little bit about us. I’ll start with me. I’m the founder of Urban Catalyst. I’ve been a developer my entire career. I’ve done several billion dollars worth of ground-up projects, all of those in the Bay Area. A lot of focus in Silicon Valley and San Jose specifically. In general, I build institutional quality and scale projects, which just means I build large income-producing projects with a typical exit strategy of selling out to a publicly traded REIT or a large institutional investment group.
There are five partners here at Urban Catalyst. We also now have 42 people that work here, but I’ll talk about my partners a little bit. So when I first started Urban Catalyst, I knew we’d be doing these projects in Downtown San Jose. I wanted to really create what I call the all-star team of Downtown San Jose developers. I did that by bringing on Josh Burroughs and Paul Ring. These two gentlemen, I’ve known for over a decade each.
Josh is our Chief Operating Officer. And prior to joining Urban Catalyst, he was the lead developer at Barry Swenson Builder. He got experience building just a variety of asset classes and product types when he was there for 10 years or so.
Paul Ring. Paul is our Executive Vice President of Development and Construction. For 15 years before he joined Urban Catalyst, he was the head developer at the Core Companies, and they focused on doing below-market-rate housing and market-rate apartments almost exclusively in Downtown San Jose.
But, of course, we’re not just developers, we’re also fund managers. Morgan Mackles is our Head of Investor Relations. I’ve known Morgan for over 25 years. He and I went to high school together. He was a groomsman at my wedding. Morgan has spent his career building scalable and repeatable sales processes. He’s done it, you know, for small and large companies, startups, all the way up to Fortune 500. And he’s the reason why we’re so successful in our Fund I fundraise, raising over $131 million and why we’re off to such a great start here. In our second fund, we’ve now raised over $105 million for this fund, on our way to $200 million.
Sean Raft, you know, last but not least. Sean, one of everyone’s favorites. Sean is our General Counsel and Chief Administrative Officer. Sean’s an attorney. And what he does is he manages our financial consultants, our accountants that do our tax and audit, our legal team, our fund administrators. He does all of our compliance with the SEC and with the Opportunity Zone rules and regulations. Sometimes I just like to say, you know, Sean really dots the I’s and crosses the T’s here at Urban Catalyst.
So these are the five partners. Combined, we have done over $5 billion worth of ground-up real estate development here in Silicon Valley, and you can really see that heavy concentration of projects in Downtown San Jose.
All right, now for the fun part. You know, every Opportunity Zone Fund is a little bit different. Wanted to show you our timeline and how it all works. So, we’re doing a three-year fundraise for this fund. As I mentioned, right on schedule, a little over halfway through the fundraise. We’re a little over halfway through our monetary goals.
Of course, just so everybody remembers, here in 2027, this is when you have to pay taxes on that initial capital gains event. And then here in 2034, after the 10-year hold, this is when we plan on selling the properties and returning the profits to our investors. And, of course, the profits are tax-free.
Now, 2034, kind of a long time to wait. We do plan on making distributions to our investors starting in 2026 as a part of our refinance and distribute program. Sometimes I call this developer 101 because this is something we do almost every single time, and that is we’re planning on starting construction on these projects towards the end of 2023. They’ll be complete here in 2025, will be leased up and stabilized here in 2026.
And when that happens, we go out and we get a permanent financing. We take the permanent financing, we pay off the construction loan, and then any excess refinance proceeds, we distribute those to our investors. That is a tax-free distribution because it is a distribution of debt. Kind of, like, a home equity line of credit.
Right now we are targeting distributing roughly 65% of our investors’ initial investment back to them in 2026. And, of course, our overall goal is that we’re able to distribute enough money from this fund that our investors can use that money to pay their taxes on that initial capital gains event in 2027.
Now, obviously, there are no guarantees associated with investing in Urban Catalyst, and you do need to read our private placement memorandum to understand all of the risks, but definitely wanted to show you our business plan.
After 2026, you know, we’ll have these stabilized assets. Those assets will be cash flowing. We plan on distributing that cash flow to our investors throughout the duration of the whole period before we sell the properties in 2034.
Now, here’s where I like to talk about what I call the third hidden benefit of the Opportunity Zone program. I mean, we talked about the deferral of paying taxes till 2027, and then the tax-free profits after 10 years. But for funds that are structured like an LLC, or as an LLC, like Urban Catalyst is, we’re also able to pass through losses. A lot of those losses that we’re able to pass through come from the depreciation of our stabilized assets.
So, just like anybody that owns real estate, we’ll depreciate our assets every year on our tax returns. The difference is we pass through that depreciation to our investors as passive loss. In fact, we plan on having so much loss that it will more than offset the amount of cash flow that we’re distributing, which should make most of that if not all of that cash flow tax-free.
Then that third hidden benefit right here at the end, you know. Typically, when you sell a real estate asset, you’re required to pay back all that depreciation in what is called depreciation recapture. And nobody likes depreciation recapture. So, specifically, for Opportunity Zone Funds with our type of structure, there is no depreciation recapture. You get to keep all of it. So, just a nice little additional benefit that they put in there towards the end of 2019 when they came out with the final round of clarifications for this program. So, here’s all of that put together.
Also, want to talk about our bonus units program. This was a really popular program in our first fund, so we did continue it here into our second fund. The way that this works, you know, if you invest with Urban Catalyst, what you’re doing is you’re buying our units, and then, of course, you’re paid out based upon the number of units that you own.
We give bonus units in three different ways. First is our Time Incentive Credit. And this is really to reward investors for earlier investment. You can see here we are. Just at the end of July, we have 4.25% bonus units. You can see it goes down every month throughout the duration of the fundraising period. And what this means is if you invest this month, and let’s say you buy $100 worth of our units, we give you $104.25 worth of our units.
The second way we give bonus units is our Multiple Ventures Program. This is for all of our investors that invested in our first fund. If you choose to invest into our second fund, you get 4.5% bonus units.
And then finally, our Volume Incentive Program. This is really to reward investors for more investment. Our minimum investment size is $250,000. You can see bonus units start at $300,000 and go all the way up to $1.9 million. And another nice thing about this Volume Incentive Program is, let’s say you have a capital gains event this year, you invest $300,000 with us, you get 1% bonus units in the Volume Incentive Program. And then next year, you know, our fund is still open. You just have another capital gains event, you do another $300,000, that would bump all of your units up to the $600,000, 2.5% bonus units. So it’s a cumulative process. And then, of course, these three add together to get your total amount of bonus units.
And really, Jimmy, that’s the end of my presentation. And I’ll stop sharing and perhaps we can do a little bit of Q&A.
Jimmy: Well, fantastic. Thanks again, Erik, for participating today and joining us as the title partner on today’s event at OZ Pitch Day here. If you do have questions for Erik Hayden and wanna know more about Urban Catalyst Opportunity Zone Fund II, please use the Q&A tool in your Zoom toolbar. So fire those questions over.
We got a couple of questions in so far. And let me check on the time here. It looks like we’ve got about five or so minutes before we’ll kick you over into your dedicated breakout session for anyone who wants to engage more one-on-one with Erik after the presentation here in the main session.
Nola asks, “How does the work-from-home trend impact your projects?” I think this question came in right before you started talking about how Zoom was clogging up your parking lot and coming back into the office. But maybe you can give us some additional thoughts on the work-from-home trend.
Erik: Sure, Jimmy. You know, that has been, of course, one of the most common questions that we’ve had over the last, you know, couple of years. And there’s a lot of different answers to it but, I mean, obviously, we take that into consideration. What we’re seeing here in Silicon Valley is we’re kind of lagging the rest of the country when it comes to the return to office.
So, right now, you know, like, the state of Texas is leading the country with pretty much 100% of their folks back in the office. Here in Silicon Valley, we’re still at about 50% of our folks, but we’re definitely been increasing pretty steadily every month. You know, for example, Zoom is in the office a couple of days a week, but I’ve noticed in the last month they’ve started coming in more and more often. Very similar, Facebook has started coming back in on certain days. Apple has started coming back in. So we’ve seen a lot of that happening.
But what we’ve really seen that is really what we wanna see is we’ve seen leasing activity start to pick back up as far as the leasing of new office. We’ve had several big leases happen over the last few months. I mentioned that huge Facebook lease of 1.2 million square feet in Santa Clara. But last year, Apple also took 700,000 square feet in Sunnyvale. Again, this year, they took another 400,000 square feet in Sunnyvale.
Tesla. You know, everybody talks about Tesla leaving and going to Texas. Everybody fails to mention that as they move their headquarters, they also did a massive expansion here in Silicon Valley. They’ve leased over 550,000 square feet of new office since they made that announcement, a lot of it in the city of Mountain View, some of it in Fremont where their large factory is.
But just here in Downtown San Jose, you know, Adobe, who’s right next door to us, they just finished building a new million-square-foot office high-rise. And they announced two weeks ago that they will be moving 3,000 of their employees back into the office before the end of this year. So we are seeing that trend increasing.
We also…and this really kind of confused us at first when we first started to see it back in July of 2020. We started to see the volume of office sales, so people buying existing office buildings here in Silicon Valley really pick up to almost, like, two or three times the typical velocity of those transactions. And, you know, it didn’t really make a lot of sense. Why would people be buying office in the middle of a pandemic when work-from-home had just started and we all kind of were scratching our heads?
And it turns out that Silicon Valley, because of the strength of the companies that are located here, it really has been that safe harbor for big REITs and big institutional equity groups that have a mandate that they want to place money into office in the United States. They really see Silicon Valley as a safe harbor.
So, those transactions have continued, just in the last six months. There’s an office complex over right next to our airport, about five miles outside of Downtown, and that complex sold for a new record pricing of over $1,100 per square foot. It’s leased to Yahoo, but it was the highest price per square foot in San Jose history. So we are seeing this huge demand for existing office and leases pickup. So as far as work-from-home is concerned, we’re feeling pretty good about the return to office.
Jimmy: Yeah. Interesting. Good comments there, Erik. We got time for a few more questions here. Who is your external auditor?
Erik: We use Novogradac as our external auditor. Novogradac has really branded themselves as the accounting firm for Opportunity Zone Funds. They created the National Working Group that advises the Treasury and the IRS on any ongoing legislation. And my partner, Sean, who’s our General Counsel is on that National Working Group. So, it’s always nice to hear their insight into, you know, the overall legislation.
Jimmy: Novogradac is great. I know we got one or two folks from Novogradac joining us right now. So hello to Novogradac out there if you’re listening and watching.
Erik: Novogradac are huge fans. We love you guys.
Jimmy: Yeah, we are as well. So we got a couple more questions here. You mentioned exiting past investment to REITs. Is that the same plan for this fund?
Erik: So, you know, really what we’re gonna do at the end of 10 years is we’re gonna strategically take these properties to the market. And it is very possible that a publicly traded REIT will be our buyer. But, of course, we’re going to do a widely marketed offering so that we can find, you know, the best buyer to pay the highest price.
Jimmy: Very good. And then we’ll do one more question, and then we’ll wrap it up here. We’ll send everybody into that breakout session if you want to join Erik there for some more one-on-one engagement. Erik, have you acquired all of the land for the Fund II projects? Are there any roadblocks there?
Erik: So, there’s no roadblocks. There are four parcels associated with the two projects. We have acquired and closed escrow on three of the four parcels. We are in a binding purchase agreement to purchase the fourth parcel, and we plan on closing escrow on that in November of this year. So that’s coming up here pretty soon.
Jimmy: Fantastic. Well, I think we will cut you loose there, Erik. Again, thanks for your participation today on OZ Pitch Day. Great presentation as always on Urban Catalyst and in Silicon Valley’s Opportunity Zones. Actually, you know what? I just thought of a question I wanted to send over to you, Erik, before I head out of here. We got one more minute. What are your thoughts on the pending legislation? Our next panel is going to focus on the OZ legislation. And, you know, there’s some thoughts about how that may disqualify some of the Opportunity Zones where you’re developing. Can you give us your quick thoughts before you head out?
Erik: Sure. So really, I see the new legislation as a great thing for the program because I mentioned the National Working Group. It is the National Working Group’s opinion that this legislation will pass prior to the end of this year. Identical bills were introduced to the House and the Senate a couple of months ago. And really the four things that those bills do, number one, it makes it so you don’t have to pay your taxes in 2027. Everyone gets to defer to 2029. So you get an additional two years until you have to pay your taxes.
Also, when the program first started, everybody got a 15% discount when they pay their taxes. So if they owed $100 in taxes in 2027, they’d only have to pay $85. That went away. So now, if you invest this year, you don’t get any additional tax break. But this new legislation would add in that additional 15% back. So those are two huge wins. We have over 750 investors. And I plan, of course, to sponsor a fireworks display over Downtown San Jose if the legislation passes. That’s how excited we are about that.
Two other things that the legislation does. The first is, it requires more reporting requirements, which as a taxpayer, I feel great about. I want to make sure my money is, you know, really doing the right thing, the program is doing what it’s supposed to do. And really, it’s an excuse for us to brag here at Urban Catalyst because we really know that we are doing the right things for our local community.
The last thing, as you mentioned, is they do consider disqualifying certain zones as Opportunity Zones, specifically zones that don’t have national median incomes that are low enough, you know, well, compared to the rest of the nation. Three of the four zones in Downtown San Jose are on the chopping block, including the two zones that all of our projects are located at.
Now, also, as a part of that legislation, they do have some pretty great grandfathering clauses, so our funds shouldn’t have any problem grandfathering in. It might be that we don’t have a third Opportunity Zone Fund anytime in the future, at least in Downtown San Jose because of that legislation, but it’s great for our investors. They get to know that, you know, our zone was so great that they’re planning on disqualifying. That’s Downtown San Jose in a nutshell.
Jimmy: That’s a great outlook there, Erik, and glad I posed that question for you. I know you had a lot of great thoughts. And I always love hearing about that potential firework show. I might have to head over there if and when that goes through. I want to check that out. Well, we’re running out of time now. Let’s send you over into your breakout session, Erik. I’ve just posted the link for Erik’s breakout session in the Zoom chat. Erik, you should click on that link and head on over there.
And if you have additional questions for Erik, you want to hear his thoughts on the firework show or the OZ legislation or anything OZ-related under the sun, head on over there now, talk one-on-one with Erik. Erik, really appreciate your time and attention today. Thank you so much.
Erik: Thank you, Jimmy. And for anyone out there, if you want to learn more about Urban Catalyst, please visit urbancatalyst.com. And please join me in the breakout session. I’d love to answer your questions directly. Thanks.
Jimmy: Perfect. Thanks, Erik.