Silicon Valley OZ Projects, With Urban Catalyst

In this webinar, Erik Hayden reviews many of the projects from Urban Catalyst’s first OZ fund, and also provides details on the Icon / Echo project in UC’s 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.

Webinar Highlights

  • Review of the target returns for Urban Catalyst’s OZ funds;
  • Background on the OZ tax incentive and qualifying investment amounts;
  • Details on the Opportunity Zones in downtown San Jose;
  • The major macroeconomic trend that will benefit San Jose (tech migration);
  • Three important characteristics that Urban Catalyst looks for in project locations;
  • Review of Urban Catalyst Fund I projects;
  • Google’s plans to build 6,000 residential units in San Jose, including a recent groundbreaking;
  • How transit-oriented development is central to Fund II;
  • A deep dive into the amenities that will be included in the Fund II projects;
  • Trends in office sales and leases in San Jose throughout the pandemic;
  • The timeline for Urban Catalyst’s OZ projects, including refinancing and distributions;
  • 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

Webinar Transcript

Jimmy: And our next presenter is our title partner, Urban Catalyst. So I’m gonna bring up Erik Hayden. There’s Erik. How are you doing today, Erik?

Erik: You know, I’m doing great, Jimmy. So happy to be here.

Jimmy: Fantastic. Happy to have you here with us today again, as always. Oh, we got a little peek behind the curtain into your real office there for a second.

Erik: You sure did. Today I’m here to talk about Urban Catalyst Fund II. Urban Catalyst, you know, we’re structured a lot like a traditional equity fund. We’re focused on doing ground-up development projects in downtown San Jose, California. And of course, we’re also an Opportunity Zone fund, and that allows us to give the Opportunity Zone tax benefits to our investors. Just to kick us off, we’ve been featured pretty prominently in the news. Over the last few years, we’ve had over 250 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 were named by Forbes Magazine as one of the top 20 Opportunity Zone funds in the country.

So, you know, nothing like getting a little national validation from Forbes that we’re doing things the right way. So in order to get the tax benefits associated with the program, investors need to invest capital gains. So this is just a little background on the program itself. Three most common ways that people have capital gains events, the sale of stock, the sale of a business, the sale of real estate. And then of course, once they have that capital gains event, they have 180 days to put their money into a qualified Opportunity Zone fund to get those tax benefits. We just don’t want anyone to miss out on that timeline. Then there are two major potential tax benefits associated with the program.

The first is investors are able to defer paying capital gains taxes on that initial capital gains event until they pay their taxes in 2027. So you get to defer for a while. The second benefit is much better. After an investor’s money seasons in an Opportunity Zone fund for 10 years, all of the profits from the fund itself are tax-free from a federal capital gains perspective. So what that means here at Urban Catalyst is we’re gonna build these buildings, lease them up, hold them until we get to the end of that 10-year mark, and then we’re going to sell the buildings and liquidate the fund because that’s when we’re able to provide the majority of the profits to our investors. And of course, those profits are tax-free.

Just taking a step back here in the Bay Area, San Francisco Bay area, here are the Opportunity Zones in green. Obviously, for this fund, as I mentioned, we’re focused on San Jose and even more specifically downtown San Jose. You can see there are four census tracts that are Opportunity Zones that cover almost all of downtown. And you know, it’s interesting, when I first started Urban Catalyst, my whole plan was to create a real estate equity fund to do ground development projects in downtown San Jose, mainly because of the overall macroeconomic trends throughout Silicon Valley, all pointing towards downtown San Jose as the next place to do development on a large scale. And it was only after I formed Urban Catalyst or just started forming Urban Catalyst that I learned about the Opportunity Zone program, and that everywhere that we were planning on building these buildings was located in an Opportunity Zone. And I thought, “Well, wouldn’t it be great to be able to give my investors these additional tax benefits?” So that’s how we became an Opportunity Zone fund.

And you know, when I talk about the macroeconomic trends here in Silicon Valley, what I’m really talking about is tech migration. So here is Silicon Valley, obviously everybody knows lots of big tech companies here in the Valley. For this example, I’m just gonna talk about these five companies, which by market cap are the five largest companies in the United States. Three of them have their headquarters here in the Valley. Two of them have a major office presence. So here in Silicon Valley, Palo Alto, Menlo Park, and Mountain View right here, this is pretty much the center of the Silicon Valley universe.

As these five companies have grown over the last 20 years, you know, they’ve expanded their office footprint where they’re located, but also all over the country, all over the world. But here in the Valley, you know, Palo Alto, Menlo Park, Mountain View, not really very big cities. So what we’ve seen is we’ve seen here in the Valley, a slow migration southward, primarily into the city of Sunnyvale. And to give everyone an idea of just the scale of this, currently here in the city of Mountain View, Google owns, sorry, Google leases 95% of the office space in the entire city. And very similar in Cupertino, Apple leases 85% of the office space. Now here in the city of Sunnyvale, Google and Apple combined have more than 50% of the office space.

So this has been great for Sunnyvale. They’ve seen development go gangbusters for over a decade, but now Sunnyvale’s almost completely built out. And so the big question on everybody’s mind, especially for us when we started Urban Catalyst, was where’s the next place these companies will continue to expand? And we thought, “Well, obviously it’ll be downtown San Jose.” But now, you know, flash forward a couple of years, we can say all of these companies have expanded into downtown San Jose because Microsoft and Apple have taken big landholdings in San Jose. Amazon has an office in downtown. Really the big story has been Google and I’ll talk a little bit more about that. Meta hasn’t quite made it to San Jose, but they did just last year in Q4 take 1.2 million square feet in the city of Santa Clara about five miles from downtown. So definitely fitting in with the tech migration trend.

Now, downtown San Jose, you know, we’ve been developers for a long time doing projects all over the Bay Area, lots of them in Silicon Valley and in San Jose. But downtown San Jose really has the three things that we wanna see when we do development anywhere. The first is, we wanna make sure there’s a demand for all the different types of projects that we’re building. That demand here is really generated by the Silicon Valley job engine. The next is we wanna do business in a place where transit and physical infrastructure are already in place. Downtown San Jose is really the only true urban environment in Silicon Valley. Diridon Station, it’s a massive multi-modal station. It’s slated to be the largest train station on the West Coast.

It already has Caltrain, which gets you to San Francisco in about an hour. And now BART, which is the largest mass transportation system here in the Bay Area, is now fully funded to connect through downtown San Jose into Diridon Station. And then San Jose State University with over 35,000 students, it’s the second largest university here in the Bay Area behind Cal Berkeley, and it’s right in the heart of downtown. And finally, you know, we wanna do business in a place where the local government wants to see development happen. And that is not the case in a lot of California cities, but it’s absolutely the case here in downtown San Jose. The government, they wanna see high-density development and they want it now.

This is a picture of my partner, Josh, and I with the mayor of San Jose, Sam Liccardo. He’s been the mayor for eight years. Before that, he was the council member representing downtown for eight years. That’s really the policies he’s put into place that have streamlined the pre-construction process. Really attracted developers like us into the downtown.

To give everyone an idea of just the massive revitalization that’s happening in downtown San Jose right now, I like to show this before and after. So here’s the current skyline in 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. There’s quite a bit of stuff going on. You can see Urban Catalyst Fund I and Fund II projects there in red.

To continue talking about the local market, here’s my two-dimensional map. This black line here, 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. Adobe’s actually just completing this million-square-foot office high-rise right next door to us. We have to watch that getting built and they also just announced they’ll be occupying that with 3,000 employees in Q1 of next year, which is always good to see. Also kind of interesting, we share a parking garage with Zoom. About two months ago, all my employees started complaining that there was nowhere to park because Zoom was back in the office.

We kind of thought if anybody was gonna work from home forever, it definitely was gonna be Zoom, but nope, Zoom is back. Here’s San Jose State University. That new BART line I was mentioning, here’s where it’s running underneath Santa Clara Street Station here downtown. And then in connecting into Diridon station, that big train station I was talking about. Now, as I mentioned, the big story over the last five years has been Google. And I’ll give you guys a brief summary. Google has acquired over 80 acres’ worth of property here in downtown San Jose. Their plans that they had approved at City Council last year show them building roughly seven million square feet of office and 6,000 residential units.

At build-out, this will be Google’s largest campus on Earth. Google started construction on this campus last month. They’re planning a 10-year, $19 billion build-out. So really exciting stuff. And to give everyone just an idea of what this means to downtown San Jose, you know, San Jose we’re the 10th largest city in America, over a million people. The downtown core has about 100,000 people. This campus alone is expected to bring between 40,000 and 60,000 people to downtown San Jose every day. So pretty exciting stuff.

But you know, Google isn’t the only story in town. We’ve also seen developers flood into downtown over the last few years. Three really notable ones, Boston Properties, Jay Paul, Westbank, and then our newest edition, of course, Hines. These four groups over the last few years have spent more than a billion dollars acquiring property in downtown San Jose, and they’re planning on doing millions of square feet of new development projects. Kinda like to highlight Jay Paul’s almost complete with his 200 park project. Boston Properties is about halfway down with this platform, 16 projects. Westbank just broke ground on this 1.2 million square foot building. So lots of really cool architecture and great buildings coming. And here at Urban Catalyst, you know, we saw this wave of development coming and our whole plan was to get in on the ground floor, and acquire properties before they were scooped up by all the other, you know, big developers and 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 history, Fund I, six projects. And Fund I, you can see they’re scattered throughout the downtown core. We had a variety of asset classes in Fund I, a couple of office projects, multi-family, senior housing, student housing, and a hotel project. For this fund, we raised $131 million in two years. We closed fundraising in December of 2020 and we’re off to really a great start. In this fund you can see we’re under construction with Paseo. We just broke ground on Gifford. We plan to start construction on Keystone in January. We’re gonna follow that with TMBR and The Mark in Q2 and Q3 and next year and Fountain Alley in Q4.

So lots of good momentum on our Fund II projects. Of course, today we’re here to talk about our second fund. Second fund is located right here. You can see we managed to acquire almost half of an entire downtown San Jose City block. We really like this location. It’s on Santa Clara Street. Santa Clara Street, where this BART line is running is really the main drag of the central business district. It’s right next to a future BART station, really making it the epitome of transit-oriented development. And it’s across the street from City Hall. And of course, here is 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. On the right is Echo. Echo is just about 400 units of multi-family apartments.

Here’s a different view of those two projects. And when I talk about these projects, what I like to talk about is the demand as to why did we decide to build these asset classes in this location at this time. I’ll start here with Echo, our multi-family project. You know, multi-family here in California, kind of a no-brainer. We have a housing crisis. It’s especially true here in Silicon Valley, and that’s because we’ve created six jobs for every housing unit that we’ve built for over 30 years straight. In fact, our population only increases as fast as we can build new housing. Interesting statistic that recently came out here in Silicon Valley, if we wanted to build enough housing to have supply equal demand, we’d have to build 150,000 housing units. We’ve never built more than 5,000 housing units in a single year in history.

So that’s really how far behind we are. We have extreme demand for housing and that generates high rents. It generates high occupancy levels. In fact, San Jose just got rated the fourth most expensive big city to live in the entire world. Our average home price is $1.5 million, and that’s not for some mansion. You know, that’s for some 1960s ranch style, three bedroom, two bath. Also rent growth has been great. We’re now 7% higher than we were pre-COVID for our multifamily rents. Our rents went up 10% last year. All the big houses, both Colliers, CBRE, Newmark, they all are forecasting double-digit rent increases over the next 12 to 18 months for multi-family. So multi-family market is going great.

Whenever we build multi-family, we like to build just fantastic amenities for our future tenants. This is our eight-story podium pool deck. You can see we have this nice infinity pool. We have these cabanas in here. Of course, this is a two-story amenity space that wraps the amenities deck. Here’s our indoor-outdoor fitness facility. This is our lounge, dining, and kitchen area. And over here we have a game room and a movie room. Up on the 26th floor, this is our rooftop lounge. We have some nice couches and fire pits. Inside, that’s an office area for our tenants. This is a conference room that doubles as a dining room in the evening. Great views from up there. You can see in all different directions.

And then switching gears to talk about Icon, our office project. Office, really the big difference for us as developers between multi-family and office is here in the Valley, we can build office fast enough to meet the demand. However, there is still a pretty strong demand for office. There has been throughout the entire pandemic. In fact, one of the things that we’ve seen here in the Valley that’s pretty interesting is that starting about July of 2020, the volume of existing office sales increased dramatically. Maybe it doubled or tripled at any point over the last 18, 20 months.

We also were seeing these office buildings trading at either record or near record pricing, which is kind of the opposite of what you would think would happen during a pandemic when everybody was working from home. We really attribute that to Silicon Valley really being that safe harbor. So all the big institutional equity groups who are big publicly traded REITs that have a mandate to invest into office in the United States, they looked across the country and said, “Where are we going to invest based on the strength of the companies here in Silicon Valley?” They decided this was that safe harbor.

Now, whenever we build new office, there are really three things we wanna see. The first is we only build office in really great locations. You know, I talked about how much we like this location in downtown San Jose, but San Jose’s competitive market area is all of Silicon Valley. So how does downtown San Jose compete with all the other cities? It really competes in two ways. The first is leasing rates for new office here in downtown San Jose are about 50% of what they are in Mountain View or Palo Alto. So significantly less expensive to lease office here in downtown San Jose. The second is, if you wanted to get, you know, 500,000 square feet of office space in Menlo Park, you know, you might be in 10 different buildings. So the ability to have one building for your entire office is a huge benefit that isn’t easily found throughout the Valley, but you can find it in downtown San Jose.

The second thing that we wanna see is what I call functionality. And that means, you know, for example, we have the right amount of parking for this project. This is an eight story parking garage. We have these really big floor plates. Every floor plate is 40,000 square feet, so that’s almost an acre of net square footage per floor. That’s what all the big tech tenants wanna see these days. And really what separates modern office buildings in downtown from, you know, buildings that were built 20 years ago are these extremely large floor plates. We also have Florida ceiling windows, 14-foot floor-to-floor heights building for that open area office feeling. We have tons of indoor-outdoor amenity spaces, exterior, staircases, balconies, rooftop gardens really to take advantage of the 300 days a year of sunshine we have in San Jose. It’s just fantastic weather.

And then the last thing is what I call architectural aesthetic beauty. And really that’s just a fancy way of saying you have to have a good-looking building. We utilize WRNS as our architect for this project. They’re one of the premier architects for our office here in the Valley. They just finished doing Microsoft’s big campus up in Mountain View, and we’re really pleased with how this design has turned out.

What makes Urban Catalyst different than a lot of other Opportunity Zone funds is, you know, most other funds, their plan is to go out, raise a bunch of money, then look all over the country to find developers that have projects in Opportunity Zones so that they can form these partnerships. You know, here at Urban Catalyst we like to look at Steve Jobs and Steve Wozniak, right? Did they go out, raise a ton of money, then hire someone to build them a computer. The answer’s 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 are the developers of all of our projects. We have projects in our portfolio and now we’re taking those projects out to the market.

Another thing I like to talk about with all of our potential investors is, you know, when you hear about Opportunity Zone funds, you’re hearing about these great tax benefits. You know, don’t get me wrong, we’re big fans of the tax benefits here at Urban Catalyst, but if the biggest benefit 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 local market, the asset classes that are being built, and who the developers are that are building those projects, that’s what matters. Here at Urban Catalyst, we see ourselves as a solid, fundamental real estate equity-funded development company. We see the opportunities and tax benefits really as just the icing on the cake for our investors.

A little bit about me, I’ve been doing ground-up development my entire career. I’ve done several billion dollars worth of projects in the San Francisco Bay Area, a heavy focus in Silicon Valley and San Jose. In general, I build institutional quality and scale projects. And that means I build large income-producing buildings, typical exit strategies, selling out to a publicly traded REIT, large institutional equity group. We have five partners here at Urban Catalyst. We also now have 43 people that work here.

And when I first formed Urban Catalyst, my whole plan, knowing we’re gonna be doing ground up development, was to create an all-star team of downtown San Jose developers. I did that by bringing on real estate experts and developers, Josh Burroughs and Paul Ring. Josh is our Chief Operating Officer. I’ve known Josh for over a decade. He spent nine years prior to joining Urban Catalyst, working for a…I call them significantly large regional development company, large landowner and general contractor. He got experience just building a variety of different asset classes, significant focus here in downtown San Jose. Paul, Paul is our Executive Vice President of Development and Construction.

You know, I’ve also known Paul, I think I’ve known Paul for 15 years now. Paul, before he joined Urban Catalyst for 15 years, he was the head developer of a group called The Core Companies. They focus on multi-family and below-market-rate housing development almost exclusively in downtown San Jose. Paul now leads our team of 18 development and construction professionals that build all of our buildings here at Urban Catalyst.

Of course, we’re not just developers, we’re also fund managers. Morgan Mackles, who I’ve known since I was in high school, he was a groomsman in my wedding. He’s our head of investor relations, so really he’s in charge of our fundraising. Morgan has spent his career building scalable and repeatable sales processes. He’s done it for small and large companies, startups all the way up to Fortune 500 and he’s the reason why we were so successful in our Fund I fundraise and why we’re doing so great here in Fund II.

Then of course last but not least, I’ve got Sean Raft. Sean is everybody’s favorite. He is our Chief Administrative Officer and general counsel. So of course, Sean’s an attorney. He manages all of our financial consultants, our accounts that do our tax and audit, our fund administrator. He also does all of our compliance with the SEC and with the Opportunity Zone rules and regulations. Kind of an easy way to say it, Sean really dots the I’S and crosses the T’S for Urban Catalyst. So these are the five partners.

Combined, we’ve done over $5 billion worth of ground-up real estate development here in Silicon Valley. And you can see the heavy concentration of projects that we’ve done in downtown San Jose. Here at Urban Catalyst, you know, we’ve been developers doing successful projects here in the Valley and in San Jose for quite some time. And now we just have an Opportunity Zone fund that we’re raising to fund our projects.

Now, wanted to switch gears to what I call the fun part, which is our project investment timeline. You know, every fund is a little bit different, so I wanna talk about ours in a little bit more detail. We’re in the middle of our three-year fundraise. The fund will close in December of 2023, more than likely. It’s a 200 million fundraise. We’ve currently raised just over 115 million. So we’re well on our way to achieving our $200 million goal. Here in 2027, this is just a reminder to everyone, this is when you pay your taxes on your initial capital gains event. We wanted to flag that. And of course, our plan is to wait 10 years and then sell the properties in 2034.

Now, obviously waiting to get profits in 2034 is quite some time. We do plan on making distributions prior to 2034, the first time being in 2026. We’re gonna have a refinance event of our projects in 2026. Now, sometimes I call this developer 101, because this is something we do almost every single time. We’re gonna start construction of these projects in 2023.

They’ll be complete here towards the end of 2025. Once they lease up and are stabilized, that’ll happen in 2026. We’ll go out and we’ll get 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. Right now we are targeting distributing 65% of our investors’ initial investment back to them in 2026 as a part of this program. And that is a tax-free distribution because it’s a distribution of debt. Our overall goal is that we have a distribution prior to 2027 that is large enough that our investors can use that money to pay their taxes on that initial capital gains event.

Now of course, this is where my attorneys like me to say, there are no guarantees associated with investing into Urban Catalyst. And please read our private place memorandum to understand all of the risks. Also after our refinance event, you know, we’ll have these stabilized assets. There’ll be cash flowing. We plan on passing through that cash flow to our investors throughout the duration of the whole period, of course, before we have the big win, which is when we sell the properties in 2034.

Now, another thing I like to talk about on this slide is what I call the third hidden benefit of the Opportunity Zone program. And it’s specifically for funds that are structured as LLCs like we are. You know, the nice part about an LLC is that you’re able to pass through losses, and we plan on having pretty significant losses almost every single year throughout the fund. So investors could expect that on their K1s. In fact, a lot of our losses are coming from the depreciation of our stabilized assets. So, you know, just like anybody that owns real estate, we depreciate the assets on the tax returns. The big difference for us, of course, is we pass it through to our investors and investors will be able to use that passive loss to offset passive income. We should have significantly more losses than cash flow throughout the duration of the whole period, which if offset would make all of that cash flow tax-free.

And then of course, at the end, and this is what I call that third benefit, typically when you sell a real estate asset and you’ve taken depreciation and then you sell it for more than you bought it for the government goes, “Hey, wait a second.” And they make you pay taxes on that depreciation taken. They call that depreciation recapture. And that’s something that all real estate investors really don’t like. Specifically for Opportunity Zone funds, there is no depreciation recapture. So all that depreciation that is passed through to our investors, our investors get to keep it.

So kinda as a recap, you know, we’re gonna have this refinance event where we’re expecting to distribute roughly 65% of our investors’ initial investment back to them tax-free. After that, we have cash flow from the stabilized assets, passive income offset by passive loss, making that cash flow tax-free. Then there’s no depreciation recapture, and when you sell the properties you get tax-free profits. So overall program’s a pretty good tax advantage program.

And then finally, we do have a bonus units program here at Urban Catalyst. This was really popular in our first fund, so we did continue it here into our second fund. Of course, the way that it works, if you invest into Urban Catalyst, what you’re doing is you’re buying units and of course, you’re paid out based upon the number of units that you own. And we give bonus units in three different ways. The first is a time incentive credit. This is really to reward investors for earlier investment. Here we are in October, sorry, November, boy, time flies, 3.25% bonus units. That means if you invested $100 into Urban Catalyst, bought $100 worth of our units, we would give you $103 and 25 cents worth of our units.

Next is our multiple ventures program. This is a loyalty rewards program. So this rewards investors that invested into Fund I. They get 4.5% bonus units that they invest again with us in Fund II. Finally, our volume incentive program. This is to reward investors for more investment. You can see our minimum investment size, 250,000, bonus units start at 1% at 300,000, goes all the way up to 1.9 million. And then these three things add together to get your total amount of bonus units. As I mentioned, pretty popular program, investors really do enjoy bonus units.

And, Jimmy, really that’s the end of my presentation. So if we have some extra time, I’m more than happy to answer some questions.

Jimmy: Yeah, we’ve got a couple of minutes here and then I’ll kick you over to your breakout session, Erik, but I wanted to see if we could get to a couple of questions that came in from the audience today. And again, in case you’re just joining us, this is Erik Hayden at Urban Catalyst. He’s going to be stepping into a separate Zoom meeting in just a couple of more minutes. I just posted the link to that meeting in the Zoom chat. Click over there in a moment when we’re done here and you can interact one on one with Erik. But we got a question here from Jerry. Jerry asks, “Erik, will rent control restrictions affect your projects?”

Erik: The answer is the current rent restrictions are very minimal so they don’t affect our projects.

Jimmy: All right. All right. That was quick and easy. And then we got another one here about last night’s election.

Erik: Oh, it wasn’t it exciting? Cindy Chavez versus Matt Mahan and it’s looking like Matt is going to win. And I’m sure the question is how does it impact our projects? Really, you know, both Matt and Cindy are pro-development for downtown. So we, you know, as a company didn’t particularly have a preference as to who won. However, just kind of as a side note, when we started Urban Catalyst, Matt was on our board of directors because Matt’s a personal friend of ours. So we are kind of happy that Matt won. That was great.

Jimmy: Has that election been called, Matt won officially?

Erik: Well, he’s up by 5,000 votes and there’s only 5,000 ballots left to count.

Jimmy: Okay. So it looks like he’s in pretty good shape. I think it might be time to call that one then. We’ll get to one more here because this question comes up a lot. The OZ reform legislation would early sunset or early disqualified certain high-income census tracts and it’s believed that San Jose may fall prey to that provision of that bill. What are your thoughts there? Do you know if any of the San Jose census tracts are in jeopardy and what happens with your fund if that’s the case?

Erik: Sure. That’s a great question. So we’re talking about the proposed legislation that is expected to pass this year, but there’s no timing. There hasn’t been any updates. They said it was gonna pass in November. So we’ve been watching that really closely because we’re actually big fans of the new legislation. It does sunset or it could potentially sunset some census tracks where the median income level is too high versus the rest of the country, which would disqualify three of the four downtown San Jose census tracks that are currently Opportunity Zones, including the two that all of our projects are located in, which is not a big deal for our funds.

Our funds will be grandfathered in a number of different ways per the legislation. It would prevent us from starting future Opportunity Zone funds in downtown San Jose more than likely. Now, I do wanna mention, if we’re talking about this new legislation, the two major benefits that it could provide for investors, the first is, right now everybody has to pay taxes on that initial capital gains event in 2027. The new legislation would push that out to 2029. So you get an additional two years, which is great. And then if investors had invested, say in 2019, you got a 15% discount when you paid your taxes in 2027. So that means if you owed $100 in taxes, you would’ve had only to pay $85.

That was really nice. It eventually went down to 10% and then as of this year, it’s at 0%. The new legislation would retroactively, going all the way up to the end of this year, give all investors that have already invested in any investors that invest for the rest of this year, that 15% discount, and then next year would be the 10% discount. So that’d be a huge win. You know, we have over 800 investors across our two funds, Jimmy. I mean we kind of wanna send out a big celebration if this new legislation passes because it really is a huge benefit for our investors.

Jimmy: Yeah. So, yeah, so we don’t know today, and I did cover this at the beginning of the program, but for anybody who’s joined within the last couple of hours, Erik’s absolutely right, there’s a possibility that if you invest in a qualified opportunity fund this year, you’ll be eligible for that 15% basis step up. We don’t know with too much certainty because we need this legislation to pass, and when and if it passes and how it passes is still subject to speculation. But fingers crossed that potentially you’ll get a 15% basis step up in ’28 to pay your ’29 taxes if the legislation goes through as currently drafted.

Erik, I’m gonna cut you lose there. I’m gonna post the link to the breakout session in the chat one more time. So, Erik, you should click that link now. Appreciate you being here with us today, Erik. Always a pleasure having Urban Catalyst as our title partner at these OZ Pitch Day events. Another successful outing for us, I think. So thank you so much.

Erik: Thank you, Jimmy. It’s always a pleasure to be here with you.


Discover Your Next Opportunity Zone Investment...

OZ Pitch Day

March 7, 2024