Riding The AI Boom In Silicon Valley, With Urban Catalyst

In this webinar, Erik Hayden shares an Opportunity Zone fund doing ground up construction projects in downtown San Jose, California.

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

  • Overview of the OZ program.
  • How the AI boom is impacting real estate in Silicon Valley.
  • Updates on Google’s plans for San Jose.
  • Summary of the construction activity underway and being planned in San Jose.
  • Updates on both Fund I and Fund II projects.
  • Discussion of each of the four projects in Fund II, including hotel, senior living, and multifamily.
  • Overview of the Urban Catalyst bonus units program.
  • Live Q&A with OZ Pitch Day attendees.

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: Up now is Erik Hayden with Urban Catalyst. Erik, how you doing?

Erik: Doing great, Jimmy. Glad to be here.

Jimmy: Glad to have you here. Back once again for OZ Pitch Day. Urban Catalyst has been our top partner over the last several years. They’ve been on, I believe, every single OZ Pitch Day we’ve ever done, and we’re pleased that you guys are back once again here with us, summer OZ Pitch Day, 2024. So, Erik, without further ado, why don’t you present Urban Catalyst OZ Fund II, developing real estate in downtown San Jose?

Erik: Well, Jimmy, we do love working with you. And thank you again for having us today. Today, I’m here to talk about our Urban Catalyst Opportunity Zone Fund II. Fund II, it’s structured a lot like a traditional real estate equity fund. We’re focused on doing ground-up development projects in downtown San Jose, California. We’ve been developers here in the Bay Area for quite some time, we’ve had a lot of success, and now we’re raising our funds to build our projects. This is our second Opportunity Zone Fund. It’s a $200 million fund raise. We’ve raised $145 million to date, and we’re planning on closing the fundraising period at the end of this year.

Just kind of to kick us off, you know, we’ve been featured pretty prominently in the news over the last few years. We’ve had, you know, several hundred 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 those, we were named by “Forbes” magazine as one of the top 20 Opportunity Zone Funds in the country. And so, nothing like getting a little national validation from “Forbes” that we’re doing things the right way.

We always like to go through the benefits of the Opportunity Zone program, just really quick, Jimmy, even though I’m sure everybody on here already knows most of them. But obviously, in order to get the tax benefits associated with the program, you have to invest capital gains. Here are the three most common ways that people have capital gains events. And then you have 180 days from the date of those capital gains events to invest into a Qualified Opportunity Zone Fund. You know, we would just wanna make sure nobody misses out on that timeline.

There are two major tax benefits associated with the program. Of course, the first is you’re able to defer paying capital gains until you pay your capital gains taxes in 2027. So, you get to defer those gains for a couple years. That’s nice. The second major benefit, and this is kind of the big benefit, right, is, after an investor’s money seasons and 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, here at Urban Catalyst, you know, our plan is to build the buildings in our portfolio, lease them up, stabilize them, hold them until we get to the end of that 10-year mark, and then sell the assets, and that’s when we plan on returning the majority of the profits to our investors. And of course, those profits are tax-free.

Taking a step back, here are the Opportunity Zones throughout the Bay Area, in green. You know, obviously, for this fund, we’re focused on San Jose, and even more specifically, downtown San Jose. You can see downtown is covered by almost four Opportunity Zones. And you know, it’s interesting. When we first started Urban Catalyst, we knew we were gonna be forming a real estate equity fund. We thought it would be a traditional equity fund, to do ground-up development, you know, pretty typical. But as we were forming our funds, that’s when the Opportunity Zone legislation came out. And it designated almost all of downtown as an Opportunity Zone, and we thought, “Well, wouldn’t it be great to be able to give our investors these additional tax benefits?” So, that’s how we became an Opportunity Zone Fund in the first place, when we launched our Fund I, and we had a lot of success with Fund I. We raised $131 million. That fund has six projects, that we continued on, and launched Fund II, and now here we are in Fund II with our four projects.

Just to kind of remind everyone, you know, San Jose is a part of Silicon Valley, and Silicon Valley, obviously, you know, gets in the news quite a bit, because we have huge tech companies here. We have lots of startups, mid-sized companies. It’s almost a little bit mind-blowing when you kind of see all of the different major companies that are either headquartered here or have a large office presence here. I mean, of course the big ones: Apple, Facebook, Google. But then we have a really nice presence from Microsoft. Of course, we have, you know, the rising star of NVIDIA, and AI, which everybody loves to talk about, is really taking root here in Silicon Valley. People are kind of saying it’s like the next thing…it’s like the internet was when the internet was invented.

To give everyone an idea of what’s going on here in downtown San Jose, I like to show this before-and-after slide. So, here is the current skyline of downtown San Jose. If all of the projects that are in the planning process are built out over the next 10 years or so, downtown San Jose, it’ll almost triple in size. Urban Catalyst projects, our Fund I and Fund II projects, are there in red. The, you know, call it the traditional downtown core is in green. And then, Google’s, you know, future mega campus is there in blue. And I’ll talk a little bit more about that, because it’s pretty exciting what Google’s up to here in downtown.

To continue talking about the local market, here is my two-dimensional map. This black line represents the Opportunity Zone. Our headquarters is right here, so we’re right in the zone. We’re right next to Adobe’s world headquarters, and Zoom’s world headquarters. It’s been fun watching Zoom as they’ve slowly started coming back into the office, because you always kind of figured if anybody was gonna work from home forever, it would definitely be Zoom. But, apparently not. They’re back in two to three days a week now, and they’re filling up the parking garage we share with them. San Jose State University, you know, 45,000 students, second-largest university in the Bay Area, behind Cal Berkeley. Of course, it’s right here in the heart of downtown. This red line is where the new BART line, which is fully funded, is now coming through downtown San Jose, and connecting into Diridon Station. BART, of course, here in the Bay Area, is the largest mass transportation system throughout the Bay Area. It’s been in existence for 65 years, and it’s only gonna take them about 70 years to get to downtown San Jose, so that’s, it’s pretty exciting. They bought the $500 million drilling machine recently, and they named it after the sandworm from the movie “Dune.”

Of course, I mentioned I’d talk a little bit more about Google. You can see they’ve purchased just a massive amount of land here in downtown. They’ve acquired over 80 acres of property. They spent a little over a half a billion dollars on their acquisitions. They also went through the planning process and got approvals to build 7 million square feet of office, and 6,000 residential units. At build-out, this will be Google’s largest campus on Earth. Google says this is a 10-year, $19 billion build-out, and to date, they’ve started demolition on… Well, they’ve completed all of their demolition on their first phase, and they’ve started demolition on their second phase. They’ve done all their historic remediation, all their environmental remediations. They’re doing a lot of the groundwork to do their vertical construction. We recently spoke with the head of Google real estate here earlier this year, and said, “Hey, when are you gonna, you know, go vertical?” And he said, “You know, we’re a little bit ahead of our schedule. We had thought it was gonna take us longer to get approvals, and we’re still, you know, finishing off building our second campus up at Sunnyvale. More than likely, when we finish that campus, we’ll start on this campus.” And the reason this is important to Urban Catalyst is because here at Urban Catalyst, we have several properties that are just a couple hundred yards away from their first phase. So, it could be a real positive impact on those properties.

A lot of other developers have come into downtown San Jose over the last, you know, five years or so, as downtown really has been the focus of where development could be built at scale here in Silicon Valley. Some notable ones, Boston Properties, you know, publicly-traded REIT. Hines, the largest development company in the country. Westbank, a large International development group out of Toronto, and then Jay Paul, who’s a regional developer, but he’s just fresh off building 26 buildings in Sunnyvale. He made a big move into downtown over the last couple of years. So, we’re seeing a lot of groups coming in. They’ve built some great projects. Some of these projects are under construction. Jay Paul just finished this million square foot office building in downtown. Boston Property’s about halfway done with this one. Adobe just finished building their 1.3 million square foot office high-rise, their fourth tower here in downtown. And it really is kind of a stunning building, you can see by that picture.

Kind of an important one to point out for fun, too, is Miro Towers. Miro Towers is across the street from two Fund II projects. It’s an apartment building, high-rise. It leased up with, you know, very quickly. It just hit 100% occupancy, and it has the highest rents in downtown. And I’ll talk more about it, but I do like pointing it out that, you know, lots of great projects here in downtown. Office and multifamily, primarily.

Here are Urban Catalyst projects. You can see our Fund I projects in blue, Fund II projects in orange. Fund II, we have two projects right up here, right across the street from City Hall. This is a great location. Santa Clara street’s kind of like the main drag of the central business district. We’re right next to that future BART station, really making it the epitome of transit-oriented development, and Miro Tower’s right next door, and always a great comparable to have right across the street. Down here in what we call Downtown West, Fund II has two projects. This is a hotel project, and this is a senior living project, and as I mentioned, just a couple hundred yards away from Google’s big mega campus.

So, here are the four projects that we have in Fund II, and I’m gonna talk about each one individually. But overall, we wanted to create a portfolio of projects, some diversified asset classes, so that, you know, we could provide that type of, you know, where I call that that type of reduced risk. So, we have a 176-key hotel. It is a Marriott TownePlace Suites. 169-unit senior living facility. And then we have two apartment projects that total just over 1000 units.

I’ll start off by talking about the hotel. Marriott has been wanting an extended stay product here in downtown San Jose for many years. We signed our franchise agreement with them. We have a really great operator in TMH Hotels. They operate three other Marriott TownePlace Suites throughout Silicon Valley. Main demand drivers for this, of course, are the SAP Center, which is our arena here in San Jose. It’s the second-most-used arena in the country, behind Madison Square Garden. And our convention center here in downtown, which has been really successful in stealing a lot of conventions from San Francisco recently. This project, we started construction on a year and a half ago, so we’re about 70% through construction. We plan on opening in January of next year. One of the big highlights of this, something you can’t say very often, is, we’re ahead of schedule and significantly under budget in our construction. We’ve had 12% construction cost savings, and we’re two months ahead of schedule. Also, the other nice thing about this project is we do have a 10-year loan. Your typical construction loans are, like, three-year loans, interest only, plus a one-year possible extension. For this, as downside protection risk, we signed up a 10-year loan, 5 years of interest-only, 5 years of 30-year amortization. And that makes it so that we will never be in a situation where we’re forced to refinance event, you know, despite where the markets might be in 2026, when we will be eligible for a refinance event.

Right across the street from that, also, just a few hundred yards away from Google, is Gifford Place. This is our senior living facility, and even more specifically, it’s assisted living and memory care. This project, we are now shovel-ready. We really like senior living here in San Jose, especially in downtown. They haven’t built a project like this in downtown in over 40 years. And San Jose periodically is rated the number one market in the country for senior living, mainly because the folks that live around here have such high salaries that they can afford to put their parents and grandparents into facilities like this. This project, we plan on starting construction as the financing markets improve slightly over the next 12 to 18 months. But it is a great project. We really are excited to get it going and build it out.

All right. Now to our two multifamily projects, Echo and Icon. So, here’s Echo. Here is Icon. Multifamily is probably the highest demand of any of our asset classes here in Silicon Valley. These two projects, Icon and Echo, it’s actually three high-rise buildings. We’ll build them in phases. We plan on starting construction on Echo here in the next 12 to 18 months or so. Again, pretty similar to the Gifford senior living. We’re just waiting for financing markets to improve slightly before we pull the trigger on that. You know, obviously, we don’t want to utilize financing that would be detrimental to the projects, so waiting for rates to get a little bit better is an important aspect of starting construction on these larger projects. So, multifamily, we really like multifamily. I mentioned across the street, here, is Miro Towers. Just kind of a little bit of a comparison between our project and Miro, since Miro’s 630 multifamily units, and we’re about 1000. They leased up at 30 units a month. We pretty much put in our pro formas leasing up at 20 to 25 units a month, so to see them lease up at that velocity was pretty incredible, and I mentioned they have the highest rents in the city. You know, based on the fact that we have the exact same location, and we have slightly better floor plans and more amenities, I would expect that we have slightly higher rents than Miro when we deliver these projects here in the next few years.

And why is it that I like multifamily here so much, and we have such a strong demand? I mean, obviously, California, we have a housing crisis. We don’t build a lot of housing here, based upon, you know, the number of jobs we create. It’s especially true here in Silicon Valley. A stat we found is, you know, for supply to equal demand, we’d have to build here around 128,000 residential units. And the most that we’ve ever built in a single year is 5,329. So, you can see we’re nowhere close to hitting supply and demand equilibrium. And it’s almost like, you know, in other markets, you have to look and say, “Well, what is the supply that’s coming on the market, and how is it going to affect our project?” Here, we can build every single project that’s in the pipeline all at the same time, and it still wouldn’t impact our supply and demand equilibrium. Couple other notable things about San Jose, kind of some things you all think about, right? The San Jose metro area, you know, here we are in Silicon Valley, we have the highest rents for multifamily apartments of any big city, any large metropolitan area in the country. Also, just kind of as a side note, why do people pay such high rents for multifamily? It’s because, you know, Santa Clara County and San Jose is the most expensive big city to live in when you go to buy a home, with an average home price of $1.5 million. And by the way, $1.5 million sounds expensive for a home. Most expensive, you know, big city in America. But going into Palo Alto, Mountain View, it’s, $3.5 million is your average home price. So it’s actually quite a deal for tech workers to live down in San Jose.

That supply and demand, why is it such a problem? Well, it’s because we don’t build a whole lot of buildings. You can see how San Jose stacks up against other major cities across the country. We, you know, we have a big geographical difference, right? Dallas, Atlanta, Austin, you can keep building outward almost forever. In San Jose, we’re constrained by mountains and water, and that means everything that we build has to be, you know, infill development. When there’s infill development, there are neighbors. The neighbors influence the politicians, to slow, stop, and, you know, deny development projects. We just don’t build as much. Of course, because we have this issue, we also have one of the highest occupancy rates in the country. Really, our population grows almost exactly as fast as we build new units, and people jump into those units as fast as they can.

And then, you know, how are rents doing? You can see from this graph, rents are doing great. You know, during COVID, they went down about 15%. They bounced back almost immediately. We came back to a point where a little over 15% higher than pre-COVID rent levels, and you can see how the last few months this year, you know, rents were a little bit flat over 2023. But in 2024, we’ve really started off with a bang. And we’ve seen that, you know, a lot of third-party reports, this one’s from Yardi Matrix, are showing that multifamily rents are projected to go up higher in the, you know, the Bay Area, South Bay area, higher than any other major metropolitan area in the country over the next 5 and 10 years. And that’s all because we generate so many jobs, and we don’t build a lot of houses.

A little bit about Urban Catalyst. I’m the founder of Urban Catalyst. Throughout my career, I’ve built a lot of development projects, a couple billion dollars worth of real estate. In general, I build institutional-quality and scale projects. That means big, income-producing buildings, with a typical exit strategy of selling to a publicly-traded REIT, or a large, you know, international or institutional development or equity group. And, you know, my partners and I have built quite a bit of, you know, development projects here in Silicon Valley. You can see all the projects, a little over $5 billion worth of projects, and you can see the heavy concentration of projects that we’ve built in downtown San Jose.

This is what I call the fun part. You know, kind of a technical breakdown of how our fund works. So, it’s been a four-year fundraising period. We’re almost coming up toward the end of our fundraising period. Just as a reminder, here’s where everybody pays taxes, in 2027, on their initial capital gains event. And then, of course, in 2035 is when we plan on selling the assets, after the 10-year hold. We do plan on making distributions to investors throughout the duration of the whole period, the first time, coming from potential refinance events. Those could start as early as 2026, with the refinance of the Keystone Hotel if that’s necessary. And they’ll continue on. We’ll refinance as we build our buildings. Refinance events are great, because it’s a distribution of debt. It’s tax-free profits. So, you know, we build our project with a construction loan, we lease it up, stabilize it, get permanent financing, take that permanent financing, pay off the construction loan, excess refinance proceeds are available for distribution.

Then we have cash flow. Of course, we have these stabilized assets. They’ll be, you know, throwing off cash, and as that cash builds up, we’ll distribute that cash to our investors. Kind of the nice thing about how we structured this fund is we’re structured as an LLC. And that allows us to give our investors a K-1, and we pass through quite a bit of losses. There’s some losses in the early part, just kind of what happens with development projects before you start construction on them. And then once our assets are stabilized, you know, we’ll have depreciation from those assets, and we’ll be passing through that depreciation on the K-1 to our investors, as passive losses. We plan on having a pretty significant amount of passive loss that we pass through. Potentially more than the cash flow that we’re generating for our investors, which would be great because then in some cases, our investors would be able to utilize that passive loss to offset that passive income, to make that cash flow tax-free.

Finally, here at the end, of course, the big benefit of the Opportunity Zone program is the tax-free profits, in our case, from a federal capital gains perspective. Kind of what I call, like, the third hidden benefit of the program, besides deferring your taxes to 2027 and getting tax-free profits, is right here at the end, when we sell our assets, you know, specifically for Opportunity Zone Funds, there is no depreciation recapture. And that’s a huge benefit, right? Because we’re gonna pass through all these passive losses. Typically, if you sell, you know, property for more than you bought it for, the government comes in and says, “Hey, you need to pay back all that depreciation you’ve taken.” For us, as an Opportunity Zone Fund, our investors, they get to keep all of those passive losses, keep all that depreciation.

So, you know, kind of a recap, you get tax-free refinance events, the potential for tax-free cash flow, tax-free profits from a federal perspective, and then no depreciation recapture. Overall, pretty good tax advantage program. Last thing I wanna talk about is our bonus units program here at Urban Catalyst. We have bonus units in three categories, our time incentive credit, multiple ventures program, and volume incentive program. The way that this works is if an investor invests in Urban Catalyst, what they’re doing is they’re buying our units, that are then paid out based upon the number of units that they own. Our time incentive credits reward investors for earlier investment. Here we are in June, 1.5% percent bonus units. That means if investors buy $100 worth of our units, we give them $101.50 worth of our units. Our multiple ventures program is a loyalty rewards program for folks that have invested into any of our other funds we do have, and we currently have three funds open here at Urban Catalyst, one of them being our Opportunity Zone Fund II. And then finally, our volume incentive program. This is to reward investors for more investment. Our minimum investment size is $250,000. Bonus units start at $300,000, and go all the way up to $1.9 million. And then these three categories add together to get your total amount of bonus units. So, that’s the end of my presentation, Jimmy. Thank you, everyone, for learning more about Urban Catalyst.

Jimmy: Well, thank you, Erik. Right on time. I love it. We got time for one or two questions. We did get a question from Greg Sutton. He asks, are there California state tax incentives available?

Erik: So, the state of California does not conform with the Federal Opportunity Zone program. Really, what that means is, you know, when we sell our assets in 2035, folks will have to pay California capital gains taxes of maximum 13.3%. Kind of the good news, Jimmy, is we had one of our accounts run a little model for us, to see how much does that actually impact investors’ return. And what it does, if you only include just that 13.3%, it reduces returns by a little bit more than… It reduces your internal rate of return by a little bit more than 1%. So, not a that significant of an impact, as far as all of the things that can happen in real estate development projects.

Jimmy: Yeah, good point. Time for one more question here, and Jerry already chimed in with his response. I think his response was great, but Erik, I’ll let you respond to this question from Michael. “How does this qualify as an Opportunity Zone?” Almost as though he can’t believe the opportunity’s so good. This area is so ripe. Why is this an Opportunity Zone? Good question, Michael.

Erik: You know, that’s exactly what we thought when they designated the areas. And then, of course, you know, when they first picked the Opportunity Zones across the country, there was a lot of articles out there, “What are the best Opportunity Zones in America?” and our Opportunity Zones here in downtown San Jose, you know, always top five, sometimes number one. But the way that it works is, of course, they use census tracts, and they base it on median income levels, and they also look at kind of the surrounding census tracts and what those income levels are. And so, downtown San Jose, relatively, has a lower income threshold than its surrounding census tracts.

Jimmy: That’s right. Great answer. Erik, we’ve run out of time, we’ve run out of questions. If anybody wants to reach out to Erik and his team, you can do so by heading to their website, urbancatalyst.com. Erik, I’m gonna put you down to attendee role so you can enjoy the rest of the show, and we’ll see you next time. Thanks again, as always, for joining us on OZ Pitch Day. Great presentation.

Erik: You know what? Have a great day, Jimmy. Good luck.