Erik Hayden  0:00  

Most capital gains events occur either from the sale of a business, the sale of real estate or the sale of stock. Here at Urban catalysts 70% of our investors their capital gains event was the sale of stock. If you have that capital gains event and you invest into a qualified opportunity zone fund, within 180 days, you’re eligible for the tax benefits. And there are three primary tax benefits. The first is you don’t have to pay taxes on that capital gains event until you pay your taxes in 2027. The second benefit is when you pay your taxes in 2027, you get a 10% reduction. So for every $100 that you would have owed in taxes, you only have to pay $90. And really the third benefit is the biggest benefit and that is after investors money seasons in an opportunity zone fund for 10 years. All of the profits from the fund itself are tax free.

Announcer  1:12  

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors buyers and sellers of commercial real estate coast to coast whether you’re an investor broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross  1:12  

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. 

Today, my guest is Erik Hayden. Erik is the founder of Silicon Valley based Urban Catalyst, named by Forbes and Sorenson Impact Center has a top 10 Opportunity Zone Fund. And in just a minute, we’re going to speak with Erik about Opportunity Zone Funds, and the potential for investors in the next 10 years. 

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we’d love to hear from you. Please leave a comment. Also, if you’d like to see our answer, I guess are Be sure to check out our YouTube channel. You can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Erik, welcome to CRE PN Radio.

Erik Hayden  1:12  

Thank you, Darrin happy to be here.

J Darrin Gross  2:37  

Yeah, I’m looking forward to our conversation today. Before we get started, if you could take just a minute and share with listeners a little bit about your background.

Erik Hayden  2:47  

Sure. So throughout my career, I’ve been doing ground up real estate development in the San Francisco Bay Area. In general, I build institutional quality and scale projects. I’ve done several billion dollars worth of development throughout my career, and a pretty heavy emphasis on Silicon Valley and downtown San Jose.

J Darrin Gross  3:08  

And in any particular asset class that you’ve you’ve worked more in?

Erik Hayden  3:09  

I’ll tell you, I’ve built a variety of asset classes. Probably the strongest asset class I have as part of my background is multifamily. But I mean, that’s been the bread and butter of developers here in Silicon Valley, you know, for over 10 years.

J Darrin Gross  3:30  

So let’s talk a little bit about opportunity zones.

You know, you you have a fund and you also do opportunity, opportunity zones. Are you do you just have a fund? Or can you talk a little bit about how your?

Erik Hayden  3:42  

Sure, so here’s a little bit about what makes us different than other opportunity zone funds out there is we’re not just fund managers, but we’re also the developers of all of our projects.

J Darrin Gross  3:53  

Okay. And are these all local to you in the area in San Francisco then? 

Erik Hayden  3:55  

Yeah, so all of our projects are located in downtown San Jose, we closed fundraising on our first fund in December. We have those projects in downtown. We started fundraising for our second fund here in January. And we have those projects identified in downtown San Jose as well.

J Darrin Gross  4:22  

Got it. And the the essence of the opportunity zone. When we touch a little bit on that I know the basics is the tax advantage, but can you share with listeners a little bit about what the opportunity is for the investor?

Erik Hayden  4:41  

Absolutely. I’ll give you a little background on the program. So the program started as a part of the 2017 tax cuts and JOBS Act. The federal government wanted to create positive social and economic impacts in lower income areas. And what they did is they designated certain census tracts. Well, these they said here’s What census tracks qualify, that could be opportunity zones, they let the states choose 25% of those eligible census tracts in each state. here in California, the tracks were chosen in April of 2018. And the way that it works is if a developer or not even a developer, but is if an opportunity zone fund invests into an opportunity zone area investors into an opportunity zone fund, get some special tax benefits. And just kind of taking a step back. In order to be eligible to receive the tax benefits associated with the opportunity zone program, investors have to have a capital gains event. Most capital gains events occur either from the sale of a business, the sale of real estate or the sale of stock. Here at Urban catalysts 70% of our investors, their capital gains event was the sale of stock. If you have that capital gains event and you invest into a qualified opportunity zone fund, within 180 days, you’re eligible for the tax benefits. And there are three primary tax benefits. The first is you don’t have to pay taxes on that capital gains event until you pay your taxes in 2027. The second benefit is when you pay your taxes in 2027, you get a 10% reduction. So for every $100, you would have owed in taxes, you only have to pay $90. And really the third benefit is the biggest benefit. And that is after investors money seasons in an opportunity zone fund for 10 years. All of the profits from the fund itself are tax free. And here at Urban catalysts, our plan, of course, we’re ground up real estate developers, we’re going to build these buildings, we’re going to stabilize them, we’re going to hold them until we get to the end of that 10 year mark, and then we’re going to sell our assets. And that’s when we return the majority of the profits to our investors. And those profits are tax free.

J Darrin Gross  6:55  

Okay, got it. I appreciate you. And that was actually very succinct compared to a lot of the explanations I’ve got people I’ve talked to. So I appreciate that. So the idea is to attract investor funds, identify projects, build the projects, hold the projects for 10 years, then liquidate and return at a substantial substantial tax savings based on the growth. I mean, that’s the that’s the the one that I’ve I think that, you know, really caught my attention was that that growth of the gain on the gain is really the the candy there, if I’m understanding correctly, and I’m assuming if you’re in a in an area that’s been identified as a, an opportunity zone, and there’s a bunch of funds, or a bunch of investment in that area, that the likelihood of that that area, you know, appreciating substantially is what we’re all planning on. Is that that kind of the idea?

Erik Hayden  7:58  

No, I don’t think that the goal of the program is to, you know, say have land value appreciate in that area. And there were some studies that showed that in the early part of the opportunity zone programs, I haven’t seen as many news articles about it lately. But the benefit is for the people that live in these areas, it’s how our ground up real estate developments going to give back to their community. I mean, it’s not only designing buildings that the community wants and needs. But you know, for urban catalysts, it’s things like, you know, we pay, you know, millions of dollars in park fees that go towards the construction new parks, we pay millions of dollars in below market rate housing fees to create below market rate housing, we have a housing crisis here in California, it’s especially true in Silicon Valley, and anything we can do to help alleviate that is a good thing. Course, in general, the the government sees the opportunity zone program really is tax neutral. Yes, they’re giving some discounts on capital gains when they’re not collecting capital gains taxes at the end of 10 years. But if you add up the total amount of real estate taxes that we’re paying, you know, we’re building these big buildings. And before there were buildings there, there was something else that wasn’t paying as much property taxes. So you take that property tax increase over the 10 year period, and it really becomes more of a net neutral program.

J Darrin Gross  9:21  

No, that’s, that’s, again, a great perspective. I hadn’t thought of that. Like most people I’ve talked to have been more from a you know, just a pure investment side of things on how to you know, win on your investments strategy and and, you know, lessen your tax burden. But the, you know, the benefit to the community, I mean, that that’s, that’s gonna be huge, especially if you have a lot of investment in an area I can only imagine that will track Well, not just attractive, but like you say it’ll be a quality place for people to Live and create more of a community there. In the areas that you were investing in, can you describe kind of what, you know how large of an area is it and what was there? versus what you’re what you’re building?

Erik Hayden  10:19  

Sure. So, in San Jose, there are a total of 11 opportunities zones, and those are just the census tracks. By the way, when the federal government designated these census tracts, they didn’t necessarily reinvent the wheel, right? They, they pretty much said, Every census tracts, every census tract that qualify for below market rate housing tax credits is going to be an opportunity zone, or at least qualify for one. So it wasn’t some new formula. It was Oh, yeah, we already kind of have this. There are four census tracts in downtown San Jose, that cover almost all of downtown. And all of our projects are located in those census tracts of downtown San Jose in general, you know, maybe I should tell you a little bit about the story of San Jose, because San Jose, while it is Silicon Valley, and sometimes I get a lot of questions like, well, how to downtown San Jose qualifies in the Silicon Valley, isn’t this, you know, where Google and Apple and all these big tech companies are? And the answer is yes. But San Jose is a different kind of city, it was really one of the first cities to experience urban sprawl. So if it hit its peak in like 1940, is a farming community with a lot of, you know, canning facilities here in downtown generating these high rises started being built. By 1965. Downtown San Jose had died. And there was not a whole lot left here. The government came in an eminent domain, almost half of the city. They started, you know, really subsidizing development, building parking garages, building infrastructure, billions of dollars of funding went in, you know, from the public market to make downtown downtown San Jose, a place that people wanted to live. But the private markets really didn’t catch up to downtown San Jose until about five years ago, when we saw this wave of development starting to really come to downtown. And by the way, that was one of the major reasons why we formed urban catalysts that was to take advantage of these macro economic trends in Silicon Valley that are all pointing towards downtown San Jose as the next place to do development on a large scale. And for urban catalysts, we were going to do business raises fun do our projects. It was only after I started forming urban catalysts that I even learned about the opportunity zone program. And that everywhere that we were planning on doing business was already located in an opportunity zone. So thought, boy, wouldn’t it be great to be able to give our investors these additional tax benefits associated with this program. And that’s how we became an opportunity zone fund. Seeing this private market catch up with San Jose, I mean, it’s been an amazing amount of development, at least potential development coming to downtown. We’ve seen Google make a massive move into downtown. And I’ll give you a little summary of that. In the last two years, Google has purchased over $450 million worth of property in downtown San Jose over 80 acres. And plans that they’ve submitted to the city show them building roughly seven and a half million square feet of office and 6000 residential units. At build out. This will be Google’s largest campus on Earth. So we’re seeing big tech companies come downtown. And a lot of developers have come to downtown to in particular, a group called Jay Paul, they’ve spent 650 million on acquisition in the last couple of years. They’re going to do you know millions of square footage of development. And then even recently, a big Toronto based development company, West Bank has come to downtown San Jose, they’ve spent 300 million in acquisition in the last six months. So we’re seeing big developers and big tech companies all flooding into downtown. And this is what we saw urban catalyst when we formed, we wanted to really get it on the ground floor, acquire properties, and do ground development projects before these big developers and big tech companies really drove up the price of the land.

J Darrin Gross  14:14  

Now that’s, you know, kudos to you on on your timing there to be ahead of all the big guys like that. How many projects do you have in your, your queue as far as work you’re going to be doing?

Erik Hayden  14:29  

So in fund one, we have seven projects, a variety of real estate asset classes. We have multifamily office, student, student living, Senior Living and an extended state business hotel. In our second fund, we have two high rise towers in downtown right next to a mass transit station, really across the street from City Hall really on the main drag of the central business district. And that’s a large office high rise and a multifamily apartment building.

J Darrin Gross  15:02  

Gotcha. And it will the multifamily be market rate or affordable or what’s the plan for those?

Erik Hayden  15:08  

Oh, it’ll be market rate, you know, we’ll still pay, it will either pay our below market rate housing fees or we’ll build some below market rate housing into the project. San Jose has an inclusionary housing policy, and we’re going to meet that policy.

J Darrin Gross  15:23  

And how many units do you expect to build between those projects? And

Erik Hayden  15:29  

The multifamily should be well, in our fun to our multifamily project will be around 350 units. In our first fund, we have 184 unit multifamily project. And we have our student housing project, which will have 800 student housing beds. So it’s a they don’t necessarily do it by units for student houses. They do it by beds.

J Darrin Gross  15:53  

Right. So they’re like a three bedroom or four bedroom unit kind of thing. With Yeah, no. And what’s the is San Jose State or what’s the university nearby for the student housing?

Erik Hayden  16:07  

Yeah, it San Jose State San Jose State is right in the heart of downtown San Jose. And with 35,000 students, it’s the second largest university in the Bay Area behind Cal Berkeley.

J Darrin Gross  16:18  

Got it? Got it. That’s that’s pretty significant. The progress of MindTap as well as all the major investors you mentioned that are have identified and have come to downtown. And I’m not that familiar with San Jose, I’ve driven through I just remember kind of being, you know, kind of a continuation at least it felt like it between San Francisco all the way down just around the bay and kind of the the topography. I know there was there was some high rise stuff. But so is this all down in the in the downtown core is that where this all taking place

Erik Hayden  16:57  

That’s correct.  It’s all in the downtown core. And, you know, San Jose, it’s an interesting city. Like I said, it’s the 10th largest city in AmErika has over a million people. But it’s also geographically like a lot like Phoenix where it’s very spread out because that urban sprawl I was talking about. So the downtown itself only has roughly 75,000 people at night and around 100,000 people in the day when people are working in their offices. 

J Darrin Gross  17:23  

Gotcha. Gotcha.

Erik Hayden  17:24  

And the height downtown is limited by the airport. So the tallest buildings are 220 feet, which is probably why you didn’t notice them when you drove through because 220 feets like 20 stories. It’s not like other cities, we have these, you know, 50 100 storey buildings.

J Darrin Gross  17:38  

Right. Well, still, though, that’s, that’s significant. You know, number of units and and just like you said, Google and and the others that are coming in there that I’m guessing that’ll kind of really kind of give a facelift to a lot of the downtown area is it is it is the Google areas at all contiguous all the ground that they’ve purchased draws their stuff is contiguous. And it’s by the diridon train station, which is slated to be the largest train station on the west coast. Got it. So there’s a significant transit, infrastructure already built or is going to be developed as well.

Erik Hayden  18:18  

So most of the transit infrastructure has already been built. And that was a part of, you know, the government’s plans and revitalizing downtown over the last couple of decades, the only major change we’re seeing is that Bart, which is the largest mass transportation system here in the Bay, or is after 62 years, finally connecting through downtown San Jose into Diridon. Station.

J Darrin Gross  18:39  

Got it. No that, that, that’s impressive, and again, you know, everything you guys are doing, as well as everybody else. I mean, it seems like just a complete home run, to have an area that has been identified in such a large scale for redevelopment to get in on that. And and, you know, while you’re, you said, definitely the the livability celuk, that’ll improve dramatically, you know, from an investment standpoint, do you have any kind of ideal, you know, what you’re, you have a target or like a perspective, so and what you expect the property to, you know, from cost to exit? Is there a multiple there are any kind of a,

Erik Hayden  19:27  

Oh, we have all of those multiples, we don’t typically share them in public, because sec rules are associated with raising funds. But I will say that, and, you know, to your point, there is risk associated with investing in any type of fund. You got to understand that risk, and there have to be returns that are projected, that are adequate to take those risks. And our returns are right in line with where they’re supposed to be for the amount of risk associated with our fund.

J Darrin Gross  19:57  

Well, that’s great. You said that the majority of the investors you’re finding are coming from stocks. Is that right?

Erik Hayden  20:06  

You know, quite a few. And by the way, I mean, when we’re talking about opportunity zones and or opportunity zone funds in general, there’s a lot of different kinds of opportunities on funds. A lot of them are focused around ground up development like urban catalysts. But I’ve talked to a lot of funds out there that don’t primarily get their money from stock investors. A lot of our the reason why our funds are from stock investors has to do with us being here in Silicon Valley, and really because of the way that we raise money in the market. But I think the most common reason or least the largest reason why stock investors are interested in urban catalysts or investing in opportunity’s own funds is there’s never really been a safe harbor for stock investors in order to defer and reduce paying taxes until opportunity’s own funds came along. And now we’re really one of the go to ways to do that, while they’re diversifying their portfolio into real estate.

J Darrin Gross  21:01  

Yeah, no, it certainly is a significant opportunity. And, you know, I can see that anybody that’s been in the market, you know, getting out and looking for a way to shelter some other games, that would make a lot of sense.

Erik Hayden  21:15  

You know, Darrin, maybe I can make a comment about the opportunity’s own tax benefits. And that is, you know, when most people hear about opportunity’s own funds, you hear about the tax benefits. I mean, obviously, we’re big fans, the tax benefits here at Urban catalysts. But if the biggest tax benefit is you get tax free profits after 10 years. there better be profits after 10 years, really, what’s the point of the whole program? So understanding that underlying real estate and who the developers are that are doing that real estate is really important for an investor to understand when they’re looking at a potential investment into an opportunity zone fun?

J Darrin Gross  21:52  

No, I, I get it, I get it. Let me ask you, the given the, you know, the start of your fund was, and correct me if I’m wrong, but on the timeline, you were definitely pre COVID, weren’t you? When you when you started? Your

Erik Hayden  22:08  

We started? In our first fund we opened in February of 2019. Okay, we closed our first fund December of 2020. And we opened our second fund here in January of 2021. 

J Darrin Gross  22:22  

Okay, so time talk about how COVID has changed or modified or Evans had any kind of effect on what you see as far as the you know, the the go forward for you guys?

Erik Hayden  22:41  

Sure. So really, the biggest impact that COVID had on us initially, was the federal government in the middle of COVID. Really, like in May or June, they said, Hey, we need to extend people’s opportunity to invest into an opportunity zone fund. So where it used to be, everyone has 180 days from the date of their capital gains event to invest into a fund. It became anyone that had an capital gains event going all the way back to October 4 of 2019. Had until December 31 of 2020 to invest. So we’ve been raising money, people have capital gains, events, they call us, they say we want to invest, we want to diversify, we want to get these tax benefits. And we’d say great, but suddenly was no one had any reason to invest. Now, they all had until December, we thought, Okay, well, our fundraising velocity will slow down in the middle of the year, and then we’ll have a really big q4, a huge December. And that’s exactly what happened. And so the biggest impact was, it just had me you know, a little bit worried there come around August, September, gone. Boy, I hope it’s a big q4 and it really came through in a much bigger way than we’d anticipated which was great. I get a lot of questions about how the designs of our buildings will change because of COVID Or have we rethought you know, overall, our asset classes have we changed our program types and in general, we haven’t made significant changes. And we have made some significant some changes as to the types of hv AC systems that we’re looking at putting into our buildings so that we can have cleaner air. We’d already planned on having you know, keyless entry touchless elevators is really that’s the new market. But some of the Floor Plan layouts of our office, or how some of our amenity spaces or lobby areas and our residential projects work, we’ve changed those slightly. From a wholesale perspective, when we look at COVID impact on the real estate market. You know, we have a long term fund, right? We don’t get tax free profits until after 10 years. So we have a longer term vision of the overall real estate market. And what we think about is what is the demand for our tenants, you know, what would be our tenant rents 10 years from now that’s going to make the determination of the value of our products. For our investors when we sell, and those rents are really going to be driven by Silicon Valley. So when I think about, you know, changes to COVID, it isn’t so much changes because of COVID. Because I’m really looking at the long term trends of Silicon Valley, and if that is going to be favorable, and historically, it’s been extremely favorable. And in general, Silicon Valley has three aspects that no one else has had as a huge concentration of tech workers, we still get more venture capital funding than anywhere else in the world. And we have, you know, six of the largest companies in AmErika either have their headquarters or major office presence in Silicon Valley. And that’s not going to change because of COVID. And over the long term, that’s what matters.

J Darrin Gross  25:47  

No, it’s hard to argue with that, as far as just the brain trust and in the long history that the tech companies have there. And in Silicon Valley. I’m kind of curious, though, and I don’t know, you know, sometimes he read stuff, and it’s more of a national kind of a clickbait or, you know, some sort of a get you to kind of read and and make something of it, but you’re on the ground there. When I asked you about some of the, the information out there about just the political climate, the the tax climate in California, are you seeing is there, you know, there’s clearly news of companies moving out. But, you know, given the long history there, is there any, any concerns there as far as, you know, long term go forward in California.

Erik Hayden  26:38  

So really, the two, the two things that happened last year that were interesting were California’s population decline for one of the first times in like 100 years, and it went down by just a little over 1%. And in the short term, that makes a lot of sense to me, because, I mean, if you’re not legally allowed to go into your office, I can see one out of 100 people saying, Yeah, I’m gonna go work from Bozeman, Montana, or I’m gonna go work from Austin, Texas. That makes a lot of sense, I really see that as more of a short term thing. The other is, you know, the news of companies leaving in three in particular, I’ll point out, Ilan musk moved to Texas, Oracle said they’re going to move their headquarters to Texas, and HP is going to move their headquarters to Texas. So talk about those three in particular, I mean, Ilan, moving to Texas, that’s a billionaires leaving California, so they don’t have to pay taxes, that’s nothing new that is COVID. Related, that’s just kind of business as usual. Oracle, yeah, that’s not a great thing to have Oracle say they’re gonna move, they haven’t moved a significant amount of their office space, but they have moved some. And then HP man, HP, they really hit their peak, you know, a long time ago, they even split into two companies last year. And what we’re seeing here in San Jose is yes, half of one of their two companies is moving to Texas, and the other one is increasing their office space in San Jose. So from our perspective, we’re seeing an increase in workers because of that, that move, at least locally, to put into a frame of reference, because a lot of the news articles you see about companies leaving, it’s sensational, right, they want to get people to read their news, right? That’s the way it always is, if you put it into perspective, just the companies that went public in the second half of 2020, in Silicon Valley, you know, in the middle of the pandemic, just those companies have a larger market cap than HP and Oracle combined. So Silicon Valley is still generating these new companies just like wildfire, like they’ll have and having a couple of older companies, you know, go to Texas, that’s not going to make any real significant impact.

J Darrin Gross  28:51  

Right? I figured as much but again, they the headline news that, you know, grabs your attention is then the names, you know, the brands, you know, and, and, you know, the names are leaving kind of thing, but I think the the thing that I think is really hard to duplicate or, you know, change is just that the history and the you know, you also have the, the you know, Stanford’s nearby, and a lot of the, you know, just kind of like the brain trust of all of these tech companies are there and whether that cross pollination or whatever I mean, that’s, that’s where, you know, those people want to be and that’s how the ideas get started and stuff. And I would just think that would be an attraction for anybody looking for talent or wanting to, you know, go where the people are.

Erik Hayden  29:43  

To give you another kind of frame of reference. cbrt recently released a study showing that the Silicon Valley office marker they called it the San Jose Metro region, is poised to be the hottest office market in AmErika. Post COVID. And what we’ve seen here in the last six months, is we’ve seen a significant number of office building sales. So a lot of these big reads are big equity investors, they’re all coming to Silicon Valley, and they’re gobbling up office space that, you know, either record or near record pricing in the middle of a pandemic, when everybody’s saying, well, isn’t work from home gonna really impact, you know, the demand for office? The answer is here in Silicon Valley, that doesn’t seem to be the case based upon the buying patterns of these huge groups and really cvars forecasts?

J Darrin Gross  30:37  

No, no, it makes sense. And I think that, you know, COVID certainly demonstrated that, you know, there are businesses that can operate, you know, effectively or efficiently, remotely. But I think that in a creative environment, I’m just kind of hearing from others that a lot of that creativity happens when you’re, you know, together, as opposed to, you know, he’s isolated in a spare bedroom or something like that, you know,

Erik Hayden  31:05  

the way that it really is shaking out is that people have learned that they can work from home. And if 4% of people work from home before the pandemic, it’ll probably be a higher percentage, after the pandemic, there will be some offset, as far as like, the amount of office space required to socially distance are some of the new ways that people are thinking that you need to interact in an office. And will those completely offset? I’m not sure, but really, that’s a short term thing. And it is here in Silicon Valley, it is the long term view of how this economy is going to do that’s going to drive office. And I mean, that’s really what’s always driven the office demand here.

J Darrin Gross  31:49  

Well, it sounds like based on your talk, and in the care what the reporting, the market seems to be healthy. And and, you know, as long as the COVID gets under control, which it seems like it’s the numbers are trending that way, and everybody’s getting vaccinated and move on, hopefully, the light at the end of the tunnel here. So 

Erik Hayden  32:11  

That’s, that’s really what we’re seeing.

J Darrin Gross  32:14  

Yeah, gotcha. Erik, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically look at the first we we look to see if we can avoid the risk. If we can’t do that, then we look to see if we can minimize the risk. And when neither of those are an option, we look to transfer the risk. And that’s what an insurance policy is. I like to ask my guests, if they can look at their own situation, whether it be your clients, the market investors, the future projects, whatever, whatever, however you want to frame it. But if you can take a look at that and determine what you think, is the biggest risk. And for clarification, I just wanna make sure you understand, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Erik Hayden, what is the BIGGEST RISK?

Erik Hayden  33:24  

Sure, and this is a great question, because this is what every investor should ask whenever they invest into a property or a fund is what is the risk versus return because that’s what matters when you’re looking to make your investments. When you look at ground up real estate development, which is really what urban catalyst is, you really have to compare it to a group that goes out and buys existing stabilized real estate assets. Because you have a much better idea of what you’re getting into, if you’re buying an asset that has a tenant, it has a cash flow, it’s already in existence, and if it’s a piece of dirt that I’m going to build a building on, and there’s a whole future. So really in, in ground up development, there are four major risks. The first is pre construction risk, and that is, am I going to be able to get building permits and approvals from the city to build the buildings I say, I’m going to build. And here in downtown San Jose, that risk is significantly mitigated, really, because the local government wants to see development happen. And they’re very clear with developers early on in the process as in way before we enter into the contract to buy the land, say, here’s what you can do, here’s what you can’t do. And they’ve been really true to their word on that. So as far as other jurisdictions here in the Bay Area in California, it’s not quite as easy in a process so that risk is much higher in other jurisdictions here in downtown San Jose, that risk is significantly mitigated. The next risk that we look at is called land development risk. That’s there are things associated with the land that you just can’t see. I mean, there’s environmental contamination. There’s liquefaction geotechnical risks, there can be underground structures that you don’t know about. There can be landslides, there can be water tables, all sorts of stuff. And of course, we do a lot of studies before we acquire any property to make sure that we know everything that we can possibly know. But I’ll tell you, one of the reasons why I like doing development in downtown San Jose is because it’s flat, I know it’s flat, I know that there’s a high water table, so I don’t build any underground parking garages. And I do all those studies to make sure I know how to mitigate, you know, build my structural systems for a geotechnical standpoint and my foundations, and how I’m going to clean up any environmental contamination that’s associated with the property, I need to be able to put, when I say put a number in a box, right, you got to understand how much your risk costs. The next type of risk associated chronic development is construction risk. And this can be a bad one. But in order to mitigate that, we do a couple of things. The first is, and this is a bank requirement, every ground development project we do, we need to have a guaranteed maximum price contract with our general contractor. So we use third party general contractors. And really the way that those work is they say, here’s the price we’re gonna build this building for. And if we go over that price, it’s on us not on you. Now, a couple caveats to that. The first is it has to be a large enough general contractor that they can handle those cost overruns, if they happen, so you can’t have them just go out of business on yet. The second is, their bidding a set of plans, those plans better be clear up your architect, let’s hope they didn’t forget to put doorknobs on the third floor. Because if they did, that cost is on you as the developer. So we have a team of 12 development and construction professionals here at Urban catalysts, where we have a ton of experience diving through those construction plans to make sure that they’re accurate and complete, so that we get the best price on our guaranteed maximum price contract. We also, of course, carry contingencies associated with the project so that there are cost overruns, we have money to pay that. And then the last thing is a risk that everybody’s going to take, which is market risk. The difference between a grounded development and a project that’s existing is we’re anticipating what is market risk several years from now, because our buildings take a while to build. So that looking into the future market is that additional risk, we mitigate that risk by doing business here in Silicon Valley, one of the best real estate markets historically in the country, one of the last places to go into a recession, one of the first places to recover. Those are the four types.

J Darrin Gross  37:39  

No, that’s that’s awesome. Very, very well stated. They’re curious, you mentioned the speed at which San Jose is willing to work with you on the permitting and stuff. I know the ground up construction usually, you know, takes quite a bit longer than just going to buy an existing building. Do you have any kind of a timeline from acquisition to completion, you have a kind of a window that you expect me as a year, two years, three years.

Erik Hayden  38:10  

So it depends on the scale of the buildings, and I’ll give you kind of a rain, it typically takes us from the day that we acquire the building to the day we start construction is between 12 and 18 months. And then depending on the scale, you know, some of our high rises are going to take two years two and a half years to build. Our smaller projects take 12 months to build, we have a renovation, it’s going to take nine months. So it’s it’s a range of time. And then of course lease up is different for all of our different product types to when you’re looking at for a market risk perspective, because it takes about three years to get an extended stay business hotel to generate, you know, its long term revenue. It’s just people need to understand there’s a hotel there, they start to do business travel, they stay there, they like it, they come back. So it just takes a little while. Same thing with the senior living facilities. In general, it takes about three years for us to lease up our senior living facility to 100% occupancy, it takes us you know, maybe a couple years or a year to two years to do our multifamily where our office we anticipate having a tenant that is going to be able to start paying rent the day that we can have a certificate of occupancy. So it varies from product type to product type.

J Darrin Gross  39:23  

I appreciate you going through that. I know it’s it’s always kind of a wake up call when you see you know something than just the the time that you you know, before any ground work has been done. I mean, trying to get your permits, and then architectural plans and, and all that stuff. A lot of times people forget about that. So I appreciate you sharing that. Erik, where can listeners go if they’d like to learn more or connect with you?

Erik Hayden  39:52  

Sure. So to learn more about Urban Catalyst, visit Urbancatalyst.com.

J Darrin Gross  39:57  

Got it. Erik, I can’t say thanks enough for taking the time to talk. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Erik Hayden  40:07  

Absolutely, Darrin, thank you again for having me. 

J Darrin Gross  40:10  

All right. For our listeners. If you like this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

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