In this episode Deidre Woollard chats with Erik Hayden, founder of Urban Catalyst about Silicon Valley real estate, the history of San Jose, and the ways that Big Tech is changing housing in the area.
Erik is responsible for developing more than $3.5 billion in real estate projects, including over 2,300 residential units in the California Bay Area, His expertise lies in navigating projects through the entitlement process by working with elected officials, community groups, and political organizations to gain support and get projects approved.
Learn more at www.urbancatalyst.com
Share your thoughts with us: firstname.lastname@example.org.
1:40 Impact of remote work
3:35 The Google factor
5:25 Facebook and housing
6:50 Transit oriented development
9:50 The quest for urban density
13:00 San Jose as a city
17:50 Dealing with local government
22:23 The parking factor
25:20 The life sciences revolution
31:05 Opportunity zones
34:51 Turning a movie theater into something new
37:40 Potential opportunity zone extensions
40:40 Running an opportunity zone fund
43:15 Handling tech investors in real estate
45:58 Erik as an investor
Deidre Woollard: Hello. I'm Deidre Woollard, an Editor at Millionacres. Thank you so much for tuning in to the Millionacres Podcast. If you follow Millionacres.com, you may have noticed that we're rolling out more localized content. That's because real estate, as any investor knows, is always local. Yet there are areas that serve people to look at greater trends to see things coming down the pike. One of those areas is definitely Silicon Valley. The impact of the pandemic on Silicon Valley is fascinating. Here to discuss that and more with me in depth is Erik Hayden, who is the Founder of Urban Catalyst. Erik is responsible for developing more than 3.5 billion in real estate projects, including over 2,300 residential units in the California Bay Area. He's got lots of information and knowledge in navigating projects through entitlement process, working with officials, community groups, all of that stuff that happens when you are trying to put together big development. Welcome, Erik, how are you today?
Erik Hayden: I'm doing great. Thank you for having me.
Deidre Woollard: Awesome. Let's start with the impact of remote work because I think that's really fascinating. Certainly, we saw with Silicon Valley that was the nexus of remote work. We started to hear in the media that a lot of people were fleeing Silicon Valley. It doesn't feel like that really is the case, I feel like they got overhyped a bit. What do you think?
Erik Hayden: Yeah, I also think it's overhyped a little bit, but obviously, there were some changes that happened because of COVID. The first thing that happened is no one was allowed to go to work. It isn't even that people have the choice to go to work, it's against the law to go to work. What we saw, of course, was a huge increase in remote working, say four percent of people prior to the pandemic worked from home, that went up in huge numbers. The real question is, what's going to happen post-pandemic when everyone's vaccinated? Are we going to see all of those workers come back into the office? The long story short is probably not. There is going to be a larger percentage of folks in general, they are going to be working from home. But when we look at supply and demand of office space, that's really what we're looking at, is we're looking at, will there still be a demand for office? Will rent still be the same in Silicon Valley? What we're seeing, the answer to that question is yes. I mean, all of these companies, yes, they've been working from home, but they have all been hiring over the last year. They haven't been leasing new office space over the last year. Because of that, we do expect to see demand for office really starting in the next several months. Overall, when we look at it, and of course, we look at real estate over a long term, if you look at it decade over decade, will Silicon Valley be Silicon Valley 10 years from now? The overwhelming majority of folks would say yes.
Deidre Woollard: People say, "Where Google goes, the world goes." Google, they've first made that big push toward remote work. Now, they're investing up, I think, it's seven billion dollars in offices, datacenters. They have also taken the lead in housing in San Jose. Let's talk a little bit about Google and what they're doing.
Erik Hayden: I mean, Google is so influential in San Jose, just like you said. In Silicon Valley, here is some stats for you, to show you how enormous Google is as far as impact on the Valley. There are 104 million square feet of office in Silicon Valley, and currently, Google occupies 26 million square feet of that. So 25 percent of all office is Google. That doesn't include the new seven million square feet of office they're planning in Downtown San Jose. Google was one of the first companies to initially say, "Hey, no one needs to come back into the office for a year. We want to say a year or so that you can go out and sign a lease somewhere else if you don't want to have to lease a super expensive Palo Alto Mountain View area. Google's basic philosophy, or if you want to call their corporate culture, is that they want to be in the office. They have announced that coming back in the office has started and they plan to continue that. When it comes to below market rate housing, I wouldn't say that they are the leader in below market rate housing, as there is a bunch of groups that build a ton of below market rate housing, but they are one of the leaders in the tech industry that has understood that housing is a real issue, not only just for the quality of life of people in Silicon Valley, but also for getting new employees to work at these tech companies. That's really what drives the Silicon Valley economy. Google has done a bunch to really help below market rate housing, above and beyond what's required by them of any of these cities, just because they know it's the right thing to do and I really applaud them for that.
Deidre Woollard: Isn't Facebook also doing some exploration into housing? I know the Chan Zuckerberg Foundation is also involved in housing. What's Facebook's philosophy as far as that?
Erik Hayden: Google, I might get the numbers wrong, but Google, I think pledged two billion towards below-market rate housing, Facebook pledged a billion, Apple pledged a billion, something like that. If you look at below market rate housing in a nutshell, as far as how much is needed to solve what a lot of people in California call the housing crisis, we need thousands and thousands and thousands of units and we're not getting anywhere close to solving that. Not even scratching the surface. When we talk about the housing crisis in general, to meet supply and demand where price would actually go down, we need something like 125,000 housing units to be built in Santa Clara County in one year, Santa Clara County is where Silicon Valley is. We've never built more than 5,000 in one year. So we're never going to meet that threshold and we're really not meeting the below-market rate housing requirements either, but we have to do something. Seeing these companies take the lead and I mean, they are pledging a billion dollars and a billion dollars is nothing they'll shake a stick at, but it isn't even a drop in the bucket to solve the overall crisis that we've got going on.
Deidre Woollard: I know some of that is also focused on transit oriented developments as well in San Jose, right?
Erik Hayden: Yeah. Google in Downtown San Jose, in the last, let's call it several years, they purchased $450 million worth of property over 80 acres. It's all around the Diridon Train Station, which is slated to be the largest train station on the West Coast. The plans that they submitted to the city show them building over seven million square feet of office and somewhere in the neighborhood had a 6,000 residential units. A lot of those being below market rate. Definitely making a big push into Downtown San Jose and of course, around transit oriented development. That's been their urban planning mantra for decades now, and it's good to see that companies in Silicon Valley are really understanding that and making decisions based around that.
Deidre Woollard: Do you think that co-living is going to play a bigger role? Are we going to see more single-family build to rent? What are the overlying trends that you're seeing?
Erik Hayden: Sure. The overlying trends, we don't see that much single-family anymore, mainly because there isn't a whole lot of land; we're pretty built out. Then second, because cities are understanding that we have housing crisis, they need to build higher density. State mandates have made the cities understand that, especially over the last five years. When we talk about multi-family, because of COVID, we saw rents go down slightly. We saw, especially in San Francisco, has gone down quite a bit. San Jose didn't get impacted quite as heavily. That is really a short-term variation. We've heard a population loss, people go into the suburbs. If you think that California, in general, lost one percent of its population last year, that would be one out of every 100 people decided they wanted to leave California and go somewhere else. If you didn't have to work in your office and you thought remote work was going to last forever, I can definitely see one out of a 100 people saying, "You know what, I'm going to move to Boise, Idaho," or "I'm going to move to Austin, Texas." Some, "I'm going to move out of California where it's less expensive to live." That's very short-term thing. In the long term, we've created so many jobs here in Silicon Valley that we literally can't build multi-family fast enough to meet that supply and demand. That's really what has driven rents over the last 30 years and will continue to do so moving forward.
Deidre Woollard: That definitely makes sense. I know the goal of the 15-minute city is something that's been talked about for San Jose and for other areas. I think that's one of the big trends before the pandemic. There was a lot of talk like the 18-hour city admitting that the city is always on. Now we see this idea that people really want to walk around. They want to be car-free. What is that being for investors in the San Jose area? Because Silicon Valley can be pretty spread out, but San Jose seems to be getting a little bit more dense.
Erik Hayden: That's the plan. I mean, San Jose, it's one of the largest geographic cities in the country. It's the 10th largest city and it's built a lot like Phoenix where it is very spread out. The local government has done a great job putting in mass transportation system to try and make transitory and development better, but it still has a long way to go. New plans are the same as old plans; they want people to move into the urban quarters, near transit where all the infrastructure is already in place. We have BART, which is the major mass transportation system throughout the Bay Area is now finally connected into San Jose. Their plans, over the next 5-7 years, is to connect through downtown into Diridon Station, that big train station. That's going to be a big thing too. But getting people into the downtown, creating that 15-minute city, as you discussed, that is a real goal. What we need is people. Mayor of San Jose has even said that his goal is to build 25,000 housing units in Downtown San Jose. That is a steep goal. That would be the equivalent of like 80-100 high-rise buildings constructed downtown. I mean, downtown right now probably has about 30 high-rise buildings. Saying that is really saying something about where the future of San Jose is going.
Deidre Woollard: Interesting. Is there a lot of, what they call, nimbyism? The "not in my backyard" energy around the community in general or what is the feeling of residents who already are in the area?
Erik Hayden: In the Downtown core, not a lot of nimbyism. In the Downtown core, people understand this is where you build high-density housing, this is where you build high-density office and other things like that. Just outside of the Downtown core, close to where Google is building their big campus, you can call that West Downtown, they are some community groups, but those community groups, in general, have been proactive. They've worked with the city to develop specific plans for their neighborhoods. They're very vocal about design, but their pushback isn't necessarily height and density anymore. They've really come to understand that they do live in the middle of a giant city. Outside of Downtown San Jose, that is not the case. The local governments in most other cities still listen to the NIMBYs and that's how life goes. The state has been doing a lot of work in recent years to take away certain aspects of local land-use authority so that developers can come in and say, ''I'm building a high density, multifamily project here by right.'' That has scared a lot of cities. We see this in general, fluctuation on city councils where they get really pro-housing and they designate a bunch of sites in their town for high density and then NIMBYism backlash, they become a completely anti-housing city for five years and then they flip back to a housing city. A lot of that going on. But overall downtown, one of the reasons we formed Urban Catalyst and focused on the downtown core is because it is so streamline, the preconstruction process, making developments happening, getting to our building permits, that is something that Downtown San Jose excels at.
Deidre Woollard: Another thing I find fascinating about San Jose is I feel like it's finding itself as a city. When we talked about those Silicon Valley workers, it used to be in the past that a lot of people would work at a Google or a Facebook but then still want to live in San Francisco because they're young, they want access to nightlife, they want that city living. Is San Jose becoming more city-like and growing up as a city?
Erik Hayden: It is. It's really interesting the way that San Jose has evolved over time. San Jose in general is a bedroom community. All those people that work at Google in Mountain View, they all living in San Jose. The commute times between Downtown San Jose and, say, Downtown Mountain View, it's like 15 miles or 20 miles. Commute time's an hour and half during peak rush hour. It's because we see the huge movement of people from San Jose North up to Mountain View in the morning, there's huge movement down to San Jose in the afternoon. San Jose, like we were to talking about, is a very spread-out city so most of those folks live in single-family suburban neighborhoods, which doesn't create that synergy. In the last 5-10 years, downtown has really been growing up. I wouldn't even say growing up, I'd say coming back to its peak time, which was probably 1945 when Downtown San Jose was really a true downtown. It went into a long period of time where it wasn't really the place to be. The government did a lot of work putting money into downtown, building up its infrastructure, building up a lot of the transit options that are now available. Now, around three years ago, we really saw that light switch turn on. We saw this movement of these big tech companies coming into downtown. At the same time, a lot of developers came into downtown, Urban Catalyst included, because we saw the wave of development coming and we wanted to get it on the ground floor and acquire properties before the prices were driven sky high by all of this activity.
Deidre Woollard: Interesting. What was it in the beginning of San Jose that made it, you talked about 1945, was that because it was on a train line? What was the thing that started off the city in the beginning?
Erik Hayden: That's a great question. I love talking about the history of San Jose because San Jose, before it was Silicon Valley, it was called the Valley of Heart's Delight because it had just some of the best weather in the whole world and it was, in general, a farming community and there are a lot of orchards, especially in springtime, the blossoms on the orchards were so beautiful that people just love to live in San Jose. San Jose formed as a city and was one of the largest cities because of its central location in the valley and its location next to the Guadalupe river. Really hit its peak in 1945 when canning was the largest industry in town, so lots of canneries, lots of prunes, canned prunes. Now, after World War II, people came back to San Jose, but there was the American dream, everybody wanted their single-family home with their white picket fence, everybody had their car and their two-car garage, and San Jose became one of the first cities to truly experience urban sprawl. That became what San Jose was. San Jose was almost completely built out by 1980 far-reaching suburban neighborhoods and when that happened, the downtown died. In California, we have things called redevelopment agencies or we did until 2013. Really what it did is it funneled some property taxes into the local city government. The city of San Jose was the largest redevelopment agency in the state of California, and they pumped billions of dollars into the downtown. The eminent domain almost half of downtown, tore down a bunch of old buildings, sold buildings to developers or land developers at a discount, subsidized development, facade improvements, street trees, sidewalks, everything to make downtown just amazing. If you talk to the former redevelopment agency heads, they'd say we spent years putting the bones in for Downtown San Jose and now it's time for people to come and build on top of that. Really, that's what we're seeing in this current wave of developments occurring.
Deidre Woollard: I love that story because it's something we see a lot with cities all across the country, the different cycles that cities go through. So for you, working with local officials to get projects built, what is that like? Is there anything that you find surprising? We talked a little bit about NIMBYism. Is there anything else aspiring developers might need to know about how to do that thing?
Erik Hayden: I'm glad you brought that up because that is one of the major aspects of a developer's job is understanding local governments all the way from staff level, all the way to city council members. In general, you've got to keep your finger on the pole since to what is happening, what the issues are, the issues change over time. I remember when I started off in the industry 15 years ago, the politicians in San Jose would run on the premise that they wouldn't allow below market rate housing built in their neighborhoods. Now, flash forward,15 years now they run on the premise, we will build more below market rate housing than anyone else. So times really change. It's important to understand who you are as a developer, what you're planning on doing, and really focusing on the community. This is one of the things we worked really hard on at Urban Catalyst that is we don't just want to create projects that are financial vehicles for investors that make money. We care about our community that we do business in. We've been doing business in Downtown San Jose for decades. We want to build projects the community wants and needs. It is possible to create that win-win where you find this great project community wants and needs that fits into their overall plan and then at the same time, it's also something that investors will want to invest in so that you can build the project. It does take money to build projects after all. Being able to demonstrate that and articulate that to your local elected officials is great. Having a clear process to go through to get to your building permits, which is so challenging in most cities in California, San Jose has done a great job of that. We meet with the planning department, the heads of public works and planning once a month, because we have so many projects in the process right now that we get extra attention, which I like. But really, working with them to find a solution. It isn't so much that they're trying to stop you instead, you have to help them figure out how to get you to the finish line. We really enjoy our relationships with them in doing that. Then when it comes time to go to city council and get approvals that your project has to do that, working with your elected officials not only through the process of them becoming elected officials in their campaigns, but also knowing what their priorities are and working with them to help achieve their goals outside of what you're doing as a developer is important. We spend a lot of time doing that. We've had two of our projects go to City Council over the last six months, and we've had unanimous approvals from both. A lot of that was because our buildings were the right buildings for the right place with staff support and their local officials knew who we are and know that we have the right ideas in mind that we're going to work with the community in the right way to build these projects. Like I said, it's that win-win.
Deidre Woollard: Interesting. In terms of when you're building these projects, is there a public factor in terms of adding parks, or are there concerns about traffic and things like that?
Erik Hayden: San Jose has some pretty clearly defined fees as far as what we have to pay for below-mark rate housing or what we have to pay for parks. For example for parks, if you're building multi-family, it's 25,000 per unit, goes towards the construction new parks. Most of the time, we're doing projects on smaller infill sites like an acre or less, and so they don't necessarily want to see a park on our property. But us paying into their parks department so that they can go and acquire properties and improve properties to build new parks is important. Same thing with below-market rate housing. Obviously, there is a crisis and we need to solve that, we're more than happy to do our parts to do that. When we talk about projects in general and what they want to see and what the neighborhood talks about it is, it's usually what I call the big four, which is density, traffic, parking, height is the fourth. Those are the four things that the community always wants to make sure that they have a say on. When you do projects in Downtown San Jose, they want to see density, they want to see height, the infrastructure is already there, not only from a roadway perspective, but also from a mass transit perspective, and then you're able to do projects more successfully. If you're doing projects in suburban neighborhoods, yeah, the NIMBYs, they definitely get a lot more agitated about all of those factors.
Deidre Woollard: I have a question about parking because I feel like the requirements for parking city-by-city seem to be shifting a little bit, before you really had to have a multi-family had at least one space per unit, now I'm seeing some places where they're changing those requirements. What is San Jose's attitude about parking right now?
Erik Hayden: San Jose, especially in the Downtown is very flexible. Outside of Downtown, they're more suburban. But in the Downtown, multifamily can be parked at one-to-one or even less in some cases. Now, we don't necessarily always do that. Depending on the location of the buildings, we obviously want to be able to attract quality tenants, and there is a market rate aspect associated with this. If we're leasing an apartment that tenant is expecting a parking spot for the type of project that we're building, then yeah, maybe we'll build a little bit more parking. Here's another one of those changing things in my career. It used to be, you better park two spaces per unit, and there is a big battle over how much parking? Now the battle is almost the opposite where the city says, we don't want you to put it any parking or very little. You see, but I know I need more parking. [laughs] My tenants are going to demand more parking. I think the current ways that the cities are working they're very good as far as encouraging transitory and development, getting our society out of their cars and into other modes of transportation. That's great. From a developer perspective, they're not pushing us down to the point where we have projects that won't be able to lease up, so having that balance is great.
Deidre Woollard: Is there any requirement as far as charging and the switch to electric vehicles or is that something that you are noticing as you build developments now that you have to think about chargers in parking lots?
Erik Hayden: Cities are now all over this. When we talk about what matters in a city, cities are primarily responsible for land-use authority, police and fire, and then city services in general. When all these politicians in the last 10 years have been running for office, they run on below-market rate housing, solar panels and car charging stations. That's like they're talking points, the buzz words. Every single project that I have done in the last five years, we've had to put in five times as many charging stations in our parking garages than we really think are necessary. Mainly because it's something that some City Council member ran on and forces you to doing. Whether it's through the Planning Department or at the DEAs. I've had projects changed while I'm at my approval maintenance and there aren't enough chargers that doubled them. You go, okay. That's just how life goes for a developer.
Deidre Woollard: Interesting. Another thing that I want to talk about too is, with Silicon Valley, obviously, it's big tech, but now it seems it's becoming big life science. That's an area of real estate that in the past year, we've all noticed, it's been industrial and life sciences are the buzz. A little bit pre-pandemic, but majorly especially for life sciences post-pandemic not just because of COVID, obviously, but because of we're all aging and everybody thinks that fountain of youth will somehow be found in Silicon Valley. What are you seeing in life sciences?
Erik Hayden: Big surge in life sciences, and just like you said, it has been the soup-du-jour, it's the flavor of the month for real estate, industrial [inaudible 00:25:57]. A lot of that has to do with when you do life science type products, you have to have people and those people have to have office space to be in or lab space to be in in order to work. Same thing with industrial, Amazon still needs to move their boxes through their facilities to get them to your doorstep. Over the last year, of course, we've seen a lot of that. I like to take 1,000-foot view, here at Urban Catalyst we do have 10-year funds. When I see real estate over this longer period of time, this is more of a pretty cool in the end of 2020, early 2021, and it will fall off in the next couple of years and something else will replace it that is the newest shiny object that everybody wants to talk about. I do think that we are going to find the fountain of youth here in Silicon Valley somewhere. I talk to a lot of CEOs that are on the same, just amazing life science products, things that are just going to change our lives forever. Center of innovation, technology in the world, here we are. When it comes to life sciences taking over tech in Silicon Valley, it's important to know that tech is still just the main driver. Really, the biggest change that's happened in Silicon Valley over the last 15 years is if 15 or 20 years ago you said, okay, Silicon Valley, it's Oracle, it's HP, it's fledgling Google, pretty cool, but it's really the land of start-ups and it was. Flash forward 20 years, and now five companies have more than 50 percent of all office space in Silicon Valley. Google, Facebook, Amazon, Microsoft, these companies they're just gigantic. It's more of an institutional company place now than it ever was before. Now glad that those startups are still here, but just the fact that you have Apple and you have iPhones and that's not going anywhere is really changed the overall landscape of Silicon Valley over the last couple of decades, and made it a lot more immune to things like a dot com crash.
Deidre Woollard: I'm back with Erik Hayden of Urban Catalyst and we're talking all things Silicon Valley. Let's get into opportunity zones because I know Urban Catalyst is heavily invested in opportunity zones. There is a lot of talk about them. We've got some deadlines coming up, there is a bit of criticism, of course, about having opportunity zones in wealthy areas like Silicon Valley. What have you heard about that?
Erik Hayden: I read the news just like anybody else and there'll always be criticism of government programs, especially when they're new like the opportunity zones programs. I would say when the program came out as a part of the 2017 tax cuts and jobs activities like five pages of legislation. Since then they've had three rounds of clarification from the treasure in the IRS and each one was like 250 pages long. The final clarification didn't come out until December of 2019. We've only had about a year and a half that this program has been finalized. It's still just almost in its infancy. Now, when we hear about talk of which places were designated opportunities zones and which ones weren't, it's a pretty simple formula. The federal government said it's going to be lower income areas that are census tracks. The states are going to get to choose which census tracks qualify and each stake has to choose 25 percent. Now, from a developer standpoint, we looked at it as, well, the census tracks that are eligible are all the exact same ones that are eligible for federal tax credits for below market rate housing. No one reinvented the wheel by selecting these sensors track. They've been in place like this for many years. There is just some new program that people want to discuss and talk about what's good and what's bad. I don't hear a whole lot of debate over below-market rate housing tax credit Sensors Track eligibility. But we have seen a little bit of that especially in the papers. Overall, I would say that Downtown San Jose and areas of the Bay Area that have been designated, every one of those census tracks deserves to be an opportunity. There isn't a single one that doesn't have that lower income aspect, that doesn't have something that this community needs that is going to benefit from this program. When it comes down in the valley of the tracks that I know, it's definitely deserving. Overall, the Biden administration when they came into office, they met with the national working groups that advises the treasure and the IRS on opportunities on legislation. One of my partners, Sean Raft, is on that working group, so we really have an insider access into what they're chatting about. In general, they said they wanted to see more reporting requirements. That's something that we really encourage and we want to see too. Not only because, in essence, we get to brag about all the really good stuff that our projects are doing for Downtown San Jose, but also because I think there should be reporting requirements for any federal program that has this type of scale and scope. I mean, I want to make sure that the program is working too. I pay taxes, so having that type of accountability's important to me just as a citizen. Those two things we think are going to be incorporated, the reporting requirements to show the benefits that these programs are creating. I can't wait to see them and I'm thinking they're going to be rolled out over the next 12-24 months.
Deidre Woollard: Yeah, that makes sense. I think one of the things that people don't get about opportunities zones is that you really have to demonstrate the improvement in the development that you're working on. I know that Urban Catalyst is involved in repurposing some buildings. What's that like?
Erik Hayden: Of all of our projects, the majority of them are ground development. We do have one project. We're converting a 12 screen movie theater into around 75,000 square feet of office with 25,000 square feet in ground floor retail. That is just an amazing project. It's our first project that starts construction next week. We just finished demolition of the interior. That project, because it used to be an old movie theater, it's average floor to ceiling height is 25-30 feet. Typical office with class A stuff, you want 14 foot floor to floor heights with a minimum 12-12.5 foot clearance. Here we have this giant 30-foot ceilings, we can do cool things inside there for our tenants like floating conference rooms, mezzanine levels, and catwalks that connect to our rooftop gardens. Just the building itself that we're using is beautiful architecture, has this huge tier and terraced windows. Really something that I would never built from the ground up but being able to do a renovation on it, it sure is fun.
Deidre Woollard: Interesting. Because there's so much talk right now about what to do with movie theaters, certainly, after the last year and people stopped going to movies, so movie theater conversions are fascinating. How did you discover that building? How did that one get on your radar?
Erik Hayden: Yeah, COVID has impacted movie theaters pretty significantly. This movie theater went out of business in 2016. This was the redevelopment agencies in Downtown San Jose. How do we make Downtown San Jose awesome? They said, "Well, we need a movie theater." Let's subsidize a developer to build a movie theater. Excuse me. Let's subsidize the movie theater to locate here and operate here and then when Gerry Brown in 2013 disbanded the redevelopment agencies and they no longer receive subsidy, they went out of business. This building was just vacant. This means one of those opportunities and rules. Substantial improvement is one of the big rules. But another rule and another way to get this substantial improvement is by acquiring a building that has been vacant for more than 12 months then utilizing it and we're doing that with this project. It had been vacant for several years. We're acquiring it and now we're transforming it into an office with that ground floor retail in it. Overall, it's right in the heart of downtown. It's really going to be an amazing ground floor experience on the Paseo de San Antonio, connecting to a lot of these other restaurants and retail shops that are on the Paseo. Because the Paseo connect San Jose state really to the heart of town, which is Cesar Chavez Plaza. Creating a restaurant row through there is really important to us, and this project is right at that centerpiece of the alley.
Deidre Woollard: Sounds amazing. I think another thing about opportunity zones, I don't know, you mentioned the working group. Are you hearing anything about some potential extensions for some of the deadlines and cut-offs? I had a guest a while back that talked a little bit about that.
Erik Hayden: We hear a lot of things out of the working group. A lot of these bills that go into the legislature, they never come out of committee. I'll preface this by saying, we have heard some interesting things and a lot of them don't go anywhere. But here's one of the interesting ones I heard recently. This goes back to our thoughts. If Trump had then re-elected, he was a big fan of opportunity zones, and we thought that he probably would have extended the program. Because right now, if you don't invest into an opportunity zone fund prior to the end of 2026, there are no tax benefits. The program itself goes through 2047. That's a long time. But that 2026 date, that's set in stone. We recently heard that there is a bill floating around out there that are wouldn't extend the program by two years. That would make it so that you would have up until the end of 2028 to invest, and also would retroactively change anyone who had invested into an opportunity zone fund. They thought that they had to pay their taxes in 2027 on that initial capital gains event, that would get extended. They wouldn't have to pay it until they pay their taxes in 2029, which would be awesome. It would also retroactively change the 15 percent discount, we'll call it the 15 percent reduction in basis. If you want to get technical on how it's characterized, when you pay your taxes, you get to pay less. Changed to 10 percent in 2020 and 2021. Goes to zero percent next year. It's a reduction in benefits as you get closer to 2026, That would all be extended by two years and it would retroactively change everyone that invested last year that only thought they're getting that 10 percent reduction, they're going to get the 15 percent reduction. Everybody this year that invested thinks they're getting the 10 percent reduction, they get 15 percent, and then next year will be 10 percent, not zero. Really just moving the whole program forward by two years, that makes a lot of sense to me too, because as I mentioned, it took a long time to roll the program out and get all the kinks worked out and get the whole process clarified. We didn't see a significant amount of investment, especially for the first 18 months after the program was enacted because people were confused about the rules. To investors, confusion equals risk, so we didn't see this massive amount of investment since December 2019. All we've had is a global pandemic which has obviously negative affected investment into a lot of different type of opportunity zone funds included. Here we are. It would make sense to give another shot at it especially if they put in reporter requirements that show that there have to be these positive impacts and that they see the positive impacts. Extending the program makes a lot of sense.
Deidre Woollard: Yeah. I would definitely agree with that. How is running an Opportunity Zone fund different than other investment funds? I mean, I would think that one of the first things would be the length of the hold because you have to hold for a significant amount of time. What are some of the other factors?
Erik Hayden: That's a great question. Yes. In general, I've done real estate development for my entire career, and so have a lot of our partners at Urban Catalyst. Traditionally, the way that we do business is we build our building, we stabilize it, and then we sell it. Because that's what maximizes internal rate of return. But typically, we are looking at say like a five to seven-year process start to finish year-in and year-out. Usually, it's closer to five years. Now, of course, the Opportunity Zone funds, you have to wait 10 years to get tax-free profits. Our plan at Urban Catalyst, we're going to develop these projects. We're going to stabilize them, then we're going to hold them until we get to that 10-year mark and then sell all of our assets at 10 years because we are structured like a traditional real estate equity fund where we are driven by internal rate of return. Now all of that being said, an Opportunity Zone project just because a project's located in an Opportunity Zone, that doesn't mean that I can have lower returns. My project has to be able to compete on the market with every other project out there. The only people that benefit from the program are the investors that get tax incentives and the people that live in those communities, they get the benefits from the projects themselves in the form of new parks, flow market housing, construction jobs, new retail, new coffee shops that they can hang out at. The developers, we don't really get those benefits and the project returns have to be similar or equivalent to any other real estate development project I've done anywhere that anyone does across the country. It's just risk versus return. What we see in the Opportunity Zone space is, we see this longer-term hold which in general makes our IRR slightly lower than what I would traditionally see in a development project. But you do get those additional associate tax benefits and what you really create and this is very Urban Catalyst, but it is a structure that a lot of Opportunity Zone funds use. We have a value add fund for the first four or five years where we're creating value through ground-up development. Then in the second or the second half of the fund, we really have more of a core fund where we have stabilized assets that are cash flow, so it almost comes like a hybrid type of fund.
Deidre Woollard: One of the things I think that's interesting perhaps about you and Urban Catalyst is you're dealing with a lot of tech investors. People who've had maybe there was an IPO or something like that. A lot of people who suddenly came into a lot of money and maybe don't necessarily know what to do with it and maybe didn't really think about real estate. How do you talk to those tech people who may just be learning about real estate, and how do you explain to them what you'll be doing with their money?
Erik Hayden: Sure. First thing I'll say is in our first fund, we raised $131 million, and we had 356 investors. Quite a few investors. Over 70 percent of them, their capital gains event was the sale of stock. The majority of those folks are from Silicon Valley. They work in a lot of these tech companies. I can really break them up into two categories. Category 1, the day trader that during COVID's made so much money in the stock market, they just never even thought about how much short-term capital gains cost are, for as far as their tax rate. The second one is more of a traditional. They've been working at Google or Facebook or Uber for 10 years. They are a senior executive and the majority of their network is tied up in their primary residents and the stocks that they have been granted overtime. Let's talk about the second one first which is these long-term employees for these big companies. They've always known that they needed to diversify their portfolio. I mean, there's no wealth advisor out there that says what you should do is keep all of your money in one stock. They've always love to diversify and now there is a way for them to diversify into real estate without this huge tax hit. At least they get some tax advantages to reduce and differ taxes and then tax-free profits after 10 years. That's important to them. They see this as the first time ever having a safe harbor to be able to diversify in the real estate with some tax advantage. That's why we've seen such a large percentage of our investors fit into that category. Now the other category, the short-term day trader, Robin Hood [laughs] Reddit charging the gate. I mean, these folks they call us I made so much money I don't even know what to do it that. I didn't know short-term capital gains rates are as high as [inaudible 00:45:39] percent we know. Here we go. Here's a solution. The Opportunity Zone funds, we accept both short and long-term capital gains for this program. We've seen a lot of those folks as well. We explain to them very easy. We say, you're diversifying into real estate, ground-up development as a certain smaller subset of real estate, and there is a higher risk than just going out and buying an existing building but in general, we have higher returns. A lot of funds are structured where they do ground-up development, or they do the renovation of existing buildings so they have to meet the substantial improvement test, one of the big tests of the program. We structure ourselves in ground development and large renovations. We're providing returns that on an apples-to-apples basis compare with just regular old real estate equity groups that do ground development, only we have these tax advantages. That's what you're investing in.
Deidre Woollard: Nice. As we wrap up, wanted to know a little bit about you and your personal investing strategy. How did you get started in real estate?
Erik Hayden: I come from a real estate family where my dad is a property owner and was a broker. My brother is a leasing broker. My sister did a lot of the in-house leasing for Tesla, opening up showrooms all over the country. My mom was a county planner for 38 years. Real estate really runs in my family and my blood. I started out in construction, and then I slowly moved into development. I started out doing land acquisition for single-family homebuilders here in the Bay Area. I quickly moved into high-density urban development doing call it institutional quality and scale projects throughout the Bay Area. Rose to the ranks. Before Urban Catalyst, I was the President of a group called Zarsion America doing the big project in downtown Oakland. Urban Catalyst was me coming back to my roots here in San Jose really doing what I like to do best which is revitalizing the downtown. Making downtown just an amazing place because it does have all those bones and that light switch has turned on. In the next 10 years, we're going to see just a renaissance in downtown, it's just going to be an amazing place to live, to work, and to hang out.
Deidre Woollard: Excellent. I think that's a great place to end it. Thank you so much for your time.
Erik Hayden: Yeah, it was lots of fun. Thanks for those great questions.
Deidre Woollard: A reminder to our listeners, you can learn more at urbancatalyst.com. If you have questions or comments, you can always email us at media@Millionacres.com. Stay well and stay invested