In response to the Tax Cuts & Jobs Act’s Opportunity Zone program, many companies are launching Qualified Opportunity Funds that will funnel resources into ground-up real estate development and renovation projects in designated acreage nationwide. San Jose-headquartered Urban Catalyst recently launched the first multi-asset Qualified Opportunity Fund in Silicon Valley, which will target real estate projects in downtown San Jose’s designated Opportunity Zone. Connect Media recently chatted with Urban Catalyst founder Erik Hayden to learn more about the fund, what it is financing, and the hoped-for result.
Q. Tell me a little about your Qualified Opportunity Fund. How does it differ from others?
A. Typical large funds are great at raising money, but then they have to look for development partners. We differ in that we are a group of developers that have acquired some amazing projects and are now out in the market raising money to finance those projects. Also, development is a local and specialized business; you have to know the process, the markets, and even the politicians. We have a board of strategic advisors, several of whom are the largest property owners in downtown San Jose. We are working with them to acquire the best projects, which gives us the competitive advantage in the San Jose opportunity zone. In a few years, when there are many Opportunity Funds in San Jose, we will have already picked up all the choice properties.
Q. Why is downtown San Jose a good target for Opportunity Zone development?
A. There are three reasons. First, the Silicon Valley job engine. Jobs create demand for all product types. San Jose is traditionally the last market to suffer in a downturn, and the first market to rebound. Also, office space in Palo Alto, Mountain View and Sunnyvale is almost completely built-out. The next progression for office development is downtown San Jose, and we are in the perfect position to take advantage of that macro trend. The second reason is San Jose’s infrastructure and transit options. San Jose already has excellent city street infrastructure and freeway access. Diridon Station is the largest multi-modal station on the West Coast. With the BART (Bay Area Rapid Transit) expansion, now the Bay Area will have public transit access right to San Jose. In addition, the San Jose International Airport is the fastest-growing major airport in the nation. Finally, when it comes to the downtown area, the city is very pro-development. They want to see development happen, and they’ve made it easier and more streamlined to do so. With larger development projects in California, entitlement to groundbreaking can typically take a few years, but in San Jose the process usually takes 12 to 18 months. One of our partners (Joshua Burroughs, Urban Catalyst’s COO) recently developed a 1,000-bed student housing tower in downtown. From the day he submitted the plan to the city to the day he started construction, the process took only 11 months. We love San Jose, and that’s why we’re here.
Q. What will the fund be working on?
A. Even though we are geographically focused on the Bay Area and specifically downtown San Jose, types of projects we plan to build are diverse, both in project size and type. We’re focusing on office, hotel, multifamily, student housing, industrial and senior living, including assisted living and memory care. We’re mainly doing ground-up development, though we are looking at some large repositions. We have a wide variety of projects we are working on. The smallest project is 60,000 square feet, and the largest will be 700,000 square feet.
Q. What have been the challenges in putting your fund together?
A. Fundraising has been fantastic so far, as we have a lot of traction in the market. It’s important to keep in mind that our partners have invested $4 million into the fund. We want our interests to be aligned with those of our investors, and this shows we have skin in the game. After the October 2018 IRS guidelines came out, we had all the information we needed to form a multi-asset fund. We structured under the Qualified Opportunity Fund guidance by using the most-experienced consultants in the country. Novogradac & Co. handles the tax side of things, Goodwin Proctor is our legal consult, and NES Financial handles finances. The challenge is that the IRS guidelines are complicated and can be confusing. When investors read articles and hear about the confusion around these funds, that equals risk in their minds. Our message is very clear: We have all of the information we need to operate and comply as a Qualified Opportunity Zone Fund. Our legal team has done an excellent job interpreting the guidelines, and we fully understand the nuances. We are happy to spend our time educating potential investors on the benefits of an Opportunity Zone Fund and clear up the confusion in the market.
Q. What are some things you might want to tell investors about Opportunity Zone investments?
A. For the first time in history, private investors have a way to defer, reduce, and eliminate any kind of capital gains taxes. This is an exciting new program that will allow individuals to take advantage of tax benefits that in the past have only been available to pension funds and endowment funds. I would say that investors should find a Qualified Opportunity Fund in which the group has more than just experience in raising money but also has experience with real estate development. There are lots of funds on the East Coast that are great at fundraising, but it’s important that those funds also include developers with boots on the ground and knowledge of the areas where they are building. Also, the fund needs to be compliant with guidance, which is why quality funds will be working with the very best accountants and attorneys in the country. What we tell our investors is that our fund is structured a lot like a traditional real estate equity fund. It’s all about the projects, projected returns, and making our community a great place. If you were to invest in the Urban Catalyst fund, I believe it would be a wise investment just because of the projects we have in the pipeline. And, guess what? Because they are all located in opportunity zones, you will also get amazing tax breaks, which is good for the investor and great for the community.
For comments, questions or concerns, please contact Amy Sorter
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