The Opportunity Zone Expo Podcast

Erik Hayden: OZ Developer / Fund Manager is Exclusive to Downtown San Jose

November 26, 2019 Erik Hayden Season 2 Episode 24
The Opportunity Zone Expo Podcast
Erik Hayden: OZ Developer / Fund Manager is Exclusive to Downtown San Jose
Show Notes Transcript

Erik Hayden, the founder of Urban Catalyst, was redeveloping downtown San Jose long before the Opportunity Zone program came into being. When the OZ program was created and designated much of old San Jose as opportunity zones, he didn't miss a stride. He created an Opportunity Zone fund so that his investors could grab OZ tax benefits, and then kept right on going.

His single-minded focus on San Jose and only San Jose makes him the premier OZ developer and fund manager for Silicon Valley.

Erik Hayden is my guest on this episode of The OZExpo Podcast.

Guest:Erik Hayden
Website: urbancatalyst.com
Host: Jack Heald

Jack Heald:

Welcome back everyone to the Opportunity Zone Expo Podcast. I'm your host Jack Heald and I am delighted today to be joined by Erik Hayden, who is the founder of Urban Catalyst. Erik, welcome to the welcome to the podcast.

Erik Hayden:

Hey, happy to be here. Jack.

Jack Heald:

Tell us a little bit real quick, where is Urban Catalyst located?

Erik Hayden:

Sure. Urban Catalyst is located in downtown San Jose, California.

Jack Heald:

I think we know where that is. Where do you guys fit in the great big Opportunity Zone ecosystem?

Erik Hayden:

Sure. Uh, Urban Catalyst is a real estate equity fund and we're focused on ground up development projects in downtown San Jose. And of course we're also an opportunity zone fund.

Jack Heald:

So you start with the fund and acquire the project , start with the projects, acquire the funds or both.

Erik Hayden:

You know, our plan with this fund, we acquired the projects and now we're raising money to fund those projects. So we are also, we're also developers of all of the projects that we're doing. We have seven projects right now, our portfolio.

Jack Heald:

Oh, you know what? I had it , I had a list of questions. It was eventually gonna get to that. Um, but we've jumped right to that point. All right , so you guys , um , both are , uh, you've got projects and you're, you're building the fund outstanding. I , I can tell you from all the conversations I've had that that puts you in some rarefied air.

Erik Hayden:

I hope you know that. Uh , that's what I've heard.

Jack Heald:

Well, so let's talk a little bit about some of this stuff that's different. Um, I talked to an awful lot of fund managers in on this show and um, fewer developers. It's nice to talk to th I , I frankly, I have a lot more fun talking to developers. Um, cause I love the idea of breaking dirt and building something. I think that's extraordinary. Um, I want to ask you some about something though that that triggered a thought as I was reading your website. Um, I personally am, I'm very interested in risk, both the , the impact of various risk events and then managing risky events. Back when I ran big software projects, I was a fanatic about , uh, categorizing and ranking the , the impact of a risk event and then managing around those eventualities. How do you guys calculate risks specifically on these opportunities on projects and then how do you manage those possible risk events?

Erik Hayden:

Sure. I mean, we think about that all the time. I mean, we categorize risks typically when we talk about real estate development, but also when we talk about managing and opportunity . So fun, although you know where there is risk, there is also the potential to, you know, see opportunity. So I almost like to see risk as opportunity. But let me tell you how I categorize risk first from a real estate perspective. And then also I'll throw in a little bit about how looking at it through the lens of the opportunities zone fund works. So obviously the opportunities zone funds , uh, the way that they're structured, it makes it highly likely that your fund is doing ground up development projects. And that's the meet that substantial improvement test. And we've been ground up developers here at Urban Catalyst. Um, our partners have been developers for 15 plus years, so we're really developer first. And when we look at real estate development projects on an individual basis, we see four types of risk . The first type of risk is entitlement risk, which is how hard is it to get approvals from whatever municipality that you want to do business. The second is a land development risk, the cost to improve the land itself. The third is construction risk , uh , just doing the sticks and bricks of building a building. And then the fourth of course is market risk, which is something that everybody takes. But there are ways to limit it now in downtown San Jose specifically, one of the reasons why all of our projects are located in a downtown area. It's really because they have taken a very positive approach to ground up development. They've really streamlined the entitlement process throughout. Most of the state of California could take three to four years for a project from the initial planning application until building permits and in downtown San Jose, you can do it in about 12 months. And the local government, it doesn't require you to go to planning commission or city council to get your approvals. It's a staff level approval. This has been put in place over a lot of time because San Jose wants to see their downtown grow. And one of the reasons why downtown st Jose was included as an opportunity zone, despite what a lot of people think is it needs a lot of love. It needs a lot of positive , um, social and economic development projects to occur. So because of that, local government support entitlement risk is somewhat mitigated in San Jose and downtown. Makes sense . The next thing, land development risk. When I think of this type of risk, I always think of environmental contamination, finding big rocks or landslides or hillside sites , uh, stream beds , uh, native AmErikan burial grounds, things that are in the dirt that you can't see, right ? So we do a lot of testing for that when we initially look at a project during due diligence. And one of our rules of thumb here at Urban Catalyst is we only do business and projects on flat sites. So that takes a substantial of land development risk out of the equation. Um , when it comes to construction risk, we're always working with what I would call , um, service providers, like architects, engineers , um, and a variety of consultants to really design projects that are very constructable. Uh, while at the same time we, we really emphasize the construction process and how, how we manage that process to reduce construction cost overruns , the schedule overruns. But then of course when you go out and get a senior debt loan for a bank, when you're completing your financial stack to build a building, the bank is going to require from a general contractor, a guaranteed maximum price contract. And that does somewhat limit the amount of production or risk that you have to take on any different project . Right ? And then finally, market risk. Market risk happens for everybody that's in real estate and really any type of business . Um , in real estate specifically when you're doing development projects instead of just buying existing buildings, the development project takes a longer period of time. You might start the process of acquiring the land and doing the entitlements and you're building up might might not be complete for say two or three years and it's the unknown period of time that you're taking risks in a market because markets change. Um, that's another reason why we like doing business in the Bay area and specifically in downtown San Jose is that it's somewhat recession resistant down here, the last couple of downturns and recessions, San Jose was the last one to go into it and really the first one to come out. So if you were going to, you know, limit your market exposure or your market risk, San Jose is a great place to do business.

Jack Heald:

So you've almost got a built in a systemic risk management just by virtue of the location, their market risk management by virtue of, of where you've chosen to do these projects. And I do emphasize almost,

Erik Hayden:

well of course you know, nothing is guaranteed but we do our best to mitigate risk and of course provide financial returns that are consistent with that risk threshold.

Jack Heald:

Okay, I've got, I understand, I've got a bunch of friends here in the Phoenix area who are in real estate and you know, there's an area of Phoenix , um, that they say the same thing as Scottsdale's the last one to go down on the first one to come back. And that's proven to be true. I've been here through two cycles, so that's proven to be true through, through both of them. Um, so , um, Urban Catalyst, why Urban Catalyst? Let's start first of all with the name and then I'm gonna follow up with some questions about the funds itself. Why Urban Catalyst?

Erik Hayden:

We always had planned on doing ground up real estate development projects in downtown San Jose even before the opportunities zone legislation , um , designated downtown as an opportunity zone. We wanted to do urban development and we wanted to be a catalyst for downtown San Jose to really make it the kind of place that people in San Jose have wanted their downtown to be for 50 years. And we wanted to be the catalyst of that change. So that's how the name came about Urban Catalyst. Fair enough. Um,

Jack Heald:

I was perusing your website and I saw that you guys have recently closed on a historic property. I confess , I don't remember the name of it. Um , it looks kind of like a , now you know more about it than I do tell. Tell us a little bit about that.

Erik Hayden:

Yeah. We just closed on a building. It's called the 1889 building. It's a beautiful historic building right on first street and downtown. That's really one of the main historic areas of downtown . The buildings on that street are just beautiful. We're doing a project right there. It's called the fountain alley building. It's going to be a 75,000 square foot office building and it's really, it's comprised of three separate parcels, a parking lot, a two story nightclub, and then there's beautiful historic building. Now obviously we're not tearing down the historic building. We're planning on utilizing it as the main entrance for our six story office building that we're building on the two parcels next door. And then so you can imagine you walk into a beautiful historic facade and historic lobby and then take your elevator drew a brand new modern office space.

Jack Heald:

Cool. Well I , I , I love the idea but that, that does raise a question that's fairly common when it comes to O Z projects. And I hear this a lot when I talk to folks about outside of the, outside of our ecosystem who don't know anything about opportunity zone. Um, there's a , a fairly common complaint or, or comment anyway that these types of development gentrify these neighborhoods. And given the fact that the program is designed to drive money into low income neighborhoods, the ones that have needed it the most, when it raises rants , that drives out the low income residents that it's intended to help. How do you guys respond to those criticisms and comments?

Erik Hayden:

You know, obviously gentrification is a real thing and it's an issue that everybody needs to pay attention to and we have paid attention to it from the very beginning. And of course this isn't just an issue in opportunities zones. It's an issue of any type of development. I mean, I always think it's interesting, you know, people talk about how these buildings are going to push people out. You know, in, in our, in our way of thinking, it's, it's always interesting because sometimes I do projects a more affluent cities and the neighbors come to my meetings and complain that my project is going to reduce the value of their houses or their businesses I'm building next door. So it's really, developers kind of don't get a break when it comes to that kind of thing. Well , no, you don't get a break. That's absolutely true. But I think of it like this in, in California in general, they've created really five times as many jobs as housing units almost every year for the last 30 years, at least in the Bay area. And that's the reason why housing has become so unaffordable for people. It's because of supply and demand. I mean it's a very simple economic thing. Everybody's the first thing you learn in econ one Oh one right? And I just want to, I've never heard that statistic. I don't want to derail your train of thought. So let's get back to it. But I like that you said in the last 30 years in California, California has created five times as many jobs as housing units. That's correct. And I think, you know, when I say that I'm on , I'm understating it. It's actually increasing. I , I have a graph that I put up in a slide deck. Sometimes it shows last year was 10 jobs. Every housing it's accelerating. And you know, the reason is is because most of the Bay area is built out and where it's not built out, there's a lot of Hills in the Bay area and you know, people in particular want to save open space, which I'm a huge fan of. You know, I'm , I'm a fan of urban revitalization. But whenever you're building buildings of any kind, office, hotels, retail , uh , we have a student housing project, a senior living facility. Whenever you have a variety of projects or you know, whatever you're building, people are always going to be against it because they don't like change. People resist change. And the poor politicians whose job is local land use authority, you know, they're really forced to walk the plank every time they approve a new development project. The neighbors that come out and oppose these projects are the same ones that will not elect them in the next election cycle. So it's, it's extremely difficult for local politicians to want to approve housing when there's no upside for them. And that is what has caused us to get here 30 years later, where now people are forced to live 50 60 miles away from their jobs, clogged the freeways, create additional greenhouse gases from their cars, and just make life in general, just so difficult. So where we're building housing in downtown San Jose and a variety of other project types, you know, we've, we've done studies that show we're going to reduce traffic overall throughout the Bay area because people are going to live closer to transit. They're going to live closer to the physical infrastructure that's already place and closer to their jobs. So I also wanted to talk a little bit about this because no matter how much I talk about gentrification, you know I'm the big bad developer and people don't quite, you know, get what I'm saying. But we went out, you know there's been a lot of talk recently in the opportunities zone world about well how do we know that opportunities zones are actually helping these areas? How come there's no way to measure what these opportunities zone funds are doing? And we had somewhat anticipated that this was going to be a question a long time ago. And so really at the beginning of this year we had a third party do a study for us that looked into some of the impacts that we created. And initially we found that our projects would be creating over 200 below market rate units through the fees that we're paying a 10 acres of Parkland through the fees that we're creating and that the property taxes that our buildings would generate, you know, above what the current property taxes are, will almost repay any discounts that the investors that invest in our fund will get. As a part of the program itself. Almost like it's a wash in taxes. The group we used was joint ventures , Silicon Valley and you know these days the , what is it, the U S impact investing Alliance. That's with the , is it the beak center and the federal reserve bank of New York have put out in general some guidelines of measuring sticks of how you can choose or how you can figure out if your fund is doing good for the community and we're working to create that plan now so that we can really go out and show everybody just how much positive you know , benefits that we're creating. So it sounds like, I want to make sure I understood what you said, that that what the report revealed is the second order effects of this kind of development. Although it may, although the particular piece of property that's being redeveloped may go up, the rinse megawatt , the people who used to live there may not be able to afford to live there because of the second order effects that drive money into city tax coffers or County tax coffers. That's additional revenue that goes into helping people. Am I hearing that correctly? Is that how that , yeah, that's, that's actually really wise to , to look at those second and third order effects that are so often ignored. I look at it from a lot of different ways. What we're creating is close to the infrastructure and transit and it's not pushing people out. It's bringing people in. And I also look at it from these secondary effects that there's significant taxes we generate. We create a lot of jobs from the construction of our projects and from the operation of them. And we also, we're building types of projects that the community wants to see. I find, you know, especially you mentioned you talk to a lot of opportunities on fund managers. You know, most fund managers, they're looking at doing projects, you know, across the country and they have a bunch of different places where they're doing business. For us. We're only doing business in one area in downtown San Jose. We've been members of this community for our entire careers and in some cases our whole lives. When people say, how do you know the community needs a hotel here? It needs a senior living facility. And I say it's because I'm a part of the community. It's because I don't have to go and host community meetings. I know everybody in the community already. I am already a part of all of their organizations and philanthropies and nonprofits. I've been here a long time and I can go out and just have conversations with the folks that I already know to find out what's needed in these areas because there can be a win win. The win-win can be we're making money for our investors so that we can get financing to build projects, but we can also build projects the community needs and wants. So that's, I think, you know the overall goal of this program and we really hope to be the example of what an opportunity zone fund is supposed to be.

Jack Heald:

Well I you, you answered a question I was going to ask, why would an investor choose Urban Catalyst instead of the dozens of other funds that they could invest in? I think that's a really good answer. If you want to be in San Jose, that's the only place you guys do your work. Um, are these single project funds, is it one, one fund per project or are you raising a pool? Are you putting a pool together to fund multiple projects?

Erik Hayden:

Yeah, we're a multi-asset fund, so we have seven projects in our portfolio and investors that invest with us can an equal portion of all of our products . You know, we find that this structure has a lot of benefits, not only if you get into the nitty gritty of the legislation and how to operate opportunities, own funds, but also because we provide pretty significant project type diversity. So it's not just all housing or all office, it's housing office, student living, hotels, senior living, you know, really across the board diversifies the risk.

Jack Heald:

So it is a single fund that you've , you've got. That's correct. Is it capped right now?

Erik Hayden:

Yes. We're raising a $250 million fund.

Jack Heald:

All right . So we are coming up on the end of 2019 which is a really significant date in the opportunity zone world. Um, how is that affecting your fundraising? Right now you're in Silicon Valley, which I'm guessing is swimming and capital gains. Talk about that.

Erik Hayden:

Sure. So obviously at the end of the year, one of the program rules changes. So right now if you invest in opportunities, own funds, when you pay your taxes, seven years from now, you get a 15% step up in basis, which of course equals a 15% reduction in your taxes. So for every a hundred dollars you would have owed, you only owe $85 and that changes to 10% at the end of this year. And we have found, especially coming up here and in November into December, that our investors are noticing that change and are planning to invest before the end of the year. So really there's a big run on investing in our fund right now and I believe that's run is going to continue through the end of the year. We've had strong demand really since April when the revised guidelines came out. But we're expecting the to raise a new record amount here in December. I've actually told all the employees and partners that work here at Urban Catalyst and no one's allowed to take vacation until the new year.

Jack Heald:

Well that makes, that certainly makes a lot of sense. So your background, Erik in particular, are you more on the development side or the finance side?

Erik Hayden:

You know, I've spent my career really balancing both. I've done a lot of development, but I've also been responsible for financing every project I've ever been involved with. So raising money of course on a project specific basis, one at a time throughout my career and it was here at Urban Catalyst, I decided that it was time to form a fund and raise money in a different way and really provide investors with this additional benefit.

Jack Heald:

Do you have a us fund specialist who's overseeing the, the technical and legal aspects of, I know there's a lot of T's to cross and I's to dot with Oza investing.

Erik Hayden:

Oh absolutely. So we have an in house attorney who works with all of our structuring and compliance and then we utilize something that we really brought over from development, which is hiring consultants and service providers. With the most experience and expertise for a specific project. So our attorneys and our accountants and our , uh, fund administrators are all really top notch and the best in the business. And specifically in the opportunities zone space.

Jack Heald:

Have you put together any kind of a plan, and this may be something in for prospectus and if it is, we'll just skip it, but um, have you put any kind of plan together for the exit from the fund, preferably 10 years down the road?

Erik Hayden:

Yeah, so our fund is structured a lot like a traditional real estate equity fund only. It's a little bit longer in duration. Our plan is to acquire all the property properties this year, start construction next year, have stabilized assets the next three to five years. And then , um , of course when we refinance those assets, say in years three through five, that's the first time we're able to distribute funds to investors. Uh, after that, our stabilized portfolio, you know, we have a pretty standard and solid cash on cash return until the end of 10 years when we plan on selling all of our projects and liquidating the fund. And of course that's when our investors have the big win. That's when most of the profits come out of the fund. And of course those profits are that tax-free from a federal capital gains perspective . Right,

Jack Heald:

right. Okay, good. This may be , um, an unnecessary question given the fact that your all, your work has always been there in San Jose, but I'm going to ask it anyway. Um, as you mentioned, the developer can't get a break and you've got to get the community on board oftentimes to , uh, to get approval for a project. What's the most bizarre thing you've ever had to do to win community support for a project you're working on?

Erik Hayden:

Yeah, that's a, that's a great question. Um, you know what comes to mind? I was doing a project, it was in San Jose just outside of the downtown, but very close to where Google has just purchased all their property for their next campus. Um, project was a 800 unit residential multifamily project in three 15 story buildings. And I ended up doing somewhere in the neighborhood of 50 community meetings on that project. You know, this was maybe 10 years ago, maybe a little longer than that, and this is back before people really understood you should build density near transit, you should build density in urban environments. And I spent a lot of time in the community talking to them about why I'm proposing this type of project, why I might propose in something this dense in their neighborhood. And through the course of all of those meetings, obviously like on meeting 27 it's the same 15 people that attended every single meeting. I mean by this point, I'm friends with all of them on Facebook and I call them my all stars and I wondered if they would rather just like hang out with me then come to my meetings , have a formal meeting. Right . And I remember it was a rainy December night and I was sitting in the meeting and that one of the heads of the planning department was there and I said, Hey you guys, you've seen my presentation. It hasn't changed. Why don't we talk about how you guys can really impact your community in a different way? Then coming to my community meetings, like yeah, it's important to come to my in meetings and talk about the development projects, but how about the overarching issues of your neighborhood and your city and the elected officials and how you can influence, you know, the direction of the city, not just one project at a time. And I gave them, I would call a two hour tutorial on how to talk to the city, what departments to talk to, how to influence their elected officials, how to be involved in the political process. And as it turns out of the 15 people that were in that meeting, one successfully got onto the metropolitan transportation commission, MTC, which is the regional board that decides where traffic , uh , funding goes throughout the state. And , uh, another one ran for city council and made the runoff. It was almost selected in the last election cycle for the neighborhood that they lived in. So I guess I was kind of proud of myself to be right there at the beginning and their political lives. Um , so you were kind of a political consultant as well, so yeah, it was, it was almost like guys, your energy to help your community could be so much better served than coming to talk with me about my project. Yeah , exactly. Now I can see that that onwards you said you've got seven different projects if any of them broken ground. No, all of our projects are still in the planning process, but we're planning to break ground on the first project in the next say Q one of 2020 and have all of the projects under construction by the end in 2020 a one once you give us a quick 30,000 foot overview of what the projects are and what you're expecting from them. Sure. So we have three projects in West San Jose, which is right next to where Google has done, you know, are $400 million worth of land acquisition in the last 12 months. You know, Google has come in and is planning their 7.5 million square foot office campus with 5,500 residential units, about 300 yards South of that project. We've acquired three projects. One is a hotel, it's a Marriott TownePlace suites, extended business day hotel, and then across the street from that we have 120 unit senior living facility, which even more specifically as assisted living and memory care, they haven't built a project like that in downtown San Jose in 35 years. There's a really a lot of demand for that, and then of course we're building a residential multifamily apartment project. It's an eight story building also on that same blocks of three projects clustered right in that one area of West downtown and then in the heart of downtown we have two office projects. We talked a little bit about the fountain Valley building and it's used , which is really pretty neat. You know what I didn't mention about the finale bill in that we've received a lot of press about recently is that we're building a 5,500 square foot rooftop bar and it'll be the largest rooftop bar in Silicon Valley. I even got, I got comments from so many people. I mean you have all these projects and everybody just loves this rooftop bar,

Jack Heald:

so how, how high up in the in the sky is that bargain and B , it'll be a on the roof of the six story. Six stories, sixth floor. Okay. Years ago I had a project in LA and I was staying at the standard. I frankly haven't been in downtown LA and forever, so I don't even know if it's still there, but they had a rooftop bar. I'm right there in the middle of town. That was God. That was a lot of fun. You know ,

Erik Hayden:

I , I've been in New York, Chicago and they have so many rooftop bars and it's so cool and they can only use them for like four or five months a year because of their weather. Here in Silicon Valley, we have 300 days a year, a sunshine, just amazing weather and we have no rooftop bars, so we're trying to solve that one rooftop bar at a time. There you go. Hopefully we're not displacing any other rooftop bars out of the area. Some of our other projects, we have a high rise residential project located right next to where the Bart expansion. There's a brand new Bart station going in right at the base of it. So really the epitome of transit oriented development. It's right across the street from the downtown city hall, which is on the corner of fourth and Santa Clara downtown. Uh , then we have our latest project that we're closing escrow on here , uh, very shortly, which is a student housing tower right next to San Jose state university. You know, people don't talk enough about San Jose state university. It has 35,000 students and as the second largest university in the Bay area behind Cal Berkeley, I think it even has more students than Stanford and Santa Clara combined. Um,

Jack Heald:

okay. I have a really bad taste in my mouth about San Jose state. And let me tell you why. Back when I was in school, bright after fire was discovered in a little bit before electricity was invented. Our football team was undefeated and we were , I think we were nine and Oh , Oh . And we had a game at San Jose state, which was supposed to have been a walkover and San Jose state beat us. I was the only, it was the only loss we had all year long. And I've held a grudge against San Jose state for a long time. I'm not going to tell you how long ago , so I'm not promoting San Jose state. Sorry, ain't happened in here. Wow.

Erik Hayden:

You know , San Jose state has changed a lot, so maybe that'll make you feel better. It's become, it's become a lot more of a, call it a destination. It used to be more of a commuter school and because of that.

Jack Heald:

Yeah, that was actually, I mean seriously, that was my impression of San Jose state was that it was a commuter school.

Erik Hayden:

No, I met , my wife went to San Jose state and she, you know, lived at home and drove to school. But in the last 10 years, that's really started to change. San Jose state's , in their estimate, they need 6,000 additional student housing beds. And I know there was an article in the San Jose mercury news, which is the main newspaper here in San Jose. Uh , back in, I think it was April, and it was all about how there is a homelessness issue with San Jose state students that 13% of students each year experienced homelessness and how they've designated parking lots on campus for students to sleep in their cars.

Jack Heald:

I'm , I'm speechless. Clearly I'm just speechless. That's just crazy. So are , what's the, the opportunities zone situation around the campus?

Erik Hayden:

Well, it surrounds two sides of the campus. You know, I know that a lot of the opportunities zone, when they selected the zones, they really tried to stay away from a lot of college campuses because students , um, you know, unfairly brought down the overall income levels. Right. But that isn't necessarily the case around San Jose state because it has been so much of a commuter school and the housing that is on campus. It does break it down a little bit, but not as much as you would expect. So the opportunity zone cuts through the campus and surrounds it on two sides. And our project of course is right across the street from campus and we've been in discussions with the head of real estate at San Jose state to see if a San Jose state wants to mass release our project. And so we've been having those , uh, those discussions. It would be great if we can work out a solution to partner with them. However our project stand alone does just fine.

Jack Heald:

All right, well that, that makes sense. Let's, let's take this conversation a little more personal. Um, and I will confess, I tend to skim these kinds of things mostly because I want my guests to be able to talk. It looks like you went to school at , uh , in Washington. Yeah, I went to the university of Washington. How did you end up , uh , in the, in the Silicon Valley?

Erik Hayden:

Well, I did what a lot of people do. I followed a girl to San Francisco and that's the whole story. You followed the girl and of course did not. I did. And of course I did not end up with that girl. I met my wife after I'd moved down here, but , um, I was wanting to live in the Bay area. My mom grew up in Tiburon. Um , my grandma and grandpa lived their entire lives in Tiburon and I always thought San Francisco was just a beautiful place and the Bay area in general. So I wanted to try it. So after college I came down and followed a girl , uh , got a job working at a construction company and eventually made my way down to San Jose where I met my wife. And uh, now I live here in the South Bay and I have four kids.

Jack Heald:

Oh, good on ya. I've got four kids. Yeah. I tell, you know , my kids are grown now. I've got seven grandkids. But I tell, I tell all of them, if you want to make a difference in the world, have a bunch of babies and train them the way you want them to be. That's the most effect. Peter Drucker said, demographics is destiny. And if you do not reproduce your own values with, with children, I mean that's the best way to do it.

Erik Hayden:

I know a lot of major religions definitely utilize that philosophy.

Jack Heald:

Yeah, that's , it's , it's a sound philosophy that's been improved over millennia. It works. Um, so , uh, so you started on the, on the construction side to just kind of give us the overview. How'd you get in from, how did you end up where you are , um, as the founder of Urban Catalyst , uh, from, what'd you , what'd you study at Washington and then just take us through that, that little , uh , development there?

Erik Hayden:

Yeah, I was, I'm an electrical engineer, microprocessor circuit design, and I was a math minor.

Jack Heald:

That's a , that's okay. I would not have guessed that.

Erik Hayden:

Maybe there's something not a lot of people know about me. Yeah, I was, I was really into math. Um, now of course, one thing that being an engineer in school taught me was I really did not want to be an engineer for my career. So when I graduated, I went to look to do something else and I found a job in construction management. Really, they said, Oh, you're an electrical engineer with good grades. Yeah, you can do this too. So I started off, you know, no construction management experience managing projects, but it worked out all right. I spent a few years working for Swinnerton and then I was in a meeting, we going to be the owner's rep for a development project. It was 2005 and it was a conversion of a brick office building on market street in San Francisco into a condo. Now I'm pretty sure the developer lost everything on the project, but that's only because of the market risk. Well, and condos are such a risky product project type in general. We don't do any of course in Urban Catalyst s , and I don't do any personally in any of my projects just because of the risk threshold associated with condoms . But I was watching the developer on in his kickoff meeting and he had all of his consultants and professionals and he was saying, we're going to do this and we're going to do that and we're going to do this. And everybody was taking notes and watching him. And I thought, I looked at my boss and I looked at him and I thought, I don't want to be my boss someday. I want to be that guy. And after that I went and cold called and emailed of course email in 2005. Not quite what it is now, but I really reached out to the industry and I ended up working for a development company and I worked for a series of development companies after that, cutting my teeth on everything from land acquisition to project entitlements, construction, financing and disposition. So really like soup to nuts, the whole, the whole story. I worked for a lot of private companies, so I, and a lot of smaller companies. So I never got siloed into one specific job function. I really got to see it all. I kind of say they , they threw me into the deep end and it was sink or swim. And eventually I Rose up to be the president of a company. And while I was the president, that was when I was with czar in AmErika, Beijing based company. I , uh, I decided to form Urban Catalyst s and I left Xhosa AmErika. And here I am.

Jack Heald:

I'm thinking about being a doubly and jumping into a AA . And what'd you say? Electronic circuit design. Microprocessors. Microcircuits microprocessor . Okay . Um, different kinds of thinking when you're, when you've actually got to use bricks and sticks to build something then , uh , drawing it on a computer. Talk about your experience moving from that very abstract world to a very concrete world of construction.

Erik Hayden:

You know, it has, it has a lot of similarities, believe it or not, because when you're designing a circuit board, you're just going through some very complicated problems. Then usually their math problems and you have to think them through and you have to solve them and they're very challenging. And it's very similar when you do ground up development, you have some very, very tough issues that you have to deal with. You have to really ride a project out, you have to sink your teeth in and get the job done. And that's what makes a successful development project. So I think it's a lot of the same skillset that of course, and the financing associated with it really came easily to me because of my background in math. So if you look at grounded development and even in a more abstract sense a what a real estate equity fund does, it's a financial vehicle for investors arrested . And that's of course, you know, very abstract sense. Obviously developers were community builders, but from the flip side, we're creating financial vehicles. So it really lend itself to it. I found that it was an easy transition for me as more of a problem solver and a leader to make these projects happen.

Jack Heald:

I will confess when I, my background is music again, I, like I said, I have a diverse background. My grad background is music. And so when I think about developers and fund managers , um, I don't, my mind does not jump to a doubly , I , that's not the kind of personality I think of who's , who's sitting in the chair that you're sitting in. So I will confess. Um , I think that's, to me, that's, that's really surprising. Um, somebody who, who runs a development and fund company, having that kind of really hard hardcore engineering math background. Typically you think of that person as being well, I think of that person as being a hail fellow. Well met, glad handing back slapping salesman, you know, that's, that's, that's my perspective, my picture. So good. Very good. Um, well I wanna I want to ask a question that may be a little uncomfortable, but I think it's a good one to ask. Um, none of us who've done big projects get through unscathed. What is one of your more painful memories from a project? And this isn't an interview where you don't have to tell me, how did you solve this and what listens to you? I just kind of interested what's, what's something that that happened that was a painful one that you're glad you learned that lesson but don't ever want to repeat?

Erik Hayden:

You know, that's a great question. And the thing for me to know, if you're a developer and you have an unsuccessful project and your investors lose their money, and a lot of times those investors are your partners and your friends. And your family, it really hurts. And a lot of times if you lose often enough, you're not going to be able to get the financing to do any more projects or you're just going to lose all your own personal money. So my biggest fear is having projects that don't succeed and no matter how many times or how good you are, it's like, you know, I love baseball analogies. It doesn't matter how good a hitter you are. Eventually you're going to strike out. And I had a project around seven years ago that was not the best project. It was a smaller 17 lot single family project , uh , in, in the city of San Jose. And you know how we were talking about land development risk and how I only do business on flat parcel .

Jack Heald:

I'm guessing that's where you learned that lesson.

Erik Hayden:

Yeah. This is where I learned that lesson. I did a project on the hillside site and I always say when you do a proforma model, the key is knowing what number to put in the box. And in this case I was looking at how much is it going to cost for land development. And I thought, okay, flat lots, single family homes, 8,000 square feet, 80,000 a lot. That's the standard number you put in there. That's what the company I was working for put in on all of their projects and that's what they were building. So I was very comfortable with that number. But then it was a hillside and I thought, you know what, I should double that number. And then in retrospect I tripled it . You know, I, I put in, you know, 240,000 a unit for land development and at the end of the day it was 580,000 a unit for land development. On the flip side, of course, I originally underwrote the houses for around 850,000 each is what you could sell them for. And they're still selling right now for around 1.2 million. But isn't that the problem itself? That I started the project seven years ago. It's 17 lots and there's selling. Oh my, that project had to be recapitalized three times. I mean, it has been, it was a huge pain for me. And then when I eventually left the company, my, my , uh, the people that took over for me and they're still dealing with it and I hate seeing projects like that and I learned my lesson. I'm never doing a project where I can't put a number in a box. I'm never doing a project that has significant land development risks that I can't him .

Jack Heald:

So you tripled the number, but you didn't, but you really didn't know. You just hadn't, didn't have the experience to know what the number really should have been. Right. Never to do God, you would think that, Oh my God, you would think tripling the number would would more than cover it.

Erik Hayden:

I'm sorry, I'm not laughing at you. I know. I know.

Jack Heald:

Big software projects for for a long time and uh , yeah, we've, we've all had those just incredibly painful.

Erik Hayden:

My investors that were in that project, they didn't lose their money, but they sure didn't make a lot of money. They kind of broke even, it took a long time. So it wasn't the most pleasant experience. And of course those groups, more than likely, you know, if I go back to them and say, I'd love to have you finance this project, right, they would probably say, you know, we've got a little burden on that other one. We're probably not going to do business with you again. That's my biggest fear is especially, you know, raising money for opportunities, zone funds. We have over 80 investors in our fund and the , I don't want to let them down. I want to do very successful projects that make them a lot of money at the same time, of course, you know , make an impact in the community in a positive way the way it's supposed to happen.

Jack Heald:

You know, I wanted to ask you about this, this is kind of goes back to an earlier part of our conversation, but given where you are Silicon Valley, given the fact that, like I said, that's , that's an area that's swimming in capital gains. Um, I'm guessing there's an awful lot of competition for opportunity zone property. Am I right?

Erik Hayden:

You know,

Jack Heald:

it's an interesting comment. You know, I've read a lot of the stuff across the country about how properties and opportunity zones have gone up in value faster than properties outside of them. And I don't really know why that is across the country, but I can tell you here in San Jose, it doesn't have anything to do with opportunities zones in San Jose where are the only multi-asset opportunities zone that is acquiring properties in the downtown area now throughout the Bay area, I know of like five other funds that are operating. A lot of them are single asset funds. Like I know I was doing one project in Oakland. Um , some of the ones out of San Francisco aren't even doing projects in the Bay area. They're doing projects, you know , all across the country. Right. I know a couple of those. But as far as who is our competition here in San Jose, you know, it's the same group of developers that have been doing business here in San Jose for 20 years. And most of them are our friends that are associates. Not as much. You know, it's not like I'm here in San Jose. It's not like we all compete with each other over property. It's more like we're all on each other's teams trying to make this place awesome. We're rooting for each other, I guess is the way you want to put it. Well , I have to ask to follow up on that then. Um, how is it that that's not just, I'm not going to ask about, about the other folks in the space, the other developers that you guys are , that you compete for properties against. How is it that you have that attitude , um, where'd that come from, that taking care of the community attitude? We're going to find out a little bit more about Erik Hayden , the person here, not just hurricane the developer. You know, overall,

Erik Hayden:

you know, I mentioned I have four kids. I mean it isn't our whole goal in this world to make the world a better place for our children. And I can do that specifically by changing the physical environment of a city. And that's what I do. My, my kids are going to grow up here in the South Bay and they're going to know that there's better opportunities in downtown. There's less traffic, there's more places to hang out to go to restaurants. There's just a more vibrant economy and the downtowns , it's cool. They're going to know that I had a part of making that happen.

Jack Heald:

Oh, that's an, that's an , I appreciate that. But, but that's an awful lot of effort just so your kids can know. There's cool places. It sounds like there's a bigger vision there than that. Come on. Who, who are you really? What's it all about?

Erik Hayden:

No , I do feel that I do feel that making the world a better place is an awesome thing. I also, I have a rule that I only do business with good people. I feel that people that are trying to do the right things in this world should be rewarded. And how I can reward them is I can work with them. And so that's why, you know, the other developers, I don't, I don't root against them. I don't think of myself as their competition. You know, the properties that I acquire usually they never even saw and vice versa. So to me, we're all in this together. We're all in this and , and they're good people. They have the right ideas. They're trying to make San Jose just an awesome place. And I am too. We all should work together to do it.

Jack Heald:

Do you have , um, a heuristic or rule of thumb, something that that's , that when you meet somebody, you, you just know, Hey, this is a good person. Do you have, you know, I, and I'm , here's an example, there's a , uh , an air conditioning contractor here in town who when he interviews a new tech for a job, his dog, Sadie is always there in the room. And if Sadie, if Sadie doesn't like the guy, there is nothing else that's going to happen that's going to convince him to hire a tech. You know, Sadie liking the guy is a good sign. He's also got approved that he's got the, got the chops. But regardless of his skills, if Sadie doesn't like this guy, he won't hire him. If you've got any kind of [inaudible] , you know, and it can be a gut feeling. It can be something like your dog or do you have, have you developed over the years a way to, to have a , a sense about who the right people are to live, to work with?

Erik Hayden:

Yeah . You know, in fact I do, you know, I've interviewed and hired a lot of people in my career, especially here at Urban Catalyst. And I know that if they're in an interview with me, you know, they've already been through a series of interviews and their resume, you know, passes muster, they can do what it is I need them to do. And to me it comes down to them being a good person, them being the right fit. I really am a believer that people are the backbone of any business and the types of people that work for you are the types of people it's going to be, how your business fails or succeeds and how you're viewed, you know, throughout the industry. So it's extremely important for me to hire good people. And here's my, here's my thoughts on it. I like to ask them. I like to look at their resume. I like to ask them where they went to college. I think that I can tell listening to their answer for 30 seconds whether or not I'm going to hire them. I especially like it when people talk about college football cause I'm a huge college football fan. I like to do, you brought up San Jose state and how you still hold a grudge. So Jack obviously like you you're hired. but I have trouble with San Jose state though. I just like it. People say you know , it has to do with their conversation. They say, yeah I went to um , I went to Santa Clara and I thought it was a lot of fun. I had some great professors, I had a great time. I lived in this kind of place. This is what I was into. I did this sport. As long as they can have a normal conversation and have an interesting conversation and have it not be awkward or strange and have them not say things that are a little like off. It really is pretty easy to figure out if they're the right kind of person. That I think is a good person. I guess maybe that's not as good a judge as someone's dog,

Jack Heald:

you know? Um, there are , there are crazy dogs. I'm not saying that's a foolproof way to go. It's just this guy has chosen it and , uh, you know, it's his , I think it's as good as some of these allegedly objective tests that people are required to take. So actually I think I'd trust a dog before I'd trust a test. Well, Erik, this has been a great conversation. I've really enjoyed , uh , uh, here and about Urban Catalyst. I'll, I'll confess to you, you guys are , um, uh , I love this, this single focus on a single location, but with a multi-property fund. Um, I've talked to developers who focus on a single type of development , um , or just single project funds. Um, but I haven't talked to anybody who's got a multi-project fund that's, that has that kind of laser focus. And in particular the combination of the development background along with the financing background. That's a, that's a nice combination. You guys are a little bit unique. I like it. Well, thanks. Um, any last words for us before I let you go?

Erik Hayden:

Sure. I wanted to just tell you something that I tell all of my investors or potential investors when it comes to investing in an opportunity zone fund a opportunity zone funds and people of course have called it the investment opportunity of a lifetime. Something that's not going to happen again. But in reality, opportunity zone funds are about the real estate projects, the benefits that you get, you know, the tax benefits that are a part of the legislation are great, but if there's no profit after 10 years, what was the whole point of the program? So when you're looking at a fund, the legislation doesn't make a bad project. Good. And make sure you know what the projects are and who the developer is to make sure that that developer has a solid reputation. That's extremely important. So that's just my, my, a public statement about investing in opportunities. I'm fine .

Jack Heald:

That's a very consistent message across the industry and won't turn a bad project into a good project. Um , well Erik, how do folks get hold of you or Urban Catalyst? If they want to know more information?

Erik Hayden:

The best way is to go to Urban Catalyst.com. Uh, we have our contact information and we have a bunch of really great videos, you know, to learn about opportunity zone funds, opportunities , zone investing of course about Urban Catalyst in our projects.

Jack Heald:

Very good. And I will remind our listeners that that information will be available in printed form on the website. So you can go there, click on it and go straight to that , uh, to that URL if you need that help. Well, Erik, I appreciate you taking some time with us here on the OZ Expo Podcast today. Um, this has been a really enjoyable conversation for me. I hope it has been for you too . I want to remind our listeners, go ahead and subscribe to the podcast so that you are notified every time we release a new episode that happens almost every week. My name is Jack Heald . I'm your host and we will talk to you next time.