Bay Area Fund Plots $881M Opportunity Zone Play

Opportunity zone fund Urban Catalyst has expanded its plans to invest $700M in downtown San Jose opportunity zones to plans to invest almost $900M, the company said this week. 

Across seven projects, Urban Catalyst said it plans on building more than 900 residential units and about 275K SF of office space, as well as other property types. Its expanded plans mostly involve two projects: Madera, a 157-unit multifamily property near Diridon Station, and Delmas, a senior living project with 167 assisted living and memory care units.

Those two projects have nearly doubled in size as part of Urban Catalyst's efforts to meet San Jose market demands. Delmas, for instance, will be the city's first assisted living, memory care facility of its scale to be built in about 35 years, Urban Catalyst founder Erik Hayden has said. 

“Our plan has always been to create a synergy and build projects that the community wants and needs," Hayden said.

Created by the federal government's Tax Cuts and Jobs Act in 2017, the opportunity zone program has faced criticism for the tax breaks it gives investors in census tracts designated as underserved. One such break is tax-free capital gains given to an investor in a project after being invested for 10 years.

Abother criticism of the program is the lack of reporting on how effective such investments are in creating opportunities for underserved communities. 

Hayden said Urban Catalyst is "100% in support" of such reporting being mandated by changes to the law. He cited San Jose's inclusionary housing requirements as being one of the biggest benefits of the company's opportunity zone investments. 

Hayden also said park impact in-lieu fees and property taxes from new developments are also metrics his organization tracks but that they haven't successfully forecast job-creation numbers. He also said they're trying to avoid social ills common with big redevelopment but that quantifying those forecast ills is more difficult.

 “We want to look at displacement and gentrification and make sure that our projects are not creating that. We want to make sure that we’re building housing to solve the housing crisis," Hayden said, citing the developer's student housing and senior living facilities components.

Urban Catalyst will abide by affordable housing requirements through a yet-to-be-determined mix of on-site affordable housing and in-lieu fees, which amount to about $25K per unit. If it were to opt to use solely fees, Urban Catalyst's 900 units would generate about $22.5M in fees for affordable housing development in the city. 

“We are appreciative of anyone willing to continue their investment into downtown San Jose, especially during these uncertain times, and we look forward to engaging with our community as these projects move forward,” San Jose Council member Raul Peralez said. 

Others have called for more specific social benefits to come from opportunity zone investments, beyond just a long-term hold of assets in underdeveloped communities. 

"If I have a fund, part of that fund is investing in nonprofit and education programs with high-risk youth. This would be great," Post Harvest Technologies CEO Jim White, an opportunity zone program proponent, told Bisnow in mid-July.

"You can get that tax deferment and IRR [internal rate of return] and you can do some good as well," he said. 

Urban Catalyst, which plans on breaking ground on all seven projects next year, has about 130 investors in its fund, which has raised about $64M to date, according to Hayden. The average investment size is a little over $500K, he said. 

Contact Dean Boerner at dean.boerner@bisnow.com.