E19: Building a Community with Real Estate Fund Manager Erik Hayden of Urban Catalyst

Jim: What is up Remote Start Nation! Let's get something started. I'm Jim Doyon, and I want to welcome you to another episode of Remote Start, where I bring you stories and strategies on how to start a business, build a brand, and create your desired lifestyle. On today's episode, we're going to be discussing starting a business as a real estate fund manager and in order to do, so I brought on founder and managing partner Erik Hayden of Urban Catalyst. Urban Catalyst is a real estate equity fund focused on ground up development projects in Downtown, San Jose, California. As a brand, they positioned themselves in a unique, a unique way as they focus not only on being fund managers, but they also are local developers. So Remote Start Nation today I'm looking forward to Erik sharing with us topics such as starting real estate fund, why he chose real estate in San Jose, how to raise money and how that applies to other industries and what kind of projects his team focuses is on. So without further ado let's get started. Eric welcome to the Remote Start Nation.

Erik: Yeah, I'm excited to be here.

Jim: Thank you excited to have you and I really appreciate you taking the time on your day, and you know, before we get started, I kinda, I wanna let the Remote Start Nation know that you know, Erik and I were introduced by a fellow friend Jeff Greeman, has a great story about becoming an entrepreneur and is one of the very in fact, first person that I interviewed for the Remote Start Podcast, so if you get a minute Remote Start Nation, go back listening to the first couple episodes, listen to Jeff and yeah, I'm glad he put us in touch, so with that said, Erik tell Remote Start Nation about Urban Catalyst.

Erik: Sure, so you know Urban Catalyst, we are a real estate equity fund, we are focused on ground development in downtown San Jose, we're currently raising our second fund, it is an opportunity zone fund. Opportunities on funds that give additional tax benefits to our investors and of course one of the rules of being an opportunity zone fund, is that you have to do either ground development or do you large renovations at least those are two of the easier ways to make the program work, so it fit right in with our experience as you know local developers to be able to utilize this type of fund structure to finance our projects.

Jim: So how did urban catalyst start?

Erik: So I've been a developer my entire career and in general I build large institutional quality and scale projects and that's just kind of a fancy way of saying I build big projects, you know, big apartment buildings, office buildings, typical access strategy is you know selling out to a publicly traded read or to a large institutional equity group, so I can do that for a long time here in the bay area, a lot of focus in Silicon Valley and in San Jose. Right before I started Urban Catalyst as the president of a company called Czars America, Czars doing a large master plan in downtown Oakland, California. 3100 residential units on 64 acres on the open waterfront. so it's doing that big project, managing our teams, building buildings, and I was really inspired on a trip to china Czars’s a Beijing based company and I went and toured all of their projects in China, they are located in nine cities they built 7,000 condos a year, which in the United States to make them like the equivalent of the Irvine company but in China it makes some nobody teeny tiny like a boutique builder, but turn all over like inner Mongolia and I really got struck with the fact that, I really wanted to start my own company, was great that I could I used to be in the president these big development companies but I needed something more in my life, so I decided to start Urban Catalyst, that trip was in august of 2018, and I even remember yeah we mentioned our mutual friend Jeff Green and I called Jeff from China and, I'm gonna do something, I know it's gonna be around downtown San Jose, because of the overall market forces showing me the downtown San Jose was the place to build buildings, and then of course when whenever you're a developer, there are really three things you need to successfully build projects, the first thing you need is you need money to do your need, lots of many of these projects even before we go out and get you know the bank loans to build the buildings we need about ten to twenty million dollars per project, so you need money to do your projects, you need somebody to write a personal guarantee on those senior debt loans, you know if I wanna go out and get a fifty million dollar loan, it's done of my loans for example we're looking in the range of like 250 million, banks want you to have about ten percent of that in liquidity so a hundred million dollars loan you need ten million in liquidity, so just cash in your bank account and you need to have about 50% of the loan amount in total net worth, so I need to have fifty million in that worth, and by the way this is why most development companies it's either a family office where got some you know, billionaire behind you or it's a large company, like a public. The last thing you need to be successful is you need control. So how do you combine all of those things, I'd spend my whole career working for these you know billionaire folks, and they had all the control, they wrote the guarantees and they end the money. I thought well if I start a real estate equity fund, the fund will provide you with the money, the fund provide me with the guarantee, and I will stay in control. And so that is what we decided to do, it coincided right at the time that the opportunity zone program came out, so I knew we wanted to be in San Jose, I knew that that was my experience building off of your experience is really important especially when you're fund raising. So I knew it it's gonna be in San Jose and in downtown sales they were right at that time in April of 2018, so a few months before I form Urban Catalyst, they had designated all of downtown San Jose as an opportunity zone, was a brand new program, nobody even really knew what it meant. I knew it meant, tax advantages but even in a more concrete way, I knew it meant that we would be different, now raising your first fund is really a challenge, because most folks if you think of like how does blacks stone raise money, how does Carl raise money, they do it from sovereign wealth funds, pension funds, endowment funds, you know, family office, insurance companies, these huge groups, if I went to of those groups and said, hey, give me a hundred million dollars oh be like, yeah get lost. That knocks you down a couple times, and you get into what's called the retail fundraising world. In the retail fund a world you raised money directly from individual investors, and almost I'd say like 95% of the retail fundraising world, they raised them through broker dealers and registered investment advisors utilizing what most people referred to as wealth managers, you know everybody has somebody that advises them on how they do their investments so those wealth managers all work for companies, if you get on the platforms to those companies, they will sell your product, which is great. Now when I first started Urban Catalyst, I called all the best broker dealers out there and said, I wanna be on your platform, I have an opportunity zone fund, it's gonna be great, and they all went, who are you and every else first time phone manager, we don't we don't put those on our platform, thank you very much.

Jim: And so stuff, but let's look at that for a second. So, you called Jeff, you're like hey, you're one of the, you're one of the people I'm talking to about to start my own thing, he gives you some advice, then, what were kind of the next steps that you took before having to you know,  start to call some of these other funds they have?

Erik: So the first thing I had to do is, I hadn't to realize how much money I needed to do this, because I knew I needed a team, I knew I need an office space, I knew I needed to be able to pay some salaries for at least a certain period time, initially I thought, I need a team of five, and in my team of five I'm gonna need about a million to a million and a half bucks, Jeff was one of my first investors and I had several other mainly friends and family. Friends and family investors were great, because they're investing because they believe in you, they don't even necessarily look at like what the risk is or the failure rate of first time fund managers today, they say you're gonna be successful because we know you, and I like that it also gives extra pressure on you, this is your family you're going to do everything, you're gonna move heaven and earth to make sure that they can get their money back and make the profit that you say they're coming.

Jim: So did you go to them with a business plan and a proposal or was it a conversation that just said, hey and I wanna do this, here I am, I'm asking you first because I know you believe in me and take that route?

Erik: Yeah, it was more like that because, business plans are they take a long time to write and they make you think about what you're doing, but at the same time, I have found that business plans changed radically in the first like six months of the new company, like you go in and think it okay here's what we're gonna do and then as you learn more and more and you explore and you fail you go, oh I change to do this, okay, we should be doing this. So at Urban Catalyst, our first name was, I need the best developers in downtown San Jose my team, so I brought two partners on to do that, then I realized I wouldn't be raising money through broker dealers, need to raise my directly from individual investors which is not very common, it's I'll call it significantly less common than raising through wealth managers.

Jim: Why is that?

Erik: The SCC only allowed this type of, I'll take a step back, you know how you might have a friend or two that buying real estate and they'll say, hey, I'm putting together a little semi of folks we're gonna go buy this building, maybe it's like fine, that's kinda like the basis of what retail fund fundraising is, now the SSD, they did, they want you to register with them and for doing that, they're not gonna care if it's some of your friends and it's four people, you know, they really care if it starts getting over like a hundred people, they only allow raising from direct individuals through what is called the regulation D5O6C program about ten years ago, and it was really not popular, it was not a popular program, because the people that were raising money this way is like, what we've been raised money two be twelve managers forever, it's really easy, we have whole systems and why would we go raise correct. This is also what you know you saw like the crowd funding world Startup of crowds source and kickstarter and all of that, that's all five those succeed right they can raise directly from individuals.

Jim: Okay, so same just applied to real estate?

Erik: It's the same, yeah I mean there's a million different ways people raise money for every venture capital, you know, lots of different tax advantage strategies, historic tax credits, conservation ease, below margarita housing and tax credits, all sorts of ways to raise money for through this channel. So I knew I needed someone to help me raise money in this type of system, and I didn't know exactly the system I needed to create, because I focused my whole career on real estate never on marketing or sales, so I brought in one of my best friends from high school and he was working in New York, I had a meeting with him, well it was more of like, we're just catching up for lunch, he was like one of my groomsmen in my wedding. I said, I need you to come and work with me, I know that you know what to do, because I don't know anything think about real estate, I've never raised man, I said it has to be the same thing, except you can create a marketing strategy to generate leads, we can build a sales team to close the leads, and that's how we'll raise money, and he said, okay, well I guess we'll figure it out he came over we started working together, and in the beginning it was just us, and now we have these big teams, I think we have about 40 people to work at Urban Catalyst now, most of them are in sales or marketing, have was sized development team to have about 50 people on that team. But yeah, so first steps where, you know, that that's well that's why I say you can have a business plan, but right my business plan was hire the right people than know one's doing to help you create what you wanna create.

Jim: That's find your weaknesses, get to people that know how to take those in tournament strengths, right, like build around their strengths.

Erik: Absolutely and then the next thing I figured out is that a million and a half bucks, was even close to amount of money five, so I went out, I brought on one more partner who is an attorney, he's our general counsel, so he's also an expert accounting and administration and the SCC and compliance and all that. So the five partners we started out, I think we had two employees when we first started and we went out and our first thing that we did was we started utilizing Google Adwords to do, to do our marketing, and this was a really great thing because opportunity zones were so brand new, we at that time and to this day, in the state of California are still the number 1 search term on Google, if you type opportunities zone fund Urban Catalyst at the top, and that is our number one fundraising source of a lead generation, but in the beginning, we didn't know if it was gonna work or not, and my partner mortgage says, Erik, so it takes like two to three years to build up a digital marketing platform to get a circular feedback loop going and understand exactly where you should be spending your money. I said, that's too long, we're raising a hundred million dollars this year, so how do we do that faster? He says, oh well there's only one way to do it faster to spend a ridiculous amount of money in the beginning and keep up and until you figure out, he guys got fail faster. I said, how much are we talking? He said, I think we should spend 250,000 dollars a month on Google Adwords. Whoa, and that is exactly what we did, and we still to this days spend between a hundred and fifty and two hundred and fifty thousand a month on Adwords.

Jim: And that is, that is the way you are raising money that's the way you're generating leads, right?

Erik: I would say that Google Adwords by themselves about 25% of our fundraising. And then the other 25% is now through you know a variety of channels you know, podcasts like this, Linkedin, we do a lot of Youtube retargeting, a lot of digital marketing Facebook, Linkedin or Facebook, Instagram. Then we have a lot of organic traffic, one of the nice things about being a developer is, we're always in the news every time we get approval for one of our big buildings here in San Jose, right now we're building nine buildings in downtown San Jose, so we're like the fourth largest developer in downtown now which is kind of exciting.

Jim: Congratulations! That's huge.

Erik: Yeah, well when you're building that much stuff, I think we've been in 250 newspaper articles, so there was a while there where I was in the San Jose business journal every other week for over a year straight.

Jim: That's a lot of press.

Erik: That's a lot of press, and when you get a lot of press, you start getting organic traffic, and then you start getting word about traffic, and then we started building up you know right now, between our two funds, our first fund we closed it in December of 2020, we raised 131 million and our second fund it's a 200 million dollar fund, we just, we're just about to hit a hundred million we're like 98 million in that fund raised. We have over 700 investors and now those 700 investors over 20% of them have reinvest, so now we have a big, we call it our customer success team that reaches out to our existing investors, because you know what they say is, who are the best new investors, the investors that have already invested.

Jim: Yeah especially if you they were happy the first one it's a, it's and take care of them it's easy to get back in, right?

Erik: So now our direct team, our direct sales team using you know, Google Adwords, and whatnot, they raise a little over 25% our customer success team raised about 25%, and then utilizing broker dealers and registered investment advisors which after we raised our first fifty million they started calling us, like, hey, we saw you on every list and every report that we look at in our industry and we wanna we wanna work with you.

Jim: Now were these the same ones that you went to when you first started and they said hey, no thank you?

Erik: That's exactly, and in the beginning you know we got kinda like the worst of the worst, then as time went on we started getting the better groups and the better, if we're still not on like, if I was in this channel and I was like, you know, the most established group out there, and there's another company called Bridge, they have tons of different types of funds, but they have opportunities funds, and  Bridge it, it's like yeah, we raised about a billion dollars a year, we're on Morgan Stanley platform, Merrill Lynch, UBS, you know, they we have to tell them to stop raising us money, it's going so fast, and they just raise it from their own institutional client group and that's it. So that's like the everybody on your list is A plus, we're still having in that B to C world, where because the smaller groups like and bio is A B C, because like I'll say C is just like less than fifty advisors on their platform, B might be like less than a hundred and fifty advisors on their platform, where if you're an A group, you have five hundred plus, there are some groups like, Ameritrade has like twenty thousand advisors, right? If you get on Ameritrade’s platform, you can sell out your entire fund and you know, two months.

Jim: Is that something that is a long term goal, of yours or are you pretty happy with where you're at now and generating you know through the channels you are.

Erik: Well it's interesting, right? And there's a lot of opinions on this, you know I mention the three things you need, the money, that guarantee, and the control. When you get on the A platforms, you start using UBS Mortgage Stanley, you're now, you're not giving up that control, lot of that control because, they wanna own you, they wanna make sure their money is going to work the right way and so they get major decision making authority over some aspects of your business, and a lot of times especially in development, you have to be really nimble, you have to be feel able to change, she have to be able to make financial choices that you know may seem a little bit odd at the time but they're in the best interest of your investors because giving great returns to your investors is the only thing that you have to do to stay in business. I like the, Steve Schwartz from Black Rocks, there's only one rule for fund managers, don't lose money, it seems so simple but there are so many groups that don't follow that just that one rule, so when you give up that control, yeah you can raise money as fast as you want, in fact I've talked to the CEO of Bridge, he's like yeah, we had tell him to slow down, because we just didn't have enough good product. Right now, we're raising money plenty fast, for the product that we have, we have that control, we like the groups that we're working with, we're very happy, will it be that five years from now maybe I go up into that kinda upper echelon of the retail fundraising, work you know five years from now after I have three or four successful funds under my belt, do I just say, hey, I'm just gonna call the California teacher's pension fund, I'm just gonna call the endowment fund, and they're just gonna give me a billion dollars each that's all need, why am I gonna bother using Google Adwords in a whole team of people, why don't I need twenty five people raising my money I could do it in two phone calls? I don't think that's gonna be the case, I think I'm gonna stay right where I am because I like here. And I like the control, I like the people, I like what I can do here.

Jim: So and that's, I mean that's huge, to be happy and everybody in the company be on the same train of this is where we're headed and this is the growth that we wanna see and continue with the control we have. So let's go back for a second to you know, you're in a position, you're raising funds, did you know right away San Jose was going to be where you wanted to start this business or you know, were you kinda still having thoughts of where you should start developing?

Erik: You know I knew it was gonna be San Jose and I knew it for a couple of reasons, the first is and I love talking with my investors about the San Jose market, I might be San Jose biggest spokesman in America. I even, I tell the mayor that sometimes like there is nobody that says nice things about San Jose more than I, but San Jose in Silicon Valley, they like to call themselves capital Silicon Valley, but they're really not they've always been somewhat left behind, you know, mountain view Palo Alto park, right next Stanford, that is the center of the Silicon Valley Universe, and those aren't very big cities, they're about 15 miles away or 20 miles away from downtown San Jose, not that far away, it's just the companies when you think of especially big on Google, Facebook, Apple, you know, those three companies, that's where they are well, Apple's you know, but cup is also about 15 miles away. So as those companies have grown and expanded over the last 20 years you know, they've moved their office footprints, they've expanded all over the world, all over the country, but in Silicon Valley, we've seen this slow migration Southward, specifically into the city of Sunnybell. Still had some undeveloped land, development for over the last decade has going gang busters, and here's kinda like the scale of that right now in the city of mountain view Google occupies 95% of the office space the entire city, and in the city Apple occupy 85% of all of the office space of the entire city, and now in the city of Sunnybell, Google and Apple combined or more than 50% of the office space. I mean 20 years ago, Google was a Startup.com or was like oh yeah, I remember pets.com, is connected to the internet to eight with AOL, you know, Google was nothing, Facebook didn't exist, so now these companies are enormous, they are bigger than all, the five largest companies have more office space than all the companies combined, Sunnybell, the beneficiary of that is now completely built out, the next city as you continue South road is the city of Santa Clara, Santa Clara seen a lot of growth but they don't really have that much undeveloped space, and so that really leaves downtown San Jose, and when I started urban catalyst I'd say, and where is the next logical place these companies are gonna go, they're gonna go down on San Jose and with the jobs that they bring to downtown San Jose that's gonna require housing, it's gonna require hotels, senior living, student housing, for San Jose state, they're gonna need all of these things, and now, I can just say, Google or Apple and Microsoft to take a big land holdings in San Jose, Amazon is opened in office in downtown, Google is the biggest store ever, they've acquired over 80 acres worth of property they spent more than 500 million dollars on that acquisition, and the plans they had a approved city council last year show the building, seven million square feet of office and 6,000 residential units. I build out this will be Google's largest campus on of Earth.

Jim: So you got right, well done.

Erik: I wouldn't even, I wouldn't even come, I mean, you can just kinda read the, you can read them you'll be like, oh well, where are I get, where else are it gonna go? As long as the Silicon Valley economy is strong, these companies are gonna need to expand, and in 2021, it was a banner year in Silicon Valley, it might have been the best shirt, in history, where these companies hired like crazy tech salaries went up 30%, we saw more venture capital funding than any year in history both by dollar amount and my percentage versus the rest of the country, we had 94 companies become unicorns, know private companies traded at over a billion dollars and we had more companies go public than any year going all the way back to the dot com, so was just an amazing year last year, obviously this year stock market isn't doing so well in text kinda leading that downturn, but overall, we've been so call it blessed with a strong economy here in the tech sector for the last 20 years, that this isn't really hurting us all that bad.

Jim: Yeah, so and with that you would kinda hit on some of the projects that you do, you know, with your current project that you're raising funding for, what are some of the plans for that?

Erik: Sure, so our first fund was six projects, we had two mixed use office buildings, we had one 200 unit apartment complex and a 165 key extended state business hotels and Marriott town place suites, we have a 167 unit senior living facility that is assisted living in memory care, and then we have a thousand beds student housing rise next San Jose, so we've started construction on two of those six projects, we're gonna start another two this year and the last two are next year. okay so that's moving right along as planned in our second fund, we have two buildings they're right next door to each other they're called Icon/Echo. Icon is a 500,000 square foot office high rise, Echo is a 400 unit multi-family apartment building, it's also a high rise, those are the only two projects in that fund, so that's we're raising the two hundred million to finance.

Jim: Okay, and then let's talk about future plans, are you gonna stay in San Jose or another fund on the line, what's, what are you thinking?

Erik: Yeah, ground development is really a challenge, right? If you think of it versus the acquisition of existing real estate assets, it's significantly more risk, and so in general we have to provide significantly higher returns to have that risk adjusted churn, but for me, when I look at development, I think of it as, I'm an expert in San Jose, I have a team that is the all star team of downtown San Jose developers, this is where I know how to do business and when I have problems I know, we could solve them here, I don't know if I'm would be able to solve those in seattle or gender or you know Austin Texas, so we're gonna continue when we do grab development doing it here because this is you know, where we've been doing business, we've been very successfully planning continue. However, as a fund manager and with our success in the retail fundraising space, we have decided to expand our fund platforms, and we're doing another couple types of funds right now, the first type of fun that we're doing is called a bridge fund, it is an interval fund, it's a debt equity fund, so it's kinda like if you invest with us, we give you a certain return per year, and it's real estate related and what we're using that fund for is to acquire existing real estate assets, then we take those assets, we put them into what is called a Delaware Statutory Trust, which is the other type we're starting, Delaware Statutory trust are also a tax advantage type fund, you can think of them like, if you had a 10/31 exchange you wanted to do, which most people do when they sell real estate, because you don't have to pay capital gains taxes, you don't have to you know pay back your depreciation recapture, so what they do is they sell their ability, buy a building equal greater value. A Delaware Statutory Trust allows investors to have their 10/31 exchange satisfied by invest thing into my fund, so it's a 10/31 exchange fund syndicate, that's got a technical way to say it, they're very popular on the retail fundraising in market, this year they're projected to raise around ten billion dollars worth of DST funds, we're coming out with our first fund in about 90 days, it's a 27 million dollar cash only fund, and when I say cash only that means, when you sell your property, you can't have debt because you also to roll the debt, so cash is great especially right now because interest rates for senior debt to acquire properties have gone up exponentially to the point they're no longer beneficial for real estate returns, so we're buying them all cash, that's what we use our bridge fund for, and then once our DST investors you know, sell out the DST, we return that money to our bridge fund plus the profits and that's how the bridge investors make their money. So this will go on for a while right now our bridge fund, we've raised you know, just under 10 million. Our first DST will come out, we plan on doing maybe two DST this year maybe to next year, but we're gonna build up our platform doing maybe 5 to 10 DSTs a year every year say in the next 5 years or so, because it makes a lot of sense for us as real estate for professionals you know, we do ground up development which is like the trickiest type of real estate so you can do or one of them, and buying existing stabilized assets you know, right now our first DST is, industrial properties in Texas if 10 year leases they built in rent increases and they have you know, credit tenants, it's kinda like the no brainer, they're just triple net, so sometimes call that coupon and clipping, that's exactly I wanna be really easy. And that's, that type of investment I'm happy going outside of downtown San Jose, I don't need to have you know the level of confidence that we have here in other locations in order to successfully do our due diligence to know that these projects are the right projects for our investors.

Jim: So other than being served Google Ads where can the Remote Start Nation find you?

Erik: You can find us by visiting urbancatalyst.com

Jim: Excellent, and I'm sure if there listening to other podcast, here or there, and yeah…

Erik: Jim, let me say one more thing about opportunities zone funds, so our third fund offering is, open and it'll be open through the end of next year, and then opportunity zone fund what it does is it allows you to defer paying capital gains taxes, so you have a capital gains event, you know like a sale of stock, sale of real data sale of a business, you can defer paying capital gains until you have to pay your taxes in 2027 on that event, so say my elevator pitch, you've always wanted to sell the stock and your company, you know, your primary net worth is your house and your stock, you never wanted to take that tax hit, now there are opportunities on funds they allow you to diversify into real estate while having tax advantages, the first point, you don't have to pay your taxes until 2027, that's great, the second one being after investors money seasons in our fund for 10 years, all of the profits from the fund itself tax free from a federal capital gains perspective, and I'll tell you, people love tax free profits.

Jim: Thank you for sharing that, and I hope the Remote Start Nation goes and checks you out. You know, one question before we go I know it's coming to an end soon here for us, if there's one bit of advice that you could give to someone starting a business, whether it's in your field or in another field just getting out and starting a business, what would that be?

Erik: My advice would be, if you wanna start a business, you've known that you wanted to business your whole life, you've always known it was gonna happen someday, start it sooner than later, because the only thing that it's gonna hold you back is time, you can always build your business, it might take ten years, it might take twenty years, but if you start twenty years later, don't have as much time as you had in the beginning.

Jim: That's some serious value. Erik, I thank you so much for sharing with us today, and I look forward potentially having you on back in the future.

So with that Remote Start I hope you could put some of this value Erik dropped with us today in your life, and start something now. So from the bottom of my heart, thank you all for joining me on journey as I help you to start a business, grow your brand, and create your desired lifestyle.

So please remember to leave a comment, subscribe, and share this episode with your community who you think could learn from what you've heard here today.

So until next time, go start something, start today, and go build the lifestyle you desire by taking action. Thank you Remote Start Nation and we'll see you soon.