When San Jose’s Office of Economic Development needed to decide which census tracts to prioritize for OZ 2.0, it asked Erik Hayden. The founder and CEO of Urban Catalyst ranked his top 10, and the city took his list to the state.
Erik joined Jimmy on-site at the Novogradac 2026 Opportunity Zones Conference in Washington DC to share what nearly a decade of Opportunity Zone development in Silicon Valley has taught him. Plus, Erik explains why investors care about the deferral of gains before the ten-year tax-free profits, why he won't chase the 30% rural benefit, how the ten-year hold complicates ground-up financing, and how Urban Catalyst’s third fund lets investors with 2026 gains commit now and wire funds as early as January 2027.
Guest: Erik Hayden
Discussed on This Episode
- Opportunity Zones in San Jose, CA
- Opportunity Zones Map
- OZ Pitch Day
- Novogradac 2026 Opportunity Zones Conference
Episode Summary
Urban Catalyst: Fund Manager and Developer
Erik Hayden is founder and CEO of Urban Catalyst, which has been around since 2018. Urban Catalyst is an Opportunity Zone fund manager and also a real estate developer, which Erik said is “kind of unique.” Doing both allows the firm to fund projects in an area it knows. Urban Catalyst does a lot of multifamily development in San Jose, and basing funds around those projects “has been a really successful strategy for us.”
The firm was planning to start a traditional private equity fund focused on ground-up development in San Jose, because the overall macroeconomic trends throughout Silicon Valley all pointed toward downtown as the next place to see development on a large scale. Right at that time, the OZ program came out, and pretty much all of downtown was covered. “We thought, wouldn’t it be nice for us to give our investors additional tax benefits associated with this program?” When Urban Catalyst launched its first fund, it was the tenth Opportunity Zone fund in America.
Why Multifamily Is the Sweet Spot
With a lot of data now from the last nine years, Erik said most Opportunity Zone development is apartments. Urban Catalyst’s first couple of funds were multi-asset funds with a variety of product types, and the firm has since changed a lot of those product types as it develops them into multifamily. Its third fund will be a single asset fund that is multifamily, “really hitting that sweet spot in the Opportunity Zone program.”
What Urban Catalyst Passes On
Erik said the firm knows every single property and every single property owner in Downtown San Jose, and some properties he has been trying to acquire for over a decade. Urban Catalyst sees a lot that it is not going to choose. The first reason is that the land price is too high, since property owners sometimes have unrealistic expectations of what their properties are worth. The other is that local government might have restrictions on what can be done on the site. Urban Catalyst only picks sites where it knows it can get the entitlement and do something financially feasible. “While tax benefits are great in the Opportunity Zone program, you better have profitable projects. That’s really the key.”
Jimmy added that the tax incentive basically boils down to avoiding capital gains tax on the back end after you sell, and if you sell at a loss, there is no tax benefit.
Investors Care About Deferral First
After talking to thousands of investors and potential investors, Erik said that while Opportunity Zone folks know the ten-year tax-free profits is the biggest benefit of the program, “the deferral of gains is really what investors care about first.”
Jimmy said his panel at the Novogradac conference had discussed how excited investors are about the renewal of the deferral and the basis step-up in 2027, especially the 30% rural benefit. The panel pointed out it only adds maybe a few dozen basis points to the return over the lifetime of the project.
Erik said investors see 30% and get really excited because it’s a great deal. But “there’s a reason there’s an additional tax incentive, and that’s because there’s additional risk,” and you better have higher returns if you’re taking more risk. Urban Catalyst is not planning on doing any rural zones because the firm’s expertise is high density multifamily infill development. “I’m not gonna change what we’re really good at just because of a 30% discount.”
What Investors Should Ask Before Writing a Check
Erik said it comes down to whether the sponsor has a good project: what is the project, what is the asset class, and what are the potential returns. It’s also about who the sponsors are, their experience, and their track record. Is this their first time being an Opportunity Zone fund manager, and is it their first time doing ground-up development? “Did they used to sell insurance and now this is their second career?” He added that “real estate development has enough risk without, you know, not having an expert on your team.”
Jimmy said he tells first-time real estate developers to do one deal without the OZ incentive complicating everything, then stack it on top. Erik agreed. Even with his development experience, being a first-time fund manager “has its own unique set of skills that you have to learn.” His advice: “Don’t try to learn on the job.”
How the Ten-Year Hold Complicates Ground-Up Financing
Erik explained that in typical institutional level apartment development, $100 to $150 million, you build and sell after about five years as soon as you stabilize. That’s called merchant building, and it’s what banks and equity providers want to see because that’s how you get the maximum internal rate of return. To get the tax-free profits under the Opportunity Zone program, you have to hold for ten years.
Third-party equity may say they have a seven-year timeline on their fund. And because the structure runs from the fund to the QOZ business to the asset, third-party equity has to come into the QOZ business with a different type of paperwork than they’ve ever seen before. To them, that creates additional risk, so they want higher returns and are less likely to do the deal.
What Policymakers Miss About Opportunity Zones
Erik said policymakers somewhat miss out because they kind of don’t understand the program, and might not realize their support could be really beneficial to their communities. Urban Catalyst is one of the only Opportunity Zone funds operating in Silicon Valley, even though there are a lot of zones in San Francisco and Oakland, at least in OZ 1.0. “There should be 20.” Urban Catalyst gets the support a developer would get. With more in-person visits and local officials talking with the state and federal government, promoting Opportunity Zones and extending that support to other sponsors, “we would see more funds and we’d see more benefits to the community.”
San Jose’s OZ 2.0 Priority List
Erik said San Jose has been very interactive with Urban Catalyst on selecting zones for OZ 2.0. When the first California map came out, the city asked which census tracts it should choose. Erik made a priority list of one through 10, and the city lobbied the state with his list.
At the time of recording on October 29, California’s nominations had been due the day before. Erik said 620 census tracts were selected, but the list had not been published. Without knowing where the zones are, Urban Catalyst has put out a lot of offers but “really can’t pull the trigger on anything.”
Since this episode was recorded, Treasury has designated 6,576 Opportunity Zones nationwide, including 620 in California and 17 in the city of San Jose.
Urban Catalyst’s Track Record and Fund III
Urban Catalyst’s first two funds have eight projects combined. The first raised $131 million and the second just under $155 million. Erik cited data shared at the conference: a little under 2,600 Opportunity Zone funds were created over the last nine years, and only 82 have raised more than $100 million. “I have two of that 82.”
Urban Catalyst’s third fund is a $100 million, single asset fund in Downtown San Jose, with a two-year fundraise. Because investment can’t really happen until January 4, 2027, investors can have a capital gains event in 2026, commit to the fund, and wire the money on January 4. Erik said not a whole lot of funds have been created for OZ 2.0, “so we’ll be one of the first ones out there again.”
To learn more, visit urbancatalyst.com. Erik will present UC OZ III at OZ Pitch Day on November 12. Learn more at ozpitchday.com.