CrowdStreet’s Darren Powderly is joined by Dennis Randall, President of Acquity Realty and Greg Ovalle, EVP Operator, to discuss why Silicon Valley is still the hub for technology and innovation, how their company is leaning in and taking advantage of the migration of workers to San Jose, and the overall trends they anticipate will continue within this particular market.
Darren Powderly, Co-Founder & VP Capital Markets
CrowdStreet
CrowdStreet
Darren founded CrowdStreet in 2012 after identifying the need to radically improve people's access to commercial real estate investments via technology. Over his 20+ year career, Darren has transacted billions of dollars’ worth of commercial real estate investments and enterprise software contracts. Darren is a driven leader who loves building relationships based on mutual success. In addition to building businesses, leading teams and advising a prestigious list of national clients, Darren has personally owned commercial real estate, syndicated investment groups and developed properties from the ground up.
00:00:04 Hey everybody, this is Darren Powderly. Welcome back to another edition of StreetBeats. Today I have with me Dennis Randall, the president and Greg Ova, the Executive Vice President of an operating partner with Acuity Realty in Silicon Valley, California. So, Greg Dennis, welcome to StreetBeats. So happy to have you guys. Please introduce yourselves. Tell us a little bit about your backgrounds.
00:00:27 Uh, I'm Dennis Randall, president of Realty. I've been in the industry for 30 years, uh, focused here in Silicon Valley since 96. So I've seen the last three cycles here in Silicon Valley. And we're looking forward to moving forward on the project called Carl.
00:00:44 Um, this is Greg Ova. I've got a pretty interesting background that's been in asset management and commercial real estate, and then technology for 20 years. I've been a, uh, an operator and an investor, and, um, uh, real estate's always been core to my heart. And I live here in San Francisco, and we are based in San Jose. We exclusively work in Silicon Valley. It's a market we know, and we have a long story on track record here. It's, it's a pretty unique place.
00:01:10 I'd love to hear like, how did you guys come to be together? Tell us a little bit about the history of, of Acuity and, uh, how you guys came to work together, because, uh, Greg, your, your background of Tech Plus Real Estate is near and dear to my heart. That's kind of what I identify as well. And then Dennis, I know you have deep expertise in commercial real estate development there, specifically in Silicon Valley.
00:01:33 Dennis, why don't you go first and talk about how you and John John used to work with Sanford Diller, who was kind of one of the icons in kind of commercial real estate and multi-family development, and then Correct. Came full circle.
00:01:43 I, I started my career in Los Angeles and was recruited up here in 1996 that joined a company by the name of Prometheus Development, still one of the largest, uh, housing developers here in the Bay Area. John ran the, uh, residential division, and I ran in the commercial division. And, uh, that's where we met. So that was back in 96. Uh, we went our separate ways. Uh, after that, John went to go work for a large national Marine. I left to go work for a large national developer here in Silicon Valley. John and I got back together in 2014, uh, and we put a company together called Insight Realty, and then subsequently put together another company called, uh, acuity Realty. Only difference between the two are the part our financial partners involved in what we're doing. Uh, John and I, uh, run the company. We, uh, source all of our investment, uh, opportunities, and we oversee all of the operations.
00:02:37 Awesome,
00:02:38 Awesome. And, and I've, Dennis and I have known each other for 20 some years. We had, uh, I had a roommates in Newport Beach that were his, uh, fraternity brothers from sc. And I, I think part of me reconnecting with, with Acuity was conversations on my balcony watching the Blue Angels here in San Francisco, the John and Dennis Love. Yeah. Right. And so John and Dennis had this tremendous track record and, you know, I had just, uh, started a company and been in technology and I'm like, I was kind of drawn to get back into it. I've done really well with it, especially with these guys. And so that's, that's what kind of going, so, you know, I think the I r r for, for, for the, this team is in the high forties right? The last billion and a half. So it's enviable. And I think, you know, if you focus on an area that, you know Right, the whole country's amazing for a lot of different submarkets, but the dynamics of California, especially Northern California and especially Silicon Valley, are super unique.
00:03:35 So tell us a little bit about, I think Dennis, you, you were telling me about the different phases of innovation that you, that, that Silicon Valley has experienced. Give us a quick, uh, history lesson there, please.
00:03:45 Well, it all started back in the fifties, uh, with the, in sixties with, uh, both the Cold War and the Space race. Uh, NASA Aimes Center here on the peninsula was the center of a lot of in innovation, uh, Stanford University and the linear accelerator. And a lot of, uh, the work done around the, our nuclear program was all based there. And then that created the core infrastructure of what is now Silicon Valley. That's, that was Silicon Valley 1.0 before Silicon Valley was even coined. It was really a defense based, uh, economy that lasted all the way up until the eighties. And then in the eighties, uh, we started, the internet really kicked off, uh, really expanded before any anybody in the public knew about it. But it built the infrastructure, both military banking visas up peninsula, uh, uh, bank of America, uh, put together the financial infrastructure, uh, in this country before anybody knew that was outta Silicon Valley.
00:04:42 Yeah. Then in the nineties, that's when we all, that was, that was, uh, Silicon Valley 2.0, Silicon Valley 3.0 was the.com expansion that we all remember in the nineties, in the early two thousands. And we also remembered the bust. Then after that in 2005, then we had the social medias Allstar. That's when Google really took off, uh, the search engine, the media, uh, the commoditization of online technologies and platforms for all sorts of businesses. And that was, uh, that was what, uh, Silicon Valley three point. Now we have Silicon Valley 4.0 where we have the integration of everything that, basically people call it the Internet of things. We have major installations here from, uh, from Mercedes, Volkswagen, uh, Hyundai, uh, Sony, I mean, every major international company on the planet has major engineering installations here in Silicon Valley. Because Silicon Valley is the campus which went San Francisco and here to San Jose. It is very common to have meetings up and down, uh, the peninsula to have to integrate your technology into your own pro other tech technologies into your product or your product into other people's platforms or products. Yeah. This is where it all gets integrated.
00:06:05 Dennis, let, lemme just add one thing. Oh, let, lemme just add one thing cuz that's a great story. It's like venture capital is a big part of this. So when the early, the early semiconductors, Fairchild computing, there's a book named the Code by Bargo O'Mara that talks about this, that, plus a lot of this started with Stanford and Cal. So here in Santa Clara County, we have three universities. We have Stanford. That's unbelievable. We have blocks from us is San Jose State University that cr cranks out more electrical engineers than anybody. And Santa Clara University, one in five residents of San Jose has a degree in math, engineering, computer science or something technical. It's kind of crazy. But that venture capital allows it to kind of happen. It's just like, okay, this is a crazy idea. Let me give you some money and see if you can, and if it starts to work and you have some milestones, and this is a by the way, Darren, this is why we're dealing with CrowdStreet because Dennis as an old school real estate guys, he realizes that real estate finance is completely inefficient. Right.
00:07:03 Oh my God.
00:07:04 So inefficient. Right.
00:07:07 Well, the thing is though, by being here in Silicon Valley and understanding what it takes to get real estate, really great real estate projects capitalized versus back of the napkin technology companies, it's amazing. So, so you have this very efficient model based on technology companies can get funded and grown very easily compared to the, the ecosystem that's around commercial real estate. What we're trying to do, what we love about CrowdStreet is that basically you're disintermediate disintermediating a very moron industry in, in real estate finance. And so,
00:07:41 And we as, as a company, yeah, we as a company embraced what we call open source development, which is we use best in class pro partners for each project. So, by the way, you guys are our open source, you're our, our finance arm, right? It, this is our first project. We know we're gonna do more. It's been unbelievable experience and we're excited about it. But, you know, we have different developers and for instance, we've got a bond financing and project, guess what? We had to get specific bond council for that. We don't have them on staff. If we had 'em on staff, it'd probably be a C or a B player at best. Mm-hmm. <affirmative>. So we're taking kind of the thinking here and, and we've got kind of multiple types of d n A here and yin and yang optimist, pessimist, by the way, John is amazing cuz he's been through some down cycles. But you can't always be upbeat, especially with real estate, you gotta be very conservative and manage risk.
00:08:31 So let's talk a little bit about Silicon Valley today and the demand drivers right now. A lot of people listening to this are gonna say, yeah, it's a great Silicon Valley, sort of was awesome, right? But people are leaving California in droves. So tell us about like, the reality of the situation, acknowledging, you know, the, the re you know, the reality on the ground right now and also what, you know, the, the the data states and what, what some of the third party resources that you guys rely on, you know, uh, unbiased third party resources that you guys rely on. What's going on on the ground right now in Silicon Valley?
00:09:03 Yeah. Well, I'll, I'll take a stab at that. I mean, to me, to, uh, people have been predicting that the demise of Silicon Valley for 30 years and it's never once occurred. In fact, it's every time it's been predicted the Valley doubles. I mean, it just, it just, that prediction has been the most wrong prediction ever made. And, uh, time and again cuz I used to buy into that, cuz I we're all looking through our own lens that we're using at the time. Uh, now I am fully engaged in understanding exactly why this is not gonna be the case. This technology touches everything, whether it's gonna be your toothbrush or your car or whatever else you're gonna use, technology's gonna be a part of it. And all the industries are here and that's gonna do nothing with growth. What the issues we have right now with Covid. Yeah. We have, uh, right now it's kind of a pause, uh, but guess look at the stock indexes, which, which companies have done the best technology platforms, almost uniformly mm-hmm. <affirmative>. Why is that? Because they're efficient provider of services, goods and services in this situation that we find ourselves in. These industries have done extremely well. We have, uh, contacts in, uh, uh, companies like Google and Apple and, and they've hired thousands of employees in the last six months where other industries have let people off.
00:10:25 Yeah.
00:10:26 So like the FANG stocks you have Facebook. Yeah, apple, Amazon, only one not, and, and then Netflix and Google. So Amazon is the only one not in your backyard. And then you got, well
00:10:39 Actually, actually, Darren, actually, it's funny. That was a nice tea. Guess what? They just bought a, a 60 million site downtown San Jose to put their web services headquarters. Yeah. So the crazy thing to, to add on what Dennis is saying, it's like if you think about market cap per employee Yeah. The technology stocks have been as a sector done better than any vertical period. Globally. Yeah. Apple's 11.7 million per employee market cap, Google's about 8.7, Facebook's like 14. Google is building their third campus, 25 to 20, 20 to 25,000 new employees in San Jose. Mm-hmm. <affirmative>. Right? They've aggregated many parcels, including some that Dennis had tied up at one time, right. With spending over half a billion dollars. They're committed, they know they can't move. They, they can't, they can't move. So what we've been seeing is a lot of all the engineers are here. We talked about that earlier. And so when I was a commercial real estate broker, Dennis calls it the slipper rule, where does the CEO live? We draw a little circle and then we'd have to kind of figure out where the office space was reasonable here. Dennis, I'll hand it over to you. It's where the software engineers are,
00:11:52 Are. Yes. It's the pocket protector rules. Where are the, where are the pocket protectors? All the, all of the engineers that do all of the crazy math and come up with all of these, uh, business plans that effectuate our lives. Uh, two-thirds of them live here in Santa, in Santa Clara County. San Jose is the largest city in Santa Clara County. So, you know, everybody talks about maybe San Francisco or the Peninsula or Oakland as being these high, high value, high impact areas. And they were, because when, when Silicon Valley got started, back in the day, as we talked about earlier, the CEOs lived up in San Francisco or, or, or Mountain View. And that's where all the technology companies started. Well, we're on Silicon Valley4.0 maybe going to 5.0 with robotics and ai. Mm-hmm. <affirmative>, that's not the case anymore. The CEO is the least important person in the company. The most important is the line engineer. And guess where all the line engineers live here in Santa Clara County? Because it's the affordable, it's the most affordable place to live in the entire Bay area. The nine county Bay area. Yeah.
00:12:59 So let's talk about that. Yeah. Migration was occurring pre Covid from San Francisco into San Jose. Yeah. Uh, because of some of the lifestyle factors that you just mentioned, the affordability factors. Tell, tell us more about, you know, the attraction of San Jose over San Jose is not San Francisco. For many of you who are not from California, they're very, very different. Um, so tell us what there's,
00:13:23 I wish, I wish I could put a map up so you could show you the Bay area, but you know, it's, it's a very interesting topography. You've got mountains to the west, you've got mountains to the east, and you've got a big body of water called the San Francisco Bay right in the middle of it. And so very, very cons, uh, constrained geographic area and especially up the peninsula towards San Francisco. Physically and politically, there's no significant growth that's gonna accommodate, uh, the population growth that's being predicted for, for the Bay Area. It's mostly going to happen here in and around San Jose.
00:13:57 Darren in a nutshell, the high real estate prices, which is homes and apartments, the high office rents in San Francisco. And the fact that all the engineers, look, if you're a young engineer, you live in San Francisco, but if you're in your mid to late thirties and you're having kids, you move down south. So that's why companies like Airbnb or Uber right, or Twitter all have offices in San Francisco. They each open 300,000 square foot engineering offices. Okay, here's a great data point 70 about per call years. About 77% of all office buildings that are being built as of last year in Silicon Valley were a hundred percent leased before they were finished. Now they were not build the suits, right? Mm-hmm. <affirmative> a build the suit is where I signed a 20 year lease, and then I do the financing, I start building it. I know who the tenant is. These are spec buildings. So I had an institutional investor ask Dennis, and I was like, why is that? It's like, well, I'll tell you why.
00:14:54 An office building in a great location is a recruiting and retention tool, right? So saving money on occupancy costs. If I'm a CEO of a technology company mm-hmm. <affirmative>, that's not what I want to do. I want to, I feed these guys three meals a day for free. Mm-hmm. <affirmative>, I want it easy for them to get to work. I want beautiful big windows. I want great access to walk places. I want them to be able to leave at five and go to their little league game, right? Mm-hmm. <affirmative>, that's so, no, no other market in the world has that dynamic because, you know, we were joking. It's like if, if you saved 2 million a year in, in a dingy building on a cul-de-sac, guess what? Your company's gonna fail.
00:15:37 Right? Well, there's a reason. There is a reason that Apple spent 5 billion on the spaceship, which is just six miles to my west where I'm sitting right now. It's because they want to retain, attract, and retain the best talent in the market. And that building, if you've been through it, is spectacular. It's otherworldly it. And, and once you're there, everywhere else is gonna look a not quite as nice. So it's been a very effective tool for Apple to attract and retain top talent and everybody else. It's looking for the same talent has to kind of step up their game. So you have a number of, uh, companies that have built their own campuses. Yeah. Our product, we're not focused on that because the big, the big whales are gonna do their own thing. And even here in downtown San Jose, there are a couple of deals that will probably be a million square feet.
00:16:24 They'll do their own thing. Adobe is building an 800,000 square foot building for themselves. Right now. We have 150,000 feet. We're really gonna be marketing to the pilot fish, the people who are around the Googles, the Adobes, the apples. Mm-hmm. <affirmative>, Teslas even though, you know, and whatnot, which is just up the road bit. So our, our niche, our focus and our project in downtown San Jose is to one, take care of the workers, the, the profit protectors cuz they love living in dense urban environments. Even now, uh, uh, via covid, that's still, that's not gonna change. And two, cause they wanna be able to walk to work, we wanna attract the pilot fish, uh, uh, companies that want to be in an, uh, urban environment. They want to be an urban environment because one, it takes, it makes life better for their employees. Yeah. Walk to work, bike to work, tr trained to work however your lifestyle is. But that is the lifestyle in Silicon Valley that the, our target population l wants to live.
00:17:23 Yeah. Dar Darren, if I could add one thing, I think a good data point is it's a combination of things. It's not one thing. It's, and we're hearing that on the conversation. So Nuveen one of the largest institutional owners of real estate in the world. They pick San Jose as one of the top five resilient pandemic, you know, impervious cities. Mm-hmm. <affirmative>. Mm-hmm <affirmative>, another one's Boston. Right? Because you've got the education, you've got the bio, you know, know you got the technology, you got, uh, life sciences, you've got all of that. Um, Washington for Defense, right? Silicon Valley. And then CB Richard Ellis has a new Tech 30 marketplace study. Uh, you know, Austin, Cambridge again, right? There's a lot of different ones. They pick Silicon Valley as the number one most resilient. And, and because it's a combination of reasons, right? Yeah. Lack of, you know, lack of dependency on a, on an industry that's being hurt by the pandemic.
00:18:18 Obviously we're actually net benefiting from it, which is sad in many aspects, but at the same time, um, and then Brookings also picked San Jose as, as top five. So, you know, it's not, it's not us just kind of tuning a horn, it's, it's understanding kind of some of the noise. Yeah. Some people have moved outta San Francisco. San Francisco's very different than San Jose. It's 50 miles away. Right. It's an entirely different sub-market. It's unfortunately been a bit of a falling knife, right? Mm-hmm. <affirmative>, uh, the rents were at super premiums for office. I think, you know, office rents in San Francisco are $15 down here in the peninsula there's seven and six and that's where the engineers are. So that's per month. That migration did start. Most
00:19:00 People, most people quote annually. That's
00:19:02 Per month. So that's per month. That's per month. Yeah. That's per month.
00:19:05 You mentioned the CBRE report, the Brookings report, the Navine report, you know, handfuls of, of third party reports. You know, they're all ranking San Jose as a very resilient and, uh, you know, to, to covid and to recessions. This should be very extremely unique recession that we're in. It's still in the middle of. Yeah. Um, but why, and they're also talking about the, the first to come back, right? Mm-hmm. <affirmative>. Um, I think that's one of the important parts about, you know, what comes next? What, how's happening in 2021?
00:19:34 I think all of us miss bumping into somebody in the hallway and going, Hey, do you got a minute? Can I bounce something off of you? Right. There's no spontaneity in that. So two months, three months, what are we nine months into this? So, um, r re hasting, CEO of Netflix, which is right, right near us. He's like, the minute the vaccine's done, I'm gonna have a hundred percent of the people back to the office. Yeah. Right. Because there's more efficiencies. We know the people at Apple and Google and they can't wait to get people back on campus. You can measure product productivity. Yep.
00:20:06 But you know, the, so I think our recovery's gonna be quicker, um, for a couple reasons because software and hardware collaborative, if I'm at Apple building hardware products, I can't work from home. The, I think the CB Richard Ellis one you you saw was 85%. And again, this was nationally, this was not just Silicon Valley. Right. 85% of the people back to office by the end of q2. And I think 98 by, um, end of q3. So look, we've got vaccine delivery that's happening now, which is outstanding, right? It's quicker than anybody imagined. What a godsend. Everybody's looking forward to it. And you know that CB Richard Ellis one also had an interesting dynamic, said we might use 15% more office space per employee, but with remote, um, work that might moderate it down to 15%. So it's kind of a net zero and mm, I think that's it. We, we, we think we're gonna have a combination of things. Mm-hmm. <affirmative>, you might go to the office three days a week or four days a week, but you know, here in Silicon Valley office space rent based upon how companies perform, it is, it is not something that's gonna be skipped on. They are not moving all to the house.
00:21:15 That's, that's well being in Silicon Valley, we have a lot of contacts at these large tech firms and the small ones as well. A lot of, we obviously do business with a lot of law firms and what's uniformly coming back is everybody is wanting to get back to work four months ago, five months ago. It's like, Hey, are we in a new normal? It's in the last month and a half. The feedback is a resounding no. Everybody is wanting to get back to work.
00:21:42 <laugh> getting
00:21:42 Back to a normal, you know, I'm not sure how things are going at home, but it's not good cause they wanna get back to the office. And I know that it's not just from the tech firms, it's also from, uh, the law firms that we know that deal with a lot of employee issues and whatnot. And it's unbelievable that they said in the last 45 days, this is, this is new data that their phones are ringing off the hook with how they're gonna handle these employee issues that the employees and employers do not like what's going on right now. They do want to get back
00:22:10 To work. It's true. We miss it. Hey, if I could Darren loop back with one other unique thing about this market as is, uh, you know, we were talking about the ocean and the bay and the constriction of transportation. We only build infill stuff. We're doing a project that is on a one acre site. It's a pretty big project, but it was originally a single story building that I b m developed their first disc drives in. Right? Absolutely. And now it's a pet shop that should be in a John Hughes movie. And guess what, in the next 30 months it's gonna be a 21 story building. It's a Q oz project, it's apartment building with five floors of office. And it's, it's, it's unbelievable. But it's, it's in the most incredible location by the way. How is it AQOZ? The, the median income's 140,000 near us. I guess the, the normal QOZ median income nationally is $42,000. Wow. So we, you know, QOZs are pretty interesting for people with capital gains mm-hmm. <affirmative>, um, on a long term basis. And, and we're excited about building now during this cycle because we're seeing great construction costs. And as an experienced sponsor, we're getting some pretty unbelievable debt because at that translates into higher cash on cash and greater returns for our kind of co cogs and co-partners like the investors we're gonna work with, with you guys. Right. So, so
00:23:35 Guys, let's talk about the opportunity zone. How did you guys, you know, most opportunity zones are right? Are, are sort of in less than favorable markets where gentrification is part of the, the program so that it, it's basically so that people with capital gains who are generally wealthy can reinvest those capital gains. You know, they can defer capital gains out for seven years, at which point in time they need to pay a reduced amount of the capital gains from the prior investment. And then the, the new capital gains and the new investment, if you hold on it for 10 years are completely eliminated. There's an elimination of, of future capital gains if you invest in an opportunity zone project. So, uh, it's, it's a great program. It, I believe it has great intentions, right? There's no pro, no government program is perfect. We could talk all about the cons of the coop opportunities zone program, but like, one of the cons is that they're like, it's hard to find compelling deals because these opportunity zones are in less than favorable locations. That's not the case with your project in downtown San Jose. How did that happen and why is that important for investors? Well,
00:24:37 I I, to be blunt by accident, because, uh, the q oz zones were politically derived, uh, about almost a decade ago, and then when the tax bill got picked up a year and a half ago, the, the, all these zones had been identified, uh, state by state and gerrymandered to some degree. And, and they were handed out in different, uh, uh, different jurisdictions. And when the tax bill got, uh, picked up and in opportunity zones got put into it to help energize inner city development, the areas that were on that list got included. Mm-hmm. <affirmative> and, uh, downtown San Jose is largely in a Q O Z area. Not all of it largely. And if you look at Q O Z locations across the, the country, they are, uh, I'd say mostly in, uh, disadvantaged areas. Um mm-hmm. <affirmative>, this is in downtown San Jose. You know, we don't need to have tax advantages per se to to, to fund this project.
00:25:39 It just happens to be in one. Yeah. And so therefore it's a project, and I think to some degree, um, this is maybe a, a little by design, is to build the infrastructure of the Q oz investment, you have to have deals that are compelling. So, uh, San Jose and, and Massachusetts and, and other in the, in the technology triangle, you know, around DC have some q oz, uh, investment availabilities down in LA as well. So to me, I think it's really the, the, the best, the best deals are gonna be the first deals. And then once Q O Z takes, uh, on a, a familiarity, it will go into the other areas. Yeah. So that, I think that's why it's there.
00:26:19 So I've heard many times that the Q O Z, um, qualified opportunities zone, you know, designation, if you have a project that's located within one of these areas, doesn't make a project like itself, you know, attractive. You have to have a really strong project and it makes a strong project better. Like it makes a good project, a great project potentially. So, um, you guys are probably gonna build this deal regardless. Right? Um, this, this mixed use office, multi-family tower, um, and in downtown town San Jose. So tell us a a little bit about like the demand drivers there. I mean, we talked a lot about office and you've got office space. Talked a little bit about multi-family, but gonna be good to talk about that and, and how the opportunity zone sort of just enhances things.
00:27:07 Well, it's all about when, whenever you do a real estate investment or any investment you're looking at, you're always looking at your after tax returns. Mm-hmm. <affirmative>. And typically because of the de depending uh, your, what your tax circumstances are, a non Q O Z deal will generate you, you know, on average, uh, for an average investor between a 12 and a 15% return overall, that's fine. You're gonna pay tax on that. So your net's gonna be closer to 10 or 11%. That's okay for, for a real estate investment, that's a good return for a real, uh, a safe, uh, investment. However, in a QOZ, that 16% return, um, is, is what we're offering. There's about a 16% return. You'd have to go out in the, in the market and find a project that was gonna yield a 20% return so you could keep 16. So that's the efficiency of the Q O Z. Uh, and it just makes our project that much more attractive, uh, to an investor who has a capital gains, uh, proceed, uh, to use that, uh, uh, tax advantage. Yes, it's still a great deal, <laugh>,
00:28:18 If I could add one thing on that. So, um, it's, it's gotta be a fundamentally strong story and, and economic, you know, um, solution being solved. So we were not trying to solve for individual investors tax conundrums. We've got, for instance, 90 million of institutional capital that's co-investing in this. They get no q O Z benefits, zero. They're like, this is an amazing location. This is a great sponsor and this is a great story on many, many levels.
00:28:49 90 million from an institutional investor on this deal. It just sounds like an absolute huge, huge project. What's the total cost of the pro of this project?
00:28:59 Uh, the total cost of about 340 million all in capitalized. Uh, we have long-term financing, uh, 15 year bond financing on the construction loan. So we, we really have built a very solid basis financially for this project. It's a project that, uh, you're gonna wanna own the long term. I think our, our view is, our plan is that we're gonna be able to execute, lease, refinance, and or, uh, in, in return our investors capital within a four to five year timeline. And then after, after you have all your money back, you're gonna be getting, uh, dividend checks from there on out. We, we, we bet that few people are gonna wanna actually sell 'em your 10 personally. You have a proforma that will sell it your 10, and we'll definitely provide, uh, an exit at some point in time, whether we sell or not. But this is gonna be excellent cash flow for your portfolio for the very long term.
00:29:51 Cool. And you built the building you pointed out behind you. And I've seen that office building in San Jose. It's, it's that that office building that you, you were involved with or Dennis is, is really a, a skyline defining office building. It's probably one of the premier office buildings in hall of Silicon Valley. Well,
00:30:07 We leased the, you can see the building right here, uh, there, this building right here that you see up my window, uh, that's known as 2 25 West Santa Clara. Uh, yeah. It's the most successful office building in downtown San Jose, uh, has been for 20 years. And the reason, it's because on, it's on the west side of downtown, right near the freeway, right near the train station right near all the amenities. And it, we, we leased that up between years. Uh, uh, we built that between 2000 and 2003. We sold it in 2004. It was a very successful project. We leased to 90 plus percent leased during the middle of the.com bus. Between 2000, 2003 was not a good time to be in the marketplace. No, that was, so we leased that up during a downturn. Okay. So that's key. Our project is really just outside my window right here in the same submarket as 225.
00:30:58 This, we believe that our brokers believe that we're not gonna have trouble leasing this building up. It's, it's that close to the train station. It's that close to all the amenities. It's gonna be that great of a building. And, uh, it's a unique building because it is a mixed use tower apartments above offices below great views, great visibility to the freeway, great access to the airport, great access from the freeway, all of the above. It, it, it click checks all the boxes. Now it's not a typical technology office building. It's not 60,000 foot floor plates. Mm-hmm. <affirmative>, it's 30,000 square foot floor plates. But so we are in the middle, we're in a niche that no one else is going after. We may have a million square foot technology company coming in downtown San Jose soon. Mm-hmm. <affirmative>, uh, we're not gonna be the office building for them. We are gonna be the office building for the, uh, the firms that support that million square foot, uh, uh, technology firm.
00:31:55 Last couple questions. You gotta wrap up here, guys. This has been incredibly interesting and insightful about what's happening in Silicon Valley. But yeah, this, why do you build a mixed use office building, uh, with apartments above and which, why, why is that? And for our listeners, um, I'm sure they're curious about that. And if you were to make a bet right now, would you think that the apartments are going to lease up more quickly than the office? Like, what are your projections on what sort of drives the first economics of this building become stabilized and cash flowing?
00:32:28 Well, the answer is the, the site wasn't big enough to be a perfect technology building. Okay. So we, it would certainly be very profitable to build a 21 story would be 21 stories would be more like 18 cuz of the heights, uh, office building. Uh, but the floor plates are not big enough to really make it a perfect office building. So it's like, okay, that's not, we can't make it all office. Uh, you couldn't make it all residential because the cost of construction for apartments doesn't, is not financially advantageous. But when you put them together, it works. The site works for the office for 150,000 feet. The site works for 290 units. They both share the garage. It and the garage has two demand drivers. The nighttime, the nighttime, uh, parking for the residence and the daytime parking for the office. It, there's a symbiosis that exists with the mixed use in this site that makes it quite profitable. And so that's why we went to mixed use.
00:33:26 So we, we've used some very conservative assumptions in lease up, I think, um, 18 months on the office, which again, I shared that data point earlier that 76% of buildings are pre-leased. We, and by the way, none of the projectors take into account that Google's gonna be adding 20 to 25,000 people here. Right. As we become online, we, we, we are building this project over 28 months with some contingency. We don't start lease up till Q3 of 2023. So beyond vaccine, right. Issues beyond economic recovery, perfectly timed for Google's new, you know, new, new campus. I mean that's, that's a lot of people. So that's not even factored into the number. Yeah. So obviously the apartments are gonna fly off off the hook if anybody has any skepticism, uh, any part of the model that's office. But we've seen the demand drivers and we're getting to the market quicker than anybody because we don't need a, a, a credit tenant of 500,000 feet to even start moving dirt, which some of the other projects have that issue. Yeah. Right. So it's a finance, it's a financing constraint. So
00:34:31 That's an exciting project, an exciting market, you guys, uh, thanks for I wish all the best of the project for that's, thank you. And, uh, we're excited to be working with both of you and your teams and thanks for that opportunity. So I appreciate you sharing all about what's happening in, uh, Silicon Valley and with you guys and your firm. Really insightful, educational, uh, I definitely learned a lot. And really, uh, I don't know if you guys have any, any parting sort of thoughts that you wanna share. Otherwise we'll, uh, kind of wrap it up here cuz we've got more than enough
00:35:01 <laugh>. Yeah, well we're just excited to be working with you and we're excited to, you know, be able to present this to your investors.
00:35:08 Thank you. Thank you. Thank you, Greg. Thank you Dennis.
00:35:12 Thank you Darren. Thanks for the opportunity. We're, we're, we're excited. Yeah.
00:35:15 Yeah, we are too. Talk with you soon.
00:00:27 Uh, I'm Dennis Randall, president of Realty. I've been in the industry for 30 years, uh, focused here in Silicon Valley since 96. So I've seen the last three cycles here in Silicon Valley. And we're looking forward to moving forward on the project called Carl.
00:00:44 Um, this is Greg Ova. I've got a pretty interesting background that's been in asset management and commercial real estate, and then technology for 20 years. I've been a, uh, an operator and an investor, and, um, uh, real estate's always been core to my heart. And I live here in San Francisco, and we are based in San Jose. We exclusively work in Silicon Valley. It's a market we know, and we have a long story on track record here. It's, it's a pretty unique place.
00:01:10 I'd love to hear like, how did you guys come to be together? Tell us a little bit about the history of, of Acuity and, uh, how you guys came to work together, because, uh, Greg, your, your background of Tech Plus Real Estate is near and dear to my heart. That's kind of what I identify as well. And then Dennis, I know you have deep expertise in commercial real estate development there, specifically in Silicon Valley.
00:01:33 Dennis, why don't you go first and talk about how you and John John used to work with Sanford Diller, who was kind of one of the icons in kind of commercial real estate and multi-family development, and then Correct. Came full circle.
00:01:43 I, I started my career in Los Angeles and was recruited up here in 1996 that joined a company by the name of Prometheus Development, still one of the largest, uh, housing developers here in the Bay Area. John ran the, uh, residential division, and I ran in the commercial division. And, uh, that's where we met. So that was back in 96. Uh, we went our separate ways. Uh, after that, John went to go work for a large national Marine. I left to go work for a large national developer here in Silicon Valley. John and I got back together in 2014, uh, and we put a company together called Insight Realty, and then subsequently put together another company called, uh, acuity Realty. Only difference between the two are the part our financial partners involved in what we're doing. Uh, John and I, uh, run the company. We, uh, source all of our investment, uh, opportunities, and we oversee all of the operations.
00:02:37 Awesome,
00:02:38 Awesome. And, and I've, Dennis and I have known each other for 20 some years. We had, uh, I had a roommates in Newport Beach that were his, uh, fraternity brothers from sc. And I, I think part of me reconnecting with, with Acuity was conversations on my balcony watching the Blue Angels here in San Francisco, the John and Dennis Love. Yeah. Right. And so John and Dennis had this tremendous track record and, you know, I had just, uh, started a company and been in technology and I'm like, I was kind of drawn to get back into it. I've done really well with it, especially with these guys. And so that's, that's what kind of going, so, you know, I think the I r r for, for, for the, this team is in the high forties right? The last billion and a half. So it's enviable. And I think, you know, if you focus on an area that, you know Right, the whole country's amazing for a lot of different submarkets, but the dynamics of California, especially Northern California and especially Silicon Valley, are super unique.
00:03:35 So tell us a little bit about, I think Dennis, you, you were telling me about the different phases of innovation that you, that, that Silicon Valley has experienced. Give us a quick, uh, history lesson there, please.
00:03:45 Well, it all started back in the fifties, uh, with the, in sixties with, uh, both the Cold War and the Space race. Uh, NASA Aimes Center here on the peninsula was the center of a lot of in innovation, uh, Stanford University and the linear accelerator. And a lot of, uh, the work done around the, our nuclear program was all based there. And then that created the core infrastructure of what is now Silicon Valley. That's, that was Silicon Valley 1.0 before Silicon Valley was even coined. It was really a defense based, uh, economy that lasted all the way up until the eighties. And then in the eighties, uh, we started, the internet really kicked off, uh, really expanded before any anybody in the public knew about it. But it built the infrastructure, both military banking visas up peninsula, uh, uh, bank of America, uh, put together the financial infrastructure, uh, in this country before anybody knew that was outta Silicon Valley.
00:04:42 Yeah. Then in the nineties, that's when we all, that was, that was, uh, Silicon Valley 2.0, Silicon Valley 3.0 was the.com expansion that we all remember in the nineties, in the early two thousands. And we also remembered the bust. Then after that in 2005, then we had the social medias Allstar. That's when Google really took off, uh, the search engine, the media, uh, the commoditization of online technologies and platforms for all sorts of businesses. And that was, uh, that was what, uh, Silicon Valley three point. Now we have Silicon Valley 4.0 where we have the integration of everything that, basically people call it the Internet of things. We have major installations here from, uh, from Mercedes, Volkswagen, uh, Hyundai, uh, Sony, I mean, every major international company on the planet has major engineering installations here in Silicon Valley. Because Silicon Valley is the campus which went San Francisco and here to San Jose. It is very common to have meetings up and down, uh, the peninsula to have to integrate your technology into your own pro other tech technologies into your product or your product into other people's platforms or products. Yeah. This is where it all gets integrated.
00:06:05 Dennis, let, lemme just add one thing. Oh, let, lemme just add one thing cuz that's a great story. It's like venture capital is a big part of this. So when the early, the early semiconductors, Fairchild computing, there's a book named the Code by Bargo O'Mara that talks about this, that, plus a lot of this started with Stanford and Cal. So here in Santa Clara County, we have three universities. We have Stanford. That's unbelievable. We have blocks from us is San Jose State University that cr cranks out more electrical engineers than anybody. And Santa Clara University, one in five residents of San Jose has a degree in math, engineering, computer science or something technical. It's kind of crazy. But that venture capital allows it to kind of happen. It's just like, okay, this is a crazy idea. Let me give you some money and see if you can, and if it starts to work and you have some milestones, and this is a by the way, Darren, this is why we're dealing with CrowdStreet because Dennis as an old school real estate guys, he realizes that real estate finance is completely inefficient. Right.
00:07:03 Oh my God.
00:07:04 So inefficient. Right.
00:07:07 Well, the thing is though, by being here in Silicon Valley and understanding what it takes to get real estate, really great real estate projects capitalized versus back of the napkin technology companies, it's amazing. So, so you have this very efficient model based on technology companies can get funded and grown very easily compared to the, the ecosystem that's around commercial real estate. What we're trying to do, what we love about CrowdStreet is that basically you're disintermediate disintermediating a very moron industry in, in real estate finance. And so,
00:07:41 And we as, as a company, yeah, we as a company embraced what we call open source development, which is we use best in class pro partners for each project. So, by the way, you guys are our open source, you're our, our finance arm, right? It, this is our first project. We know we're gonna do more. It's been unbelievable experience and we're excited about it. But, you know, we have different developers and for instance, we've got a bond financing and project, guess what? We had to get specific bond council for that. We don't have them on staff. If we had 'em on staff, it'd probably be a C or a B player at best. Mm-hmm. <affirmative>. So we're taking kind of the thinking here and, and we've got kind of multiple types of d n A here and yin and yang optimist, pessimist, by the way, John is amazing cuz he's been through some down cycles. But you can't always be upbeat, especially with real estate, you gotta be very conservative and manage risk.
00:08:31 So let's talk a little bit about Silicon Valley today and the demand drivers right now. A lot of people listening to this are gonna say, yeah, it's a great Silicon Valley, sort of was awesome, right? But people are leaving California in droves. So tell us about like, the reality of the situation, acknowledging, you know, the, the re you know, the reality on the ground right now and also what, you know, the, the the data states and what, what some of the third party resources that you guys rely on, you know, uh, unbiased third party resources that you guys rely on. What's going on on the ground right now in Silicon Valley?
00:09:03 Yeah. Well, I'll, I'll take a stab at that. I mean, to me, to, uh, people have been predicting that the demise of Silicon Valley for 30 years and it's never once occurred. In fact, it's every time it's been predicted the Valley doubles. I mean, it just, it just, that prediction has been the most wrong prediction ever made. And, uh, time and again cuz I used to buy into that, cuz I we're all looking through our own lens that we're using at the time. Uh, now I am fully engaged in understanding exactly why this is not gonna be the case. This technology touches everything, whether it's gonna be your toothbrush or your car or whatever else you're gonna use, technology's gonna be a part of it. And all the industries are here and that's gonna do nothing with growth. What the issues we have right now with Covid. Yeah. We have, uh, right now it's kind of a pause, uh, but guess look at the stock indexes, which, which companies have done the best technology platforms, almost uniformly mm-hmm. <affirmative>. Why is that? Because they're efficient provider of services, goods and services in this situation that we find ourselves in. These industries have done extremely well. We have, uh, contacts in, uh, uh, companies like Google and Apple and, and they've hired thousands of employees in the last six months where other industries have let people off.
00:10:25 Yeah.
00:10:26 So like the FANG stocks you have Facebook. Yeah, apple, Amazon, only one not, and, and then Netflix and Google. So Amazon is the only one not in your backyard. And then you got, well
00:10:39 Actually, actually, Darren, actually, it's funny. That was a nice tea. Guess what? They just bought a, a 60 million site downtown San Jose to put their web services headquarters. Yeah. So the crazy thing to, to add on what Dennis is saying, it's like if you think about market cap per employee Yeah. The technology stocks have been as a sector done better than any vertical period. Globally. Yeah. Apple's 11.7 million per employee market cap, Google's about 8.7, Facebook's like 14. Google is building their third campus, 25 to 20, 20 to 25,000 new employees in San Jose. Mm-hmm. <affirmative>. Right? They've aggregated many parcels, including some that Dennis had tied up at one time, right. With spending over half a billion dollars. They're committed, they know they can't move. They, they can't, they can't move. So what we've been seeing is a lot of all the engineers are here. We talked about that earlier. And so when I was a commercial real estate broker, Dennis calls it the slipper rule, where does the CEO live? We draw a little circle and then we'd have to kind of figure out where the office space was reasonable here. Dennis, I'll hand it over to you. It's where the software engineers are,
00:11:52 Are. Yes. It's the pocket protector rules. Where are the, where are the pocket protectors? All the, all of the engineers that do all of the crazy math and come up with all of these, uh, business plans that effectuate our lives. Uh, two-thirds of them live here in Santa, in Santa Clara County. San Jose is the largest city in Santa Clara County. So, you know, everybody talks about maybe San Francisco or the Peninsula or Oakland as being these high, high value, high impact areas. And they were, because when, when Silicon Valley got started, back in the day, as we talked about earlier, the CEOs lived up in San Francisco or, or, or Mountain View. And that's where all the technology companies started. Well, we're on Silicon Valley4.0 maybe going to 5.0 with robotics and ai. Mm-hmm. <affirmative>, that's not the case anymore. The CEO is the least important person in the company. The most important is the line engineer. And guess where all the line engineers live here in Santa Clara County? Because it's the affordable, it's the most affordable place to live in the entire Bay area. The nine county Bay area. Yeah.
00:12:59 So let's talk about that. Yeah. Migration was occurring pre Covid from San Francisco into San Jose. Yeah. Uh, because of some of the lifestyle factors that you just mentioned, the affordability factors. Tell, tell us more about, you know, the attraction of San Jose over San Jose is not San Francisco. For many of you who are not from California, they're very, very different. Um, so tell us what there's,
00:13:23 I wish, I wish I could put a map up so you could show you the Bay area, but you know, it's, it's a very interesting topography. You've got mountains to the west, you've got mountains to the east, and you've got a big body of water called the San Francisco Bay right in the middle of it. And so very, very cons, uh, constrained geographic area and especially up the peninsula towards San Francisco. Physically and politically, there's no significant growth that's gonna accommodate, uh, the population growth that's being predicted for, for the Bay Area. It's mostly going to happen here in and around San Jose.
00:13:57 Darren in a nutshell, the high real estate prices, which is homes and apartments, the high office rents in San Francisco. And the fact that all the engineers, look, if you're a young engineer, you live in San Francisco, but if you're in your mid to late thirties and you're having kids, you move down south. So that's why companies like Airbnb or Uber right, or Twitter all have offices in San Francisco. They each open 300,000 square foot engineering offices. Okay, here's a great data point 70 about per call years. About 77% of all office buildings that are being built as of last year in Silicon Valley were a hundred percent leased before they were finished. Now they were not build the suits, right? Mm-hmm. <affirmative> a build the suit is where I signed a 20 year lease, and then I do the financing, I start building it. I know who the tenant is. These are spec buildings. So I had an institutional investor ask Dennis, and I was like, why is that? It's like, well, I'll tell you why.
00:14:54 An office building in a great location is a recruiting and retention tool, right? So saving money on occupancy costs. If I'm a CEO of a technology company mm-hmm. <affirmative>, that's not what I want to do. I want to, I feed these guys three meals a day for free. Mm-hmm. <affirmative>, I want it easy for them to get to work. I want beautiful big windows. I want great access to walk places. I want them to be able to leave at five and go to their little league game, right? Mm-hmm. <affirmative>, that's so, no, no other market in the world has that dynamic because, you know, we were joking. It's like if, if you saved 2 million a year in, in a dingy building on a cul-de-sac, guess what? Your company's gonna fail.
00:15:37 Right? Well, there's a reason. There is a reason that Apple spent 5 billion on the spaceship, which is just six miles to my west where I'm sitting right now. It's because they want to retain, attract, and retain the best talent in the market. And that building, if you've been through it, is spectacular. It's otherworldly it. And, and once you're there, everywhere else is gonna look a not quite as nice. So it's been a very effective tool for Apple to attract and retain top talent and everybody else. It's looking for the same talent has to kind of step up their game. So you have a number of, uh, companies that have built their own campuses. Yeah. Our product, we're not focused on that because the big, the big whales are gonna do their own thing. And even here in downtown San Jose, there are a couple of deals that will probably be a million square feet.
00:16:24 They'll do their own thing. Adobe is building an 800,000 square foot building for themselves. Right now. We have 150,000 feet. We're really gonna be marketing to the pilot fish, the people who are around the Googles, the Adobes, the apples. Mm-hmm. <affirmative>, Teslas even though, you know, and whatnot, which is just up the road bit. So our, our niche, our focus and our project in downtown San Jose is to one, take care of the workers, the, the profit protectors cuz they love living in dense urban environments. Even now, uh, uh, via covid, that's still, that's not gonna change. And two, cause they wanna be able to walk to work, we wanna attract the pilot fish, uh, uh, companies that want to be in an, uh, urban environment. They want to be an urban environment because one, it takes, it makes life better for their employees. Yeah. Walk to work, bike to work, tr trained to work however your lifestyle is. But that is the lifestyle in Silicon Valley that the, our target population l wants to live.
00:17:23 Yeah. Dar Darren, if I could add one thing, I think a good data point is it's a combination of things. It's not one thing. It's, and we're hearing that on the conversation. So Nuveen one of the largest institutional owners of real estate in the world. They pick San Jose as one of the top five resilient pandemic, you know, impervious cities. Mm-hmm. <affirmative>. Mm-hmm <affirmative>, another one's Boston. Right? Because you've got the education, you've got the bio, you know, know you got the technology, you got, uh, life sciences, you've got all of that. Um, Washington for Defense, right? Silicon Valley. And then CB Richard Ellis has a new Tech 30 marketplace study. Uh, you know, Austin, Cambridge again, right? There's a lot of different ones. They pick Silicon Valley as the number one most resilient. And, and because it's a combination of reasons, right? Yeah. Lack of, you know, lack of dependency on a, on an industry that's being hurt by the pandemic.
00:18:18 Obviously we're actually net benefiting from it, which is sad in many aspects, but at the same time, um, and then Brookings also picked San Jose as, as top five. So, you know, it's not, it's not us just kind of tuning a horn, it's, it's understanding kind of some of the noise. Yeah. Some people have moved outta San Francisco. San Francisco's very different than San Jose. It's 50 miles away. Right. It's an entirely different sub-market. It's unfortunately been a bit of a falling knife, right? Mm-hmm. <affirmative>, uh, the rents were at super premiums for office. I think, you know, office rents in San Francisco are $15 down here in the peninsula there's seven and six and that's where the engineers are. So that's per month. That migration did start. Most
00:19:00 People, most people quote annually. That's
00:19:02 Per month. So that's per month. That's per month. Yeah. That's per month.
00:19:05 You mentioned the CBRE report, the Brookings report, the Navine report, you know, handfuls of, of third party reports. You know, they're all ranking San Jose as a very resilient and, uh, you know, to, to covid and to recessions. This should be very extremely unique recession that we're in. It's still in the middle of. Yeah. Um, but why, and they're also talking about the, the first to come back, right? Mm-hmm. <affirmative>. Um, I think that's one of the important parts about, you know, what comes next? What, how's happening in 2021?
00:19:34 I think all of us miss bumping into somebody in the hallway and going, Hey, do you got a minute? Can I bounce something off of you? Right. There's no spontaneity in that. So two months, three months, what are we nine months into this? So, um, r re hasting, CEO of Netflix, which is right, right near us. He's like, the minute the vaccine's done, I'm gonna have a hundred percent of the people back to the office. Yeah. Right. Because there's more efficiencies. We know the people at Apple and Google and they can't wait to get people back on campus. You can measure product productivity. Yep.
00:20:06 But you know, the, so I think our recovery's gonna be quicker, um, for a couple reasons because software and hardware collaborative, if I'm at Apple building hardware products, I can't work from home. The, I think the CB Richard Ellis one you you saw was 85%. And again, this was nationally, this was not just Silicon Valley. Right. 85% of the people back to office by the end of q2. And I think 98 by, um, end of q3. So look, we've got vaccine delivery that's happening now, which is outstanding, right? It's quicker than anybody imagined. What a godsend. Everybody's looking forward to it. And you know that CB Richard Ellis one also had an interesting dynamic, said we might use 15% more office space per employee, but with remote, um, work that might moderate it down to 15%. So it's kind of a net zero and mm, I think that's it. We, we, we think we're gonna have a combination of things. Mm-hmm. <affirmative>, you might go to the office three days a week or four days a week, but you know, here in Silicon Valley office space rent based upon how companies perform, it is, it is not something that's gonna be skipped on. They are not moving all to the house.
00:21:15 That's, that's well being in Silicon Valley, we have a lot of contacts at these large tech firms and the small ones as well. A lot of, we obviously do business with a lot of law firms and what's uniformly coming back is everybody is wanting to get back to work four months ago, five months ago. It's like, Hey, are we in a new normal? It's in the last month and a half. The feedback is a resounding no. Everybody is wanting to get back to work.
00:21:42 <laugh> getting
00:21:42 Back to a normal, you know, I'm not sure how things are going at home, but it's not good cause they wanna get back to the office. And I know that it's not just from the tech firms, it's also from, uh, the law firms that we know that deal with a lot of employee issues and whatnot. And it's unbelievable that they said in the last 45 days, this is, this is new data that their phones are ringing off the hook with how they're gonna handle these employee issues that the employees and employers do not like what's going on right now. They do want to get back
00:22:10 To work. It's true. We miss it. Hey, if I could Darren loop back with one other unique thing about this market as is, uh, you know, we were talking about the ocean and the bay and the constriction of transportation. We only build infill stuff. We're doing a project that is on a one acre site. It's a pretty big project, but it was originally a single story building that I b m developed their first disc drives in. Right? Absolutely. And now it's a pet shop that should be in a John Hughes movie. And guess what, in the next 30 months it's gonna be a 21 story building. It's a Q oz project, it's apartment building with five floors of office. And it's, it's, it's unbelievable. But it's, it's in the most incredible location by the way. How is it AQOZ? The, the median income's 140,000 near us. I guess the, the normal QOZ median income nationally is $42,000. Wow. So we, you know, QOZs are pretty interesting for people with capital gains mm-hmm. <affirmative>, um, on a long term basis. And, and we're excited about building now during this cycle because we're seeing great construction costs. And as an experienced sponsor, we're getting some pretty unbelievable debt because at that translates into higher cash on cash and greater returns for our kind of co cogs and co-partners like the investors we're gonna work with, with you guys. Right. So, so
00:23:35 Guys, let's talk about the opportunity zone. How did you guys, you know, most opportunity zones are right? Are, are sort of in less than favorable markets where gentrification is part of the, the program so that it, it's basically so that people with capital gains who are generally wealthy can reinvest those capital gains. You know, they can defer capital gains out for seven years, at which point in time they need to pay a reduced amount of the capital gains from the prior investment. And then the, the new capital gains and the new investment, if you hold on it for 10 years are completely eliminated. There's an elimination of, of future capital gains if you invest in an opportunity zone project. So, uh, it's, it's a great program. It, I believe it has great intentions, right? There's no pro, no government program is perfect. We could talk all about the cons of the coop opportunities zone program, but like, one of the cons is that they're like, it's hard to find compelling deals because these opportunity zones are in less than favorable locations. That's not the case with your project in downtown San Jose. How did that happen and why is that important for investors? Well,
00:24:37 I I, to be blunt by accident, because, uh, the q oz zones were politically derived, uh, about almost a decade ago, and then when the tax bill got picked up a year and a half ago, the, the, all these zones had been identified, uh, state by state and gerrymandered to some degree. And, and they were handed out in different, uh, uh, different jurisdictions. And when the tax bill got, uh, picked up and in opportunity zones got put into it to help energize inner city development, the areas that were on that list got included. Mm-hmm. <affirmative> and, uh, downtown San Jose is largely in a Q O Z area. Not all of it largely. And if you look at Q O Z locations across the, the country, they are, uh, I'd say mostly in, uh, disadvantaged areas. Um mm-hmm. <affirmative>, this is in downtown San Jose. You know, we don't need to have tax advantages per se to to, to fund this project.
00:25:39 It just happens to be in one. Yeah. And so therefore it's a project, and I think to some degree, um, this is maybe a, a little by design, is to build the infrastructure of the Q oz investment, you have to have deals that are compelling. So, uh, San Jose and, and Massachusetts and, and other in the, in the technology triangle, you know, around DC have some q oz, uh, investment availabilities down in LA as well. So to me, I think it's really the, the, the best, the best deals are gonna be the first deals. And then once Q O Z takes, uh, on a, a familiarity, it will go into the other areas. Yeah. So that, I think that's why it's there.
00:26:19 So I've heard many times that the Q O Z, um, qualified opportunities zone, you know, designation, if you have a project that's located within one of these areas, doesn't make a project like itself, you know, attractive. You have to have a really strong project and it makes a strong project better. Like it makes a good project, a great project potentially. So, um, you guys are probably gonna build this deal regardless. Right? Um, this, this mixed use office, multi-family tower, um, and in downtown town San Jose. So tell us a a little bit about like the demand drivers there. I mean, we talked a lot about office and you've got office space. Talked a little bit about multi-family, but gonna be good to talk about that and, and how the opportunity zone sort of just enhances things.
00:27:07 Well, it's all about when, whenever you do a real estate investment or any investment you're looking at, you're always looking at your after tax returns. Mm-hmm. <affirmative>. And typically because of the de depending uh, your, what your tax circumstances are, a non Q O Z deal will generate you, you know, on average, uh, for an average investor between a 12 and a 15% return overall, that's fine. You're gonna pay tax on that. So your net's gonna be closer to 10 or 11%. That's okay for, for a real estate investment, that's a good return for a real, uh, a safe, uh, investment. However, in a QOZ, that 16% return, um, is, is what we're offering. There's about a 16% return. You'd have to go out in the, in the market and find a project that was gonna yield a 20% return so you could keep 16. So that's the efficiency of the Q O Z. Uh, and it just makes our project that much more attractive, uh, to an investor who has a capital gains, uh, proceed, uh, to use that, uh, uh, tax advantage. Yes, it's still a great deal, <laugh>,
00:28:18 If I could add one thing on that. So, um, it's, it's gotta be a fundamentally strong story and, and economic, you know, um, solution being solved. So we were not trying to solve for individual investors tax conundrums. We've got, for instance, 90 million of institutional capital that's co-investing in this. They get no q O Z benefits, zero. They're like, this is an amazing location. This is a great sponsor and this is a great story on many, many levels.
00:28:49 90 million from an institutional investor on this deal. It just sounds like an absolute huge, huge project. What's the total cost of the pro of this project?
00:28:59 Uh, the total cost of about 340 million all in capitalized. Uh, we have long-term financing, uh, 15 year bond financing on the construction loan. So we, we really have built a very solid basis financially for this project. It's a project that, uh, you're gonna wanna own the long term. I think our, our view is, our plan is that we're gonna be able to execute, lease, refinance, and or, uh, in, in return our investors capital within a four to five year timeline. And then after, after you have all your money back, you're gonna be getting, uh, dividend checks from there on out. We, we, we bet that few people are gonna wanna actually sell 'em your 10 personally. You have a proforma that will sell it your 10, and we'll definitely provide, uh, an exit at some point in time, whether we sell or not. But this is gonna be excellent cash flow for your portfolio for the very long term.
00:29:51 Cool. And you built the building you pointed out behind you. And I've seen that office building in San Jose. It's, it's that that office building that you, you were involved with or Dennis is, is really a, a skyline defining office building. It's probably one of the premier office buildings in hall of Silicon Valley. Well,
00:30:07 We leased the, you can see the building right here, uh, there, this building right here that you see up my window, uh, that's known as 2 25 West Santa Clara. Uh, yeah. It's the most successful office building in downtown San Jose, uh, has been for 20 years. And the reason, it's because on, it's on the west side of downtown, right near the freeway, right near the train station right near all the amenities. And it, we, we leased that up between years. Uh, uh, we built that between 2000 and 2003. We sold it in 2004. It was a very successful project. We leased to 90 plus percent leased during the middle of the.com bus. Between 2000, 2003 was not a good time to be in the marketplace. No, that was, so we leased that up during a downturn. Okay. So that's key. Our project is really just outside my window right here in the same submarket as 225.
00:30:58 This, we believe that our brokers believe that we're not gonna have trouble leasing this building up. It's, it's that close to the train station. It's that close to all the amenities. It's gonna be that great of a building. And, uh, it's a unique building because it is a mixed use tower apartments above offices below great views, great visibility to the freeway, great access to the airport, great access from the freeway, all of the above. It, it, it click checks all the boxes. Now it's not a typical technology office building. It's not 60,000 foot floor plates. Mm-hmm. <affirmative>, it's 30,000 square foot floor plates. But so we are in the middle, we're in a niche that no one else is going after. We may have a million square foot technology company coming in downtown San Jose soon. Mm-hmm. <affirmative>, uh, we're not gonna be the office building for them. We are gonna be the office building for the, uh, the firms that support that million square foot, uh, uh, technology firm.
00:31:55 Last couple questions. You gotta wrap up here, guys. This has been incredibly interesting and insightful about what's happening in Silicon Valley. But yeah, this, why do you build a mixed use office building, uh, with apartments above and which, why, why is that? And for our listeners, um, I'm sure they're curious about that. And if you were to make a bet right now, would you think that the apartments are going to lease up more quickly than the office? Like, what are your projections on what sort of drives the first economics of this building become stabilized and cash flowing?
00:32:28 Well, the answer is the, the site wasn't big enough to be a perfect technology building. Okay. So we, it would certainly be very profitable to build a 21 story would be 21 stories would be more like 18 cuz of the heights, uh, office building. Uh, but the floor plates are not big enough to really make it a perfect office building. So it's like, okay, that's not, we can't make it all office. Uh, you couldn't make it all residential because the cost of construction for apartments doesn't, is not financially advantageous. But when you put them together, it works. The site works for the office for 150,000 feet. The site works for 290 units. They both share the garage. It and the garage has two demand drivers. The nighttime, the nighttime, uh, parking for the residence and the daytime parking for the office. It, there's a symbiosis that exists with the mixed use in this site that makes it quite profitable. And so that's why we went to mixed use.
00:33:26 So we, we've used some very conservative assumptions in lease up, I think, um, 18 months on the office, which again, I shared that data point earlier that 76% of buildings are pre-leased. We, and by the way, none of the projectors take into account that Google's gonna be adding 20 to 25,000 people here. Right. As we become online, we, we, we are building this project over 28 months with some contingency. We don't start lease up till Q3 of 2023. So beyond vaccine, right. Issues beyond economic recovery, perfectly timed for Google's new, you know, new, new campus. I mean that's, that's a lot of people. So that's not even factored into the number. Yeah. So obviously the apartments are gonna fly off off the hook if anybody has any skepticism, uh, any part of the model that's office. But we've seen the demand drivers and we're getting to the market quicker than anybody because we don't need a, a, a credit tenant of 500,000 feet to even start moving dirt, which some of the other projects have that issue. Yeah. Right. So it's a finance, it's a financing constraint. So
00:34:31 That's an exciting project, an exciting market, you guys, uh, thanks for I wish all the best of the project for that's, thank you. And, uh, we're excited to be working with both of you and your teams and thanks for that opportunity. So I appreciate you sharing all about what's happening in, uh, Silicon Valley and with you guys and your firm. Really insightful, educational, uh, I definitely learned a lot. And really, uh, I don't know if you guys have any, any parting sort of thoughts that you wanna share. Otherwise we'll, uh, kind of wrap it up here cuz we've got more than enough
00:35:01 <laugh>. Yeah, well we're just excited to be working with you and we're excited to, you know, be able to present this to your investors.
00:35:08 Thank you. Thank you. Thank you, Greg. Thank you Dennis.
00:35:12 Thank you Darren. Thanks for the opportunity. We're, we're, we're excited. Yeah.
00:35:15 Yeah, we are too. Talk with you soon.