Victor MacFarlane knows what it takes to become a successful real estate developer. It takes cash—and lots of it.
MacFarlane originally cut his teeth on a 200-unit multifamily development in Denver, and the experience left him with a raw appreciation for the regional, entrepreneurial competitors duking it out with primetime players. “It is harder to be strategic when you are worried about your next paycheck,” MacFarlane says, noting that the industry still operates under conditions where “you can be an excellent developer and still be living deal to deal.”
To help its smaller development partners get over the finance hump—and get a first crack at some of the deals that appear on their local radar screens—San Francisco-based MacFarlane Partners has launched an “Emerging Developer” fund that, in addition to providing joint venture capital for projects, also makes a direct investment into the developer's firm.
MacFarlane Partners tested the strategy this year, investing its own money into Sacramento-based New Faze Development, an urban infill specialist with commercial, retail, and multifamily projects across Northern California. Moving forward, MacFarlane will make similar investments in other development companies backed by a $500 million fund the firm is managing for the California State Teachers Retirement System (CalSTRS). In addition to the minority stake that MacFarlane Partners and CalSTRS will retain in participating companies, MacFarlane gets right of first refusal to fund all projects that cross those developer's desks.
“If we can match those guys who need some oomph of expertise in strategy with people who have been sourcing capital from Saturday until Friday in their sleep, then we can create a new stream of development entities that we think provide an ultimate benefit to the community and make money, particularly for those who are willing to reach into urban development and into the inner city,” says MacFarlane managing principal Greg Vilkin, a past president at Forest City Development West and no stranger to the woes of capital sourcing. “We believe [that] ultimately those things will deliver great returns for us.”
New Faze president and CEO Allen Warren says the partnership is a natural and beneficial extension of the relationship he has enjoyed with MacFarlane Partners for the past two years.
“Our ambition is to grow our firm, and this will allow us to move into the institutional markets much easier,” Warren says. “With MacFarlane's expertise and the capital and the opportunity to access additional capital, we don't have to worry so much about going out to find financial partners.” Indeed, through their relationship with MacFarlane, New Faze closed on a $72 million fund with CalPERS that will allow the company to work in its urban multifamily and mixed-use sweet spot for the next seven to 10 years.
Since the philosophy behind the “Emerging Developer” fund is to get players like New Faze out of the short-term mindset, initial results are still forthcoming. “This was not intended to be a sprint or a short-term deal,” Warren says. “It involves working hard, and we are in the early stages—but so far it has been great.”