“At the time, I was with the [state] treasurer’s office as the CalPERS/CalSTRS representative,” recalls current CalPERS CEO Fred Buenrostro. “So I was tucked away in the second floor of the treasurer’s office in Sacramento, and yes, Victor came to visit me. He emphasized his financial management, [and] he told me about his work developing multifamily housing in Denver. I liked him. I think we were all trying to figure out how to get him into our programs.”
Some 13 years later, CalPERS has $3 billion-plus invested in urban projects, and 30 percent of those dollars are managed by MacFarlane Partners. In fact, MacFarlane Partners eventually managed a portfolio of $1.2 billion in equity—supplied entirely by CalPERS. Urban Fund Two, scheduled to close sometime this month, will also hit $1 billion—much (but not all) of which will be supplied by the pension fund.
“MacFarlane Partners has a lot of CalPERS money because it has been a top performer and easily our leading urban investment partner,” says Buenrostro, who adds that assets managed by MacFarlane since his firm became a core manager have realized a 33 percent return. “When you can get that type of return, it is easy to determine that MacFarlane is the kind of person you want managing your money.”
G.E. Capital sure thought so in 1996, acquiring almost the entirety of the firm’s assets under management, but passing on the inner-city investments. MacFarlane spent the next three years fulfilling a management contract with G.E. In 2000, he briefly considered retirement, but instead found his way back to his urban roots, restarting MacFarlane Partners with the management of the South Central assets that G.E. had snubbed. It was, he says, what he was always meant to do.
THE BOYS ARE BACK IN TOWN During MacFarlane’s brief stint with G.E., New Urbanism had emerged on the multifamily scene as the development concept du jour. Esteemed Harvard business professor Michael Porter had launched the Initiative for a Competitive Inner City; several CalPERS core managers were making their own successful urban investments; and developer partners—most notably Forest City Residential and The Related Cos.—had established both a capacity and a desire to do more complex urban projects.
“[At that time], I went back to CalPERS and said we need to expand the mandate and make it grow,” MacFarlane says. CalPERS agreed and established the first urban fund—a $150 million channel to develop retail, multifamily and other urban projects that fall under the purview and moniker of “smart growth.”
As part of his Y2K entrée back into the urban side of real estate investment, MacFarlane amiably bought out Magic Johnson (who, in turn, formed his own urban investment firm with Canyon Residential) and lobbied for the lion’s share of CalPERS urban investment funds. He also began securing a dream team of executive leadership for the newly reformed MacFarlane Partners by wooing Greg Vilkin from Forest City Residential West and Chuck Berman from AvalonBay Communities.
In Vilkin, who was fresh from spearheading the new urbanist redevelopment at Stapleton Airport in Denver, MacFarlane brought onboard a development partner, a personal friend of some 20 years, and a multifamily executive who understood the MacFarlane approach. “In our business, the money is always made in the arbitrage, in changing an area from non-desirable to desirable. That is where you get uplift in value. Otherwise, you are just buying core real estate,” says Vilkin, who is a managing principal of the firm. “We specialize in market change, where we think we understand [growth demographics] better than others and see opportunities that others do not see. Then we align ourselves with firms that have like minds and the ability to execute. Our job is simply to find opportunities where we can change the area and get a huge uplift in price.”
Berman, who also served as the northeast regional partner for Trammel Crow prior to heading up AvalonBay, brings even more multifamily pedigree to the MacFarlane Partners’ table. Although he joined the firm as vice chairman and managing principal only two years ago, Berman traces the formation of the executive team at MacFarlane back to 2000. “We believed there was a lot of opportunity for redevelopment in certain core urban markets with developers that would appreciate dealing with financial partners who had a lot of development expertise themselves,” Berman says.
Developers certainly agree with that testament. In addition to continuing to pursue joint ventures with long-time partners such as Forest City and The Related Cos., MacFarlane has pushed to endear the firm to regional developers like San-Francisco-based TMG and is now beginning to directly invest in smaller, emerging development firms with a need for growth capital (see “Developer Fuel,” page 44).
