target markets are located on the West Coast or along the Eastern Seaboard. “Real estate is about people. If you’re in a suburban area where you’re going to build a power center, that means somebody has to drive there,” he says. “If you’re building in a high-density location, you can basically figure out what your demand is. You also get to take advantage of existing infrastructure, transit lines, etc.”
MacFarlane’s ascent has not been without problems. He went through times so lean in the early days that his firm barely met its cash flow needs. “A number of times I had to borrow—from friends, banks, wherever I could get it—to meet the next payroll,” he recalls. But the husband and father of five says stubbornness kept him going. “And the belief that we had something to offer. But it could have gone another way.”
In this game, capital is king. Real estate private equity firms typically raise institutional capital and try to leverage that capital as an equity investment in real estate assets. Over the years, they’ll manage those assets or develop an exit strategy that allows them to either sell or refinance in such a way that investors get a full return of their equity and a return on their capital that is commensurate with the risks they have taken. Similar to private equity firms that invest in companies, real estate private equity firms raise money; acquire, develop, or renovate properties; and often generate ongoing fees for managing those properties.
MacFarlane, a Middletown, Ohio, native who holds an M.B.A. from the University of Pittsburgh; a Juris Doctor from UCLA; and a bachelor’s degree from the University of New Mexico, admits that there’s limited access to capital these days. “The dramatic events impacting the capital markets have impacted us,” he says, adding that though his firm is well-capitalized, it can’t get the same type of project financing that had been the norm for years and, as a result, some projects will be delayed until capital markets stabilize. “Whereas last year it may have been easy for us to get a 75% construction loan, today you’ll only get 60% or 65%, if you can get it, and it’s only well-capitalized firms that can still get these loans.” He points out, however, that there are still opportunities, since fewer players are involved, for well-capitalized investors who can operate under these conditions. “There are always opportunities, in every cycle—they just may look a little bit different.”
FROM AETNA TO ENTREPRENEUR
MacFarlane has seen his share of ups and downs in his 30 years in real estate. He started his career at Aetna Life and Casualty, where he ran a couple of the insurance giant’s acquisition regions and then a third of its asset management portfolio. After four years, he joined a private real estate syndicator. Before the tax laws were changed in 1985, there were tax advantages for syndication—getting together groups of wealthy individuals to pool their funds and invest them in real estate through those partnerships.