The private equity firm McKinley Capital Partners entered the new year with a full head of steam. It was in the process of raising $50 million for its latest investment fund, which will lean towards purchasing foreclosed homes from banks, where Gregor Watson, one of the firm’s four principals, foresees a 12- to 18-month window of opportunity.
Oakland, Calif.–based McKinley, which also has offices in San Diego and Lake Oswego, Ore., is among the myriad investors that lately have been swooping down on distressed properties with an eye toward bigger payoffs down the road when the housing market recovers. Since it was founded in 2007, McKinley has entitled and developed nearly 7,300 lots, according to its website.
In December, the company closed out a $30 million investment fund through which it acquired enough land to build 1,500 homes in several California cities, including Dublin, Riverside, Livermore, and Santa Barbara. Half of that fund was used to purchase between 60 and 80 existing single-family homes per month, which McKinley is renting now but intends to sell over the next three to five years. It raised capital for this fund at the beginning of 2007, but didn’t start spending until early 2008, “when the world was falling apart,” says Watson. “Luck and timing.”
Watson told the San Francisco Chronicle last August that his company is buying existing homes in pursuit of “a double bottom line”: By fixing up these homes (at around $10,000 per unit) and renting them for $1,200 to $1,500 per month, it not only generates immediate cash flow that justifies the purchase price, but also is stabilizing neighborhoods and finding potential buyers.
McKinley’s purchasing strategy, says Watson, is to avoid newer and higher-priced homes in cookie-cutter subdivisions. Buying homes from banks, however, is “a very inefficient process,” especially when lenders aren’t releasing everything they have on their books because they often don’t know how to value these assets. “So that presents opportunities for us. We’re looking to find gems.”
McKinley Capital’s management team brings considerable expertise to the table. One partner, Steve Riter, has over 25 years of residential development experience, including a stint with Catellus Residential Group, where he was president of land acquisition and development. Another partner, Dan Aguilar, in the 1990s was vice president of finance and land acquisition for Southwest Diversified/Coscan (now Brookfield Homes). And last year, the company added as its managing partner Laurence Pelosi, Lennar’s former director of land acquisitions, who had been handling residential investments for Morgan Stanley Real Estate.
Watson says that as his company contemplates expanding into other development arenas such as multifamily, finding money shouldn’t be a problem. So far, the company’s capital has come primarily from ultra-high net worth Europeans who form what are known as “family offices” for investment purposes. McKinley’s business model has been to focus primarily on land development, bringing in 20 percent to 50 percent of the equity needed for a project and then turning to institutional investors for the rest. “There’s a lot of capital looking for groups to invest with,” says Watson.
What McKinley wants to avoid, though, is leverage; its first fund didn’t have any, and Watson doesn’t think leverage belongs in land development “until you get to the infrastructure stage.”
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