An Interview With: J. Paul Mcnamara
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A banker for 33 years, who in 1988 started and ran Sequoia Bank and sold it to United Bancshares in 2003, Paul McNamara has reappeared in the real estate space this year, creating a Bethesda-based private equity fund with the goal of raising $50 million to make investments in the $2 to 6 million range in Washington-area commercial real estate. It’s called the “Washington Century Fund,” and he has already raised $20 million. Originally from Bay Shore, Long Island, where he was a graduate of Dowling University, he came to DC in 1970 to start his career at Marriott. In 1973, he joined Manufacturer Hanovers in New York, then returned to DC to National Bank of Washington where he worked for 12 years in senior management. He then served as president of Sequoia for 15 years, and Vice Chairman of United Bank from 2003 until late 2005, where he remains a member of the board.
Bisnow on Business: How did you segue this year to commercial real estate?
Well, you cannot be a banker in Washington and not be actively involved in the commercial real estate business. As our local economy has grown, real estate is so integral that all banks are involved in the residential side, the commercial side, or both. So I’ve always been in it from the lending perspective, the debt side of it. I’ve lent to developers of dirt, and developers of rehab projects in the inner city, and done the whole gamut. When I decided to leave banking, it was almost a natural thing for me to look to the real estate industry. And while I was at the bank, I was also a real estate investor as a private individual.
I invested in lots of apartment houses and warehouses and small offices in the greater Washington area over the past 15 years. So I built up a pretty good portfolio in a couple of partnerships with some friends. When I decided to retire, the thought was to maybe formalize what we had been doing on a non-structured basis. At the same time, a friend of mine who had once worked for me and is in the real estate business, wanted to relocated from Boston to Washington. So we decided to form a company, and test the waters and see whether there is a market where we saw a void: providing equity capital to small and mid-sized projects in the greater Washington area.
Why would there be a vacuum?
If you think about it, the big Wall Street types are chasing all of the big buildings on Connecticut Avenue and the K Street corridor, and the major developments. But when you get into the surrounding suburbs and some of the different pockets of the city, the transaction that requires two million dollars worth of equity doesn’t appeal to a Wall Street company. Yet it’s too big for most individuals. A lot of real estate developers have grown through what we would call friends and family or country club money. That’s going around and asking your aunts and uncles, or some of your folks you play golf with, to lend you some money on a good idea. That has a ceiling, and when you get to that ceiling you’re out of business. What we’re doing is bridging that gap between the Wall Street big deals and the smaller deals.
Is the $50 million you’re trying to raise coming from individuals or institutions?
Right now it’s individuals, but we have several institutions that have indicated that once I get to $25 million dollars, they will look very seriously at us. And I believe that we’ll also get some investors in the smaller endowment and foundation marketplace.
What’s your sweet spot for making an investment?
From two to six million dollars. That’s the ideal for us. Although I looked at a deal today that required $900,000, and it’s a wonderfully located warehouse.
And what kind of a return over how long a term are you looking for?
The investors will get an eight percent preferred return and a 12 to 14 percent expected return on an annual basis over the life of the fund, which is seven years.
How do you give them some sense of assurance that’s going to happen?
A lot of it goes to reputation. A lot of it goes to my past success in the banking arena. The folks that I have solicited, for the most part, are people I have known over the years. However, there are others like a lawyer on Pennsylvania Avenue that I just met, who understood exactly what I was doing and committed a million dollars.
What is the typical investment into the fund?
Minimum investment is $300,000. It’s a private fund. You’re limited to a hundred investors. Anything over that and then you’d be SEC regulated, and we don’t want to do that.
So you have to be an accredited investor?
And this is all callable money?
That’s exactly right. We draw the money as needed over a three-year period. And the way we’re doing it is on a joint-venture basis. Our footprint, when I say the Greater Washington market, includes Maryland, the District, Virginia, and Delaware. I don’t know Frederick, Maryland, nor do I know Fredericksburg, other than they’re good economies. But we have developed relationships with local real estate investors in those markets, and we have them looking for opportunities that they will manage on a day-to-day basis. We’ll provide the equity capital to acquire an asset. It’s got to be an asset where we think that in the long run it’s going to have the ability, through changing the tenant mix and improving the income stream, to increase the value of the real estate over a period of seven years.
So you’ve been raising money for six or seven weeks, but also looking at things to buy?
And when do you think you’ll deploy your first equity?
It will happen in the second quarter. We’ll be live in the second quarter.
And who’s “we”?
There are four principals of the company called Potomac Capital Advisors, which provides the services to the Washington Century Fund. One is a fellow by the name of Jim Powers, who’s the one that came down from Boston. Another is John Ryan, who has been an investor in real estate his entire life. And then there’s a fourth partner who’s sort of a silent partner in the mix.
How are you feeling about it?
I’m feeling great. The response has really been terrific. We’ve been at it under two months, and I’ve raised 20-million dollars so far.
So you’re almost at the institutional threshold.
Yes. I really have a good feeling. My goal was to be between $30 and 50 million. I had lunch with a fellow today who committed to me for a million dollars.
This is the lawyer?
No. It’s someone else.
Was this somebody you knew or another stranger?
Somebody I knew I hadn’t seen in five years. But a fellow who had been a shareholder in my former bank.
Are you focusing on a particular kind of property?
We’re focused on small office, small strip shopping centers, multi-family, which is apartment houses, and then warehouses. The warehouses would be flex space or straight warehouse space or mini-storage. We’ve been in all of those. Generally they’re smaller deals. The amount of capital needed is smaller, and that’s not really served well by the Wall Street community.
Do you prefer close-in, far out, or what geography?
We’re looking at a variety. For example, we’re looking at an opportunity in Dover, Delaware, because of the base there. In the base re-alignment, that’s one of the winners.
Why would there not be others like yours that do this?
There are a few, but it’s not easy raising the kind of capital needed. To make it efficient, when we did our initial pro formas, you really have to have about $25 million. We get a fee, and that fee pays salaries and rent and heat and lights and all that stuff. And so when you get that all in the mix, you have to have at least $25 million to make it work. That’s a lot of money to raise.
What is your fee based on?
On amount of capital invested.
And then you get 20 percent of the return or something?
Yes, we get a part of the return. We have a profit participation based on the performance of the fund.
How do you spend your day? Do you get in your car and drive around and see investors and property?
I get in the car and I knock on doors.
Wouldn’t it be easier to go to the German investor representatives here and say, “Give us 30 million dollars” and subscribe the whole fund? You wouldn’t have to raise it in bits and pieces.
And then you would have the tail wagging the dog, so to speak. In fact, there’s actually a limitation on how much one investor can have in a private fund. But also they would want to be controlling the whole fund, which is something we don’t want. In any case, there are a lot of people looking for good investments in this market in something that’s not techy orientated, where you can kick the tires and have an understanding of what it is, and where it is, and why it’s successful.
How do you know what opportunities are out there? People bring them to you, or do you pore over raw data and listings and find them?
It’s shoe leather. You get out there, and you really are knocking on doors and speaking to people and asking what’s out there. Perfect example is just a few weeks ago, we met with some local real estate professionals in Washington. Quite honestly it was to talk to them as potential investors. Well, it ended up they told me, “yeah we’ve been doing this type of investment on our own but we were doing it with two other fellows and you have to meet these guys.” Well, we met those guys, and their focus is on multi-family, apartment houses and the like. And it’s sort of word of mouth. And they had reached the ceiling of what they could raise themselves in this friends and family and country club money. They had sort of run out of sources, and it was just providential that we met, and they’re very bright guys. We liked what they were doing, and they liked what we were doing.
What capability do you have to do rigorous analysis of opportunities? A Blackstone must have all kinds of numbers people.
Sure, and that’s what Jim’s role is. Jim Powers’ role in this initially is to do that. And as we grow a little bit, we’ll bring an analyst on board. And we have an investment committee with very senior people from real estate and investment banking. They make the ultimate decision on each investment in the fund, and their level of experience is vast. These are deals you can really get your teeth into and see the results of your efforts. I compare a lot of it to a small bank. Every day you get a deposit in the door, you actually see the company grow, and you know where it came from.
So you really have your ear to the ground right now. What are you sensing about real estate opportunities and trends? Have we peaked?
The market is still very strong here. And I really do think it’s going to continue to be strong. Every indicator that’s out there. You know, if you look at apartments, there’s a one percent vacancy rate in the Washington area. It’s staggering that it’s that low, and it’s the lowest of any place in the country by far. The government continues to expand. Continues to push itself out of the city, and if you look at the overall footprint of the greater Washington area, its growth pattern for the last ten years has been phenomenal. There’s no expectation that that’s really going to slow into the future.
Just to recap your own personal experience, what did you do prior to starting this new business?
I came to Washington in 1970 and spent three years with Marriott in the non-hotel division, then went back to New York to work at Manufacturers Hanover bank. I returned to DC in 1976, which was one of my only quality of life decisions, because I found this area really appealing. I got a job with National Bank of Washington and spent 12 years there, starting off in the operations side of the bank and ending up running the funds management side of the bank. Then in 1988 I left to start Sequoia Bank. That was pretty interesting. We bought what was basically a bankrupt thrift up in Baltimore, which had $15 million in assets, called Sequoia Savings and Loan. We acquired the company from the government and then we relocated to Washington and the savings and loan crisis hit. So we became a captive of the savings and loan crisis and stayed in Baltimore for about three years. We expaned the company up there, and then we opened a branch in Bethesda. And then by 1992 everything had calmed down on the thrift side. The banking industry was in crisis at that point. And we converted the company from a savings and loan to a commercial bank. We did that through a couple of acquisitions that we made over the years, and we operated the company for 17 years on a very profitable basis and sold the company in 2003 to United Bank. That has allowed me to shift gears. :)