By J.K. Dineen, San Francisco Business Times

San Francisco residential development startup DM Development is betting its future on Hayes Valley.

The new company, founded in 2010 by Danielle Dignan and Mark MacDonald, has teamed up with boutique New York developer DDG Partners to pay a combined $8 million for two dirt parcels in Hayes Valley. The sites, 450 Hayes St. and 400 Grove St., could support a combined 85 units of housing.

The two properties, which were sold by the city in an auction late last year, are among 22 parcels that once lined the streets along the double-decker freeway that was severely damaged in the Loma Prieta earthquake and finally razed in 2005.

The developers are just beginning to talk to architects about the project and will likely start entitlements later this year.

The exact plans will draw a great deal of scrutiny from residents, given that the Hayes Street property is in the heart of Hayes Valley’s shopping strip and across the street from the Patricia Green park at Octavia Boulevard and Hayes Street.

A number of developers, selected through a design competition in 2007, are negotiating to acquire other nearby Octavia Boulevard parcels. Those projects have all been stalled by the economic downturn.

Given the prominence of the site, it is incumbent on DM and DDG to come up with an exceptional project, said MacDonald.

“We recognize the amount of thought and hard work the city has put into the Market-Octavia plan, and we really want to do something on the site that is special,” said MacDonald. “This square is such a beautiful venue and you will be looking at whatever we put up. So we are being very, very thoughtful about (the architect) we select.”

Dignan and MacDonald came to real estate through unusual paths. MacDonald was a Stanford-educated software engineer and senior manager at Oracle when he found himself drawn to real estate. He went back to school for an M.B.A. and started on small rehab and development projects.

Dignan spent 15 years as a captain of sailing boats and wilderness expedition leader, delivering boats around the world, before she settled in San Francisco and started buying and renovating houses. The two met through an Urban Land Institute development class, and last year entitled and sold a small project at 2919 Laguna St.

For DDG, the two Hayes Valley projects represent the company’s first foray into the West Coast market. DDG has built seven condo projects in New York City. Company President Joe MacMillan said the company assiduously studied the San Francisco market until finding exactly the right neighborhood and partner to work with. The group is considering several other opportunities as well, he said.

“We studied the San Francisco market for 24 months — we like to know a market before we go into it. We spent considerable time driving around the city, getting to know it. We liked Russian Hill, Nob Hill, SoMa, the Mission, but felt Hayes Valley had the neighborhood feel we were looking for. We felt like it is the nucleus of a very creative area, and that was something we wanted to be a part of.”

MacMillan said DDG, which operates with a group of private investors, has capital lined up to build once approvals are obtained.

“We have the required funds necessary to develop these parcels — that is not something we are worried about,” said MacMillan.

Assuming the Octavia Boulevard projects get back on track, Hayes Valley could become one of the busier neighborhoods in the city in terms of housing development. In late September, San Francisco-based Pocket Development paid $4.4 million for 401 Grove St., a site that is entitled for 61 units.

DDG and DM Development are on the prowl for more building sites.

“We share the philosophy in term of focusing on high design as well as sustainability. There was a lot of synergy when the groups got together,” said Dignan.

DM Development recently opened an office in Hayes Valley. “Every day I come, I love it a little bit more,” said Dignan.