Ross McCuistion's Blog Post REAE 5311

McDougal's Redevelopments

McDougal Companies are based in Lubbock, Texas and were established in 1982 for the purpose of acquiring and running apartment buildings. In the 1999 Delbert McDougal decided to redevelop Overton, a rundown area of Lubbock adjacent to Texas Tech University. Overton was over 360 acres of low income housing with 2% of the population and over 20% of the local crime. This is the largest private redevelopment in U.S. Today it is close to completion with all but a handful of tracts sold. At the present time there are six major apartment complexes focused on student housing. Currently under construction are a hotel convention center, high income housing, and a number of three-bedroom condos. A Wal-Mart Super Center was also completed in early 2006. Financing for this project was completed without the help of equity partners. Instead it relied solely on bank institutions, which makes the success all the more remarkable.

The city of Irving contacted McDougal Companies in 2004 wanting to undertake a similar project in South Irving. This area had declined substantially in the last ten years and crime had become a major problem. The city was hoping to have the area redeveloped, therefore increasing tax revenue for the city, and reducing the crime rate. McDougal Companies proposed a deal, entitled Heritage Crossing, which included a monthly fee and a guarantee from the city that they would financially back all the loans associated with purchasing, holding, and demolishing properties within the specified area. Some in City Hall were leery of taking all the risk of the development while giving McDougal Companies the potential upside of a major redevelopment. However, it was an undertaking that could be very profitable for everyone involved. The city of Irving would profit because not only would it get it’s investment money returned plus interest, it would also earn tax revenues that are predicted to increase dramatically over the next ten years. The deal is also good for McDougal Companies because it takes the majority of the risk out of the development while at the same time offering many opportunities for secondary projects.

Currently McDougal has spent an estimated $30 million, and recently received another loan of $16 million. All funding is being used for the purchase of dilapidated structures and substandard apartments in south Irving. Today a drive through south Irving would not lead one to conclude a $46 million dollar redevelopment project going on, but Delbert McDougal he estimates they have purchased over 50 properties in the area and are scheduled to start demolishing many of them by the end of the year. Mr. McDougal estimates the entire project will take 10 to 15 years to complete with the first major structure, a Washington Mutual Bank Building (interestingly enough considering the current banking crisis), is scheduled for completion by the end of the year.

The main focus of this redevelopment is the DART rail station that is scheduled to be in place by late 2009. With the increase in gas prices and current trend of New Urbanism, McDougal is hoping for success in areas closer to the city center. The plans for the area are mostly based on new Urbanism with many four story apartment complexes with retail on the first level. Most everything will be within walking distance of the train station with streets and sidewalks designed to be pedestrian friendly. It is the goal of a project to minimize the need for automotive transportation while providing a wide range of services nearby, and increasing the use of public transportation.

One of the most interesting things about projects similar to this one is how McDougal Companies are able to get the community to sell their properties without using eminent domain and without paying excessive prices for properties that are not for sale. Mr. McDougal explained to me how he purchases such property. He has a team of realtors out in the community trying to build relationships with homeowners. This process can takes years, but slowly they begin to acquire more and more property until it turns into a snowball effect. He rarely uses eminent domain and said it is really in everybody’s interests to settle on a fair market value. Paying too much for a property, especially at the beginning of a project, can be one of the most expensive mistakes because it sets the bar for what everyone else will expect. There are occasionally people who will try and take advantage of the situation by buying land and hoping to flip it for a profit, or refusing to sell in hopes of forcing a higher price for their property in the future. McDougal said these are all things he considers before he begins acquiring properties in a certain area. The truth is that most plans are very flexible and can easily be changed to work around such situations. Once plans have been put in place the holdout properties have little value to the project, and holding out can easily backfire.

The redevelopment area is so large it would be impossible to buy everything before beginning construction. Therefore small areas are targeted in hope that these developments will attract other developments throughout the area. This approach is different from the first project in Lubbock where McDougal purchased most of the 360 acres before beginning the redevelopment. The first stage of the Irving Heritage Crossing development is a planned apartment complex near the current train station which will soon become a DART rail station in late 2009. There are agreements for two existing banks and a McDonalds next to the station to do extensive renovations to their properties to bring them up to date with the new look of the area. This location is the first of five locations close to the train station that are scheduled for redevelopment.

This kind of redevelopment is not for the faint of heart. Obstacles seem to be everywhere, and the McDougal’s do not plan on getting all their investments out anytime soon. After asking Mr. McDougal about the type of work he is doing he said there are very few companies that take on projects of this nature. He mentioned the long time frame as one reason and the difficulty of dealing with the environmental issues as another. To undertake a project of this nature someone has to have a great vision as to what is possible possess a number of connections throughout the real estate industry. Since the south Irving project has begun, McDougal Companies has been contacted by San Antonio, Lubbock, Farmer’s Branch, and Lake Dallas all with the hope for redevelopment similar to what took place in the Overton Project.

Sources:

1. Privett, T (2007) Failure is Not an Option. Legacy Edition, a division of Historical Publishing Network
2. The City of Irving Web Site (October 6, 2009) McDougal Companies redevelopment. http://www.ci.irving.tx.us/news-articles/heritage-crossing-1008.html
3. The Dallas Morning News Website (October 10, 2008) Irving Approves $16 Million Loan to McDougal Developer. http://www.ci.irving.tx.us/news-articles/heritage-crossing-1008.html
4. McDougal Companies Website (September 25, 2008) Company History. http://www.mcdougal.com/history.shtml
5. The Daily Toreador (October 2, 2008) Overton Project a year ahead of Schedule, 2008 is McDougal’s Target Finish. http://media.www.dailytoreador.com/media/storage/paper870/news/2004/01/26/CampusNews/Overton.Project.A.Year.Ahead.Of.Schedule.2008.Is.Mcdougal.Companies.Target.Finis-1278011.shtml
6. Wikipedia (October 10, 2008) New Urbanism. http://en.wikipedia.org/wiki/New_Urbanism