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A nose for unique properties

For most of the last half of the 20th century, a sprawling 13-acre tract of land on Chicago's Gold Coast was the city's enduring embarrassment. Strategically situated between the tony Michigan Avenue shopping corridor and the frothy beaches of Lake Michigan a scant few blocks away, this was potentially some of the most valuable real estate in Chicago.

But the site was weighed down by abandoned warehouses and a network of outmoded rail tracks, and its owner, the 140-year-old Chicago Dock and Canal Trust, plotted urban renewal at a glacial pace. The land screamed for entrepreneurial action.

Dan McLean was willing to gamble on the property. In a hotly competitive auction in 1997, McLean outbid 20 other developers by agreeing to buy out Chicago Dock and Canal for $180 million. He had a sweeping vision for the land surpassing all others: a $2 billion complex called River East that would encompass 2 million sq. ft. of condominiums, retail space and a hotel, creating in the process a new community of 3,000 residents.

He hasn't wasted time since in fulfilling that vision. The project is half complete and construction is on track for the windup of River East sometime between 2006 and 2008.

Ambitious agenda

The chairman and chief executive of MCL Cos., the 53-year-old McLean (pronounced Mac Leen) was once primarily known around Chicago as a builder of far more modest low-rise townhouses and condos. But now his ambition is boundless. While still absorbed by River East, he has begun laying plans to take MCL to a national, or at least multi-regional, stage.

McLean acquired most of Fisher Island off the Florida coast near Miami Beach, the wealthy private enclave for business tycoons and show business personalities such as Oprah Winfrey and Mel Brooks. He already has built 48 homes there, with an average price of $2.5 million, and another 90 are under way. Eventually, he plans to build a total of 300 units on Fisher Island — amounting to perhaps the most expensive, and unique, subdivision anywhere.

McLean also has undertaken residential construction recently in Denver and has embarked on his first New York project, a 27-story, $200 million condo tower on the site of the former New York Cancer Center, at 105th Street and Central Park West. Some 100 condos, priced from $750,000 to $7.5 million, will deliver sometime in late 2002. MCL, which already has started marketing the condos, predicts they will all be sold by the time the project is completed.

Meantime, the restless McLean is seeking opportunities elsewhere. “We're looking for more sites in New York, and we're also looking in Boston and Washington, D.C.,” he said. “We just haven't found the right real estate yet. We could easily take this firm to six or seven cities, and I wouldn't feel that we were overextended.”

A well-heeled and connected player

With a staff of 700 employees, MCL reported revenues of nearly $150 million in 2000. More than 25 years of real estate investing has left McLean, the son of an accountant who grew up in the gritty industrial town of Rockford, Ill., a rich man. He flies a private jet to meetings and owns homes in Chicago, Aspen, Colo., and Fisher Island, as well as a fabulous summertime playground outside of Lake Geneva, Wis., where his private 6,000-yard, 18-hole golf course, a lake and tennis courts are spread over 350 heavily timbered acres. It is in this bucolic setting, while entertaining visiting bankers and investors over a leisurely round on the links, that McLean hatches the strategies and financing for many of his deals.

With a personal wealth estimated well north of $100 million, McLean finds comfort in surrounding himself with moneyed friends, most of whom provide the financing support for his projects. They include John Melk, one of the earliest investors in the Blockbuster Video chain; Patrick Ryan, chairman of insurance giant Aon Corp.; Richard Duchossois, an industrialist who built the Arlington International Racecourse in suburban Arlington Heights, Va., a decade ago; and Dean Buntrock, the retired chairman of the huge garbage-hauler Waste Management Inc.

Melk, a Chicagoan who pocketed a big chunk of the $8.5 billion that Viacom Inc. paid for Blockbuster in 1992, has been investing in MCL projects since the 1980s and hasn't lost money on a single deal yet. He has been most impressed, he said, by McLean's sharp eye for depressed property in down-and-out urban areas, such as the South Loop, Old Town and even Cabrini-Green neighborhoods of Chicago, and his ability to transform them into trendy must-have townhouse and condo developments spiced with retail around the edges. It's generally accepted in Chicago that McLean leads the way into rundown areas crying out for renewal, and is followed by less courageous rivals who build around him.

“Dan isn't afraid to work in slum areas,” Melk observed. “He helps the city get developed and redeveloped. It gives me a great sense of accomplishment to work with him. It doesn't hurt that his projects make money in the process.”

Peer Pedersen, a well-to-do lawyer in Chicago, has invested in River East, Fisher Island, Central Park West and other MCL deals. Much of the real estate, like the Cancer Center in New York, had languished for many years, passed over by other developers, he noted. “Dan has a nose or a feeling for unique properties,” said Pedersen, who also has invested with Chicago real estate mogul John Buck. “Most of his projects are very difficult and complicated, requiring municipal approvals and a number of phases of construction. But he has a vision that allows him to sort through all the obstacles and see the finished development with great clarity.”

The equity advantage

The deep pockets of his coterie of a dozen or so well-heeled friends, who are sometimes asked to pony up $10 million apiece or more to support a project, are a critical component in McLean's success. He takes the advantage of heavy equity backing to most of his deals, and revels in his light borrowings. He boasts, for instance, that he repaid the debt on the acquisition of the River East land in just two years, while Fisher Island was debt-free within 23 months. Why is this significant? McLean remembers when condo conversions in Chicago dried up in the early 1980s and office construction ground to a halt a few years later, bringing heavily leveraged local developers crashing to earth. “When you aren't carrying debt, you can afford to wait when markets turn bad on you,” McLean said.

William Smith, a principal with rival development firm Smithfield Properties LLC in Chicago, is even more blunt. “If you have a lot of leverage on land and the market goes against you, you're under pressure to liquidate, usually on unfavorable terms,” Smith said. “If you own vacant land for cash, then obviously you can afford to be patient. That's the advantage that Dan has.”

There are times when debt is necessary, and at that game McLean has proven he can mix it up with the savviest bankers and come out with the sweetest concessions. A case study could be made of the financing negotiations, for instance, behind the anchor of River East, a mixed-use complex called River East Center that includes 620 condos and a 460-room Embassy Suites hotel in a 58-story high-rise. MCL figured the project would cost $345 million, but was prepared to bring just $45 million in its own equity to the deal ($30 million of that in the land, the other $15 million in cash). That amounted to less than 15% equity in a marketplace where most lenders require 35% or more.

McLean was able to secure a $225 million construction loan from a syndicate of banks, but it looked like he would have to fall back on mezzanine financing to fill the $75 million funding gap. That would have been expensive — an interest rate of 30%, amounting to a hefty $22.5 million in debt service per year. But McLean, exhibiting the shifty moves of a good halfback looking for a crack in the defensive line, was able to piece together a highly unusual alternative.

The Royal Bank of Scotland in Edinburgh agreed to finance the entire $300 million for River East Center with the condition that McLean buy financial guaranty insurance from London-based Royal & SunAlliance Group. That's something that few developers have ever tried, but McLean happily complied, and acquired the guaranty at a cost of $10 million per year, less than half what the mezzanine financing would have cost. The difference was critical in allowing the project to go forward.

“We'll pay off the Bank of Scotland within three years with revenues from the sale of condos,” predicts Kevin Augustyn, CFO of MCL. He concedes that the company could have gone back to its original investors and asked for a second round of financing. “We felt the use of outside capital was a better alternative from a risk standpoint for our investors,” he said.

Where are profits likely to come in? McLean figures he will reap $185 million from the sale of condos, $140 million on the hotel development and $60 million each from a 1,200-car parking garage and a theater/health club retail complex for a total of $445 million. Considering that the $345 million in financing covered both hard and soft costs such as architectural and legal fees, that will leave a profit of nearly $100 million. Over a period of 10 years, River East's backers likely will see their original investments quadruple in value.

“We prefer individual investors to institutions on our projects because individuals are more patient, typically, if a project takes a little longer to complete,” McLean said. “We can give individuals very good rates of return that make the wait worthwhile.”

Taking his lumps

This impressive track record doesn't mean that all of MCL's projects turn to gold or are above controversy. Some years ago, McLean ventured into the suburbs for a couple of residential projects and experienced subpar returns. “Putting up buildings in empty cornfields is a very competitive business with not a lot of profit margin. It's not the kind of developing I like to do,” McLean admitted.

Some critics have complained that MCL's designs are less than inspiring, though the dazzling glass and steel at River East proves the company knows how to produce noteworthy architecture under the right circumstances. Others have noted that MCL's dense projects often bring auto congestion and gridlock to narrow neighborhood streets. To be fair, most of the company's new construction falls close to mass transit lines. In spite of its massive scale, in fact, River East has maintained a palpable neighborhood aura.

At least a few rivals are envious of McLean's municipal contacts. Mayor Richard Daley lives in an MCL building south of the Loop. But the developer points out that he has endured more than one impasse with zoning regulators. Currently, for instance, MCL is negotiating to put multifamily housing on a site in and around the former Cabrini-Green public housing complex, which is in the process of demolition. The city mandates that any new development set aside 33% of all units for publicly subsidized tenants. McLean is lobbying for a set-aside closer to 20%. The best guess is that the two sides will eventually settle somewhere in the middle.

Over the years, McLean has honed a very specific operating style. He isn't much interested, for instance, in fee-based development. “I'd rather have the payoff of ownership myself,” he emphasized. And he has largely shunned opportunities to redevelop older suburbs such as Oak Park and Evanston around Chicago, which have been revitalized with new downtown shopping malls and condo mid-rises. “A smaller project in the suburbs might be worth $25 or $50 million and require just as much work on our part as a larger deal,” McLean pointed out. “It's not worth the time and effort. At this point, we're really only interested in projects with a scale of $100 million or more.”

Indeed, employees mostly talk big numbers in the hallways of MCL's Chicago headquarters. The staff is loyal and exceptionally vigilant over every aspect of a project, from the color of the carpeting to the glare of the sun refracting off tenants' windows. “Dan is good at outlining a vision and then allowing us to fill it in with the details, though he likes to keep a handle on everything that goes on,” said Tamara Laber, MCL's senior vice president of marketing, an employee since 1989.

The future looks promising, she added, the sour economy notwithstanding. “We think the market will stay pretty strong and don't anticipate any trouble filling River East and our other developments,” Laber said. “We look forward to the challenge of getting started on some new projects.”

H. Lee Murphy is a Geneva, Ill.-based writer.

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