S.E.C. Real Estate Observer

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Editor’s Note: Steve Eustis and Jeff Drinkard were the recipients of the 2016 Clifford P. Weaver Award given by the Society to recognize the most creative transaction of the year.  The narrative below was provided by Steve Eustis when he submitted his application for the award.  The editor assigned the title of the article.

In May of 2016, WVE San Angelo Investments, LP, sold a 2.12-acre tract of land to an independent emergency room company.  While this was an easy land sale for a platted lot with all utilities next to a Comfort Inn and Suites, getting the land to that point was anything but easy, as you will see when the rest of the story is told.

In the 1960s the State of Texas and the City of San Angelo announced plans for a limited access freeway that would begin on the far east side of San Angelo, traverse through the middle of town, and terminate on the far west side—a big-city freeway in a little West Texas town of about 70,000 people.  It created a lot of excitement in town.

In the early 1970s all the land was acquired.  Hundreds of houses (including my grandmother’s) and dozens of commercial properties were purchased for the right-of-way and all improvements were removed.  And then, there it sat for years—a swath of vacant land 500 feet wide running right through town for 10 miles!  There were no funds available to build the freeway.  I was just starting my real estate career, and I wish I had a nickel for every time I tried to explain to unconvinced out-of-town buyers that one of these days we were going to have a freeway right here. Only a few speculators bought land along the freeway because the joke was that none of us would see a freeway in our lifetime.

Finally, in the early 1990s, limited funds started being appropriated by the State of Texas; each year, a little at a time.  They first started constructing frontage roads—a mile one year and a mile the next year—until about 2001, when funds were approved to complete the the Houston Harte Expressway.

Before the freeway project was ever announced in the 1960s, an unqualified and underfunded speculator and his attorney had begun assembling large parcels of then-ranch land on the west side of San Angelo, the direction of growth for the City. The new freeway would go through the middle of their assemblage. After many years of holding the land and waiting for a freeway, a falling out with his attorney/partner, and scores of very poor decisions, the speculator filed for bankruptcy. His bankruptcy was filed just before the freeway was entering its final construction phase.

The bankruptcy trustee contacted me to list the property for the courts, and one of my first calls was to Jeff Drinkard, a fellow S.E.C. Member and friend.  I explained the property and its benefits to Jeff, and he drove to San Angelo the next morning. Within a couple of weeks, we were under contract, and I was a partner, along with Jeff, his brother Mark, and Tom Gross, Jeff’s in-house attorney, in a land development project that would turn out to be the largest commercial development ever done in San Angelo.  I did get permission from the trustee to be one of the purchasers without compromising my listing agreement.

The freeway land totaled approximately 272 acres, and our purchase also included non-freeway land on the east side of town totaling approximately 80 acres.

We had many challenges ahead: no entitlements; a large portion of the land was in the 100-year flood zone; an arroyo (dry creek) ran through the property; a 100-foot-wide strip of land running through one of our best pieces of land was owned in fee by a utility company for high voltage transmission lines; the former attorney/partner of the bankrupt speculator still had one-half ownership in about 50 acres, and he died in the middle of our transaction; the City’s 75-year-old former landfill was contiguous; and other problems kept arising.  Jeff positively refers to things like this as “opportunities to create solutions for all involved.”

The prime tract in our acquisition was 15 acres at the intersection of the freeway frontage roads and Sherwood Way, San Angelo’s main commercial corridor, where the mall, restaurants, a new movie theatre, and so on are located. The problem, however, was that TXDOT (Texas Department of Transportation) owned about 7 acres of land that kept this prime piece of the property from having Sherwood Way frontage and access.  Our contract on the purchase from the trustee was subject to us acquiring this TXDOT land.

I could write a book on the TXDOT issue but, in a nutshell, the tract had been labeled excess property by TXDOT and could be purchased by the contiguous property owner, which was still the bankruptcy trustee.  The process required an appraisal to be ordered by TXDOT, but we had to pay for it.  The resulting appraisal was unbelievable and suggested a price for those 7 acres of more than we were paying for the entire 272 acres!  The ROW (right-of-way) agent in the district TXDOT office who was handling the sale was not in any hurry to help us complete the sale or look at the evidence we had that showed it was an unrealistic appraisal.

We hired a review appraiser who discredited almost every word of the appraisal, but TXDOT’s ROW agent would not budge.  After about 9 months, and after pulling every political string I had, TXDOT finally agreed to allow another appraisal.  The second appraisal came in at a value that we could accept.  However, at a meeting at the TXDOT headquarters in Austin, Texas, where we met with the ROW agent, his district supervisors, several of TXDOT’s highest officials, and our attorney, we were told that the price was still the original appraisal amount! They were standing by one of their own, no matter how ridiculous it was.  We sat dumbfounded as TXDOT explained that our written pleadings the last nine months had been to allow another appraisal, which they finally agreed to, but not that they use the value in the new appraisal as the sale price!  They said that would have been against their rules and that if we had included in our pleadings the fact that we actually wanted to use that appraisal to determine the purchase price, they would have denied our pleading!  The next hour was basically a high-volume argument between me and the ROW agent. At the end of the meeting, Jeff Drinkard, who had not said a word the entire meeting, rose to speak.  I wish I had a recording of him calmly delivering a speech of how disappointed this process had made him at the incompetence in the government, the lack of accountability and integrity at the highest level of this agency, and other words I’m sure were used by our Founding Fathers.  I’m sure Thomas Jefferson was applauding!

A few days later I got an off-the-record call from the head of our TXDOT district office, who was also a friend of mine.  He told me that the entire purchase process could start over and an official appraisal ordered if there was a change in ownership of the contiguous property, which was to be us!  We closed on the entire property package with the trustee and immediately applied to TXDOT to purchase their excess property.  They allowed me to select the appraiser—from their approved list—and we soon owned that property.  We now owned about 23 acres of the most prime tract of land in San Angelo.

We overcame many other challenges, some of which I will quickly highlight:

PROBLEM: A secured hard money lender had a lien on about 50 acres and was in the process of filing for a lifting of the stay so he could foreclose.
SOLUTION: Jeff bought his note at face value.

PROBLEM: AEP (American Electric Power) owned a 100-foot-wide piece of land for their transmission lines through the middle of our prime piece.
SOLUTION: We offered to buy the land from AEP and give them a perpetual easement.  I don’t think AEP had ever been asked to sell land under a transmission line, but, after scratching their heads over how stupid we must be, they smiled and took our money.  We now had another four acres to add to our prime piece (subject to an easement to AEP), but when we sold the entire tract, that AEP land was included in the gross acreage, and we got about 4 times what we paid for it! A win-win.

PROBLEM: A sizable portion of our land on both sides of the freeway and along the Arroyo was in the flood plain.
SOLUTION: The freeway, now under construction, had thousands of yards of excess dirt that the road contractor was going to haul 20 miles to store. We allowed them to deposit it on our land if they would also spread it and compact it.  Another win-win.

PROBLEM: This flood zone land was still designated on the maps as Flood Plain.
SOLUTION: We hired an engineering firm in El Paso that specializes in FEMA issues.  They developed and applied for a CLOMR (Conditional Letter of Map Revision) which included an engineering design of not only raising the elevation of our low areas with dirt from the freeway but also cleaning out and deepening the arroyo, stabilizing its banks, and installing erosion control measures.  The CLOMAR was accepted by FEMA.  Once the actual work was completed, we applied for and received a LOMR (letter of map revision), which revised the official Flood Maps. This was not an easy process, and it took about three years to get the LOMR.

PROBLEM: We had large land tracts with no entitlements.
SOLUTION: We began working with the City on platting, zoning, and all the issues of entitlements.

PROBLEM: No utilities or streets.
SOLUTION: We designed a layout of large tract lots that we could subsequently subdivide that minimized the number of streets and allowed us to only put utilities around the perimeter of the large lots.  However, we still built over a mile of public streets with curb and gutter, two bridges, and almost three miles of water and sewer lines.

PROBLEM: It was going to cost millions of dollars to get the property entitled so we could sell it to users.
SOLUTION: I arranged a loan with First Financial Bank through its president Mike Boyd.  Jeff’s personal signature probably added to the loan approval process!

PROBLEM: Time!  This entire process was now into year three since we first went under contract, and we were burning through cash.
SOLUTION: We decided to market the property subject to all entitlements being complete.  By the time we closed on the land, I had purchase contracts from the largest Ford dealership in West Texas and Shannon Hospital for an MOB and surgery center.  By the time we finished all the entitlements, I also had purchase contracts from Home Depot, Circuit City, a shopping center developer for a Best Buy, Academy Sports, and other retailers. Subsequent sales were to several hotels, an Olive Garden, Furniture Row, the highest-grossing convenience store in town, a branch site for First Financial Bank, and several other end users for 2–3 acre tracts.

PROBLEM: We still had the 80 acres on the east side of town.  It was in 4 large undeveloped tracts and located within a general area of VA and FHA homes. One 24-acre piece was located behind Howard College, our growing community college of about 2,500 students.
SOLUTION: We donated the 24-acre tract to Howard College for campus expansion, and we sold the remaining parcels in bulk to a residential builder.

I could detail many other aspects of this project, including a few acquisitions to better position our property; trades with the City of San Angelo for unrelated utility expansions they needed for land we wanted; our near-acquisition of a contiguous 75-year-old, closed City landfill; and many other stories.  Maybe one day I will write a book about this project!

About five years ago, sales came to a stop.  We still had considerable land available in the development, but economic conditions had changed.  In addition, Jeff was reprioritizing his life, and he offered me the opportunity to buy his interest at a very favorable price.  Not wanting to risk the once-in-a-lifetime wealth I had accumulated from this project or go into debt on vacant land during an economic downturn, I chose to find a new partner: Gary Vandenberg and his client and attorney, Keith Walker.  The economy improved because of the oil boom, and this new partnership is now profiting. We still have about 18 acres of inventory out of the over 350 acres we started with, so the goose is still laying.

One might conclude that this was a great and financially successful project, end of story.  But more important were the relationships created.  Jeff’s brother, Mark, has the engineer-wired brain in the family, and after the acquisition and for the next two years, Mark spent several days a month in San Angelo reviewing street and utility designs and overseeing their construction.  He and I got to be great friends and I fondly called him “Cousin Mark.”  We worked together on a tough and complicated project but had a great time and a million laughs doing it.  Unfortunately, Mark passed away about five years ago, but he will always be a part of this story and a part of my life.

When you go into partnership with someone who named his company HF2M and the explanation for the name is “Have Fun, Make Money,” you better buckle up!  We had fun, and we made money. Jeff has been the most influential mentor I have ever had.  His real estate expertise is superb, but his faith, his fairness and integrity, his generosity, and his good will to all around him make Jeff who he is.  Jeff and I are in another project together in the Austin area, and it’s also going to be a home run.  I look forward to more business and personal adventures with Jeff.