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A MISUNDERSTOOD INVESTMENT COMPANY
Prairie State Securities LLC was started in 1987 by Scott K. McLean as a governmental securities investment company. (Its name was changed to Prairie State Tax Lien Holdings LLC in 2005.) It invests in tax securities acquired from counties primarily throughout the state of Illinois. In order to collect the money for real estate taxes that have not been paid, counties auction off tax securities, or liens against the real estate. The securities carry an interest rate and act as a zero coupon bond. Companies buying the securities must pay for the security in full with cash, as is required by law. Within a specified period of time, the principal and interest on the lien may be repaid by the property owner. If the lien is not repaid, the final remedy is that they may have to foreclose on the tax lien. This involves going to court at the circuit level and acquiring the deed to the property.
Scott realizes that the immediate perception of his company and others like it may not be a positive one. But, as he explains “people don’t understand that by buying real estate taxes, we are a vital part of the financing of the counties. In St. Clair County, unpaid taxes normally total five to seven million dollars. If companies like ours don’t buy those taxes, it will affect schools, police protection, fire protection and streets.”
And their aim, says Scott, is not to take people’s houses away from them. The goal is to collect the unpaid taxes, so the company often takes time payments from people. “Owing a bill is no disgrace. This just happens to be a bill for which there are serious repercussions if it isn’t paid. This is a big deal; people may lose their homes; so we try to handle it in a morally compassionate way. We know that everyone has a story, a situation, and hardships.” The securities side of the business is handled by Scott, along with Securities Portfolio Managers Jen Pryor and Debbie Jones, who also is the time payment coordinator.
When Foreclosures Happen
Since foreclosures do happen, the company ends up owning real estate, which they can resell on the open market. Because they are able to obtain the properties at a discount, they are able to sell them at a lot less than market value. About six years ago, Scott somewhat reluctantly began keeping some of the properties to use as rental properties. “At the time it was something I really didn’t want to do. All the headaches that come with being a landlord…” he says. But he felt it was necessary to diversify, and the decision has been a positive one. Jill Thomas, a Senior Real Estate Portfolio Manager, handles all of the management of the rental properties and oversees the rehabilitation of the properties for the real estate side of the company with Assistant Real Estate Portfolio Manager Brenda Wilson. That company started as Prairie State Properties LLC and was changed in 2005 to Prairie State Real Estate Holdings LLC.
A four person crew of contractors, carpenters and rehab people, led by Field Manager Tom Martindale perform the rehabilitation and upkeep on properties within a defined area that they feel they can affectively maintain. Their boundaries generally extend no farther than Granite City to the north, Waterloo to the south and no farther east than O’Fallon. Anything obtained outside that area is sold through any number of real estate agents that Jill has contact with throughout the state. Located in Belleville, Illinois, Prairie State does business in about 83 counties, most of which are in Illinois, and a few in Florida.
Due to the current condition of the real estate market and subsequent foreclosures, the company is busier than ever. “When times are bad in the housing and financial markets, things are better for us because we are dealing with a high number of delinquencies” explains Scott. “But the downside is that even at a very deep discount, the properties are harder for us to sell now. Even if the willingness to buy is there, the banks are tightening their reins as far as lending money and potential buyers and speculators may have trouble obtaining financing.” Despite these facts, McLean would like to continue building up his real estate portfolio, estimating that the securities side of the business, being as time intensive as it is, causes about 90% of his headaches.
Being Better than the Big Guys
Scott can’t stress enough that neither tax securities nor real estate are “get-rich-quick” businesses, despite what various TV shows and late night commercials might have you believe. Buying tax securities is “a very competitive business, a very detailed business, and not a very liquid business” Scott asserts. “You don’t make a fast dollar in it; you have to build it up over years and years.” He also points out that in order to succeed, you need to be knowledgeable in a lot of different areas, including real estate and real estate titles; you must be familiar with the law; and you need to understand banking and finance since your dealings with banks are not like simply going in and saying you want to buy a piece of real estate. There is no specific credential or certificate necessary for operating this business and Scott believes that “you can’t really learn it before going into it. Instead you must draw on all of your knowledge in these fields in order to make good decisions.”
The company has grown considerably over the years. Starting with a $750,000 line of credit in 1987, it now has a line of credit of $15 million, growing from $8 million just in the last three years. Prairie State is considered a mid-sized company, and they are often going up against very large companies with much larger amounts of capital. As Scott explains, they “just have to be better than the big companies.”
Outfoxing the Foxes
Scott thinks that part of the secret to his success is due to thinking like a hedgehog. Perhaps not the most flattering animal to be compared to, unless of course you are a fan of the Jim Collins’ 2001 book, Good to Great: Why Some Companies Make the Leap…and Others Don’t. In it, Collins sites an essay by Isaiah Berlin, comparing a hedgehog to a fox. He describes the fox as being more cunning than the hedgehog, devising numerous ways to attack it. The hedgehog on the other hand, is focused on doing just one thing – rolling into a ball each time the fox attacks. The hedgehog has simplified its complex world, using one basic principle to guide it instead of being distracted by things that aren’t relevant. By operating this way the hedgehog always wins, because by contrast, the fox spends its time doing various random things to reach its goal, rarely learning from its mistakes or its successes. “We are in a tense, complex business and we have to cut through the complexity and take things piece by piece. We maintain a disciplined, orderly pattern to the way we do things.” The “Hedgehog Concept” has helped to bring Scott and his staff the clarity and focus it has needed in order to be successful for the past 20 years.
From Tennis to Taxes
When Scott, a Belleville native, went to the University of Kansas on a tennis scholarship, he had no idea that he would end up doing what he does today. The only thing he knew for sure was that he wouldn’t be joining the family business. The McLean family had owned a stone company in East St. Louis since 1898. In the 1980s it became a division of General Dynamics Material Service Corporation and in the mid-90s, it was liquidated. Scott hadn’t had much interest in the business, so it didn’t bother him much. Instead, he started college as a Journalism major and had aspirations to be a sports broadcaster. As time went on, he changed his mind about broadcasting and considered being a lawyer. But when he worked during the summers at a real estate office, something really clicked. One of his tasks during those summers was finding out who the owners were of certain properties, so he spent a lot of time “poking around” at the courthouse. He found out about investing in tax securities, so he started investigating the field, and as he remembers, it “all kind of fell together” for him. He learned as much as he could about it and started a short-lived partnership in 1986. When that partnership ended in 1987, he formed Prairie State with his father, who remained with the company until his retirement about ten years later. Since then, Scott has owned the company with his wife Tracy.
Scott often thinks of something his grandfather, who was the president of the Bank of St. Louis, used to say when he was growing up. He advised him to find a business where you can make money in your sleep. He has been fortunate to be able to accomplish that with Prairie State. He points out that “if you own a store that is open from 9 to 5, you’re not making money when it’s closed; your dollars are tied up in inventory, and your overhead is costing you money.” But with the security end of the business, there are rollovers in terms of interest rates, and on the real estate side, they are getting rent and hopefully appreciation of their property.
Knowing the RacketScott’s business philosophies can apply to anyone wanting to start a business, regardless of the industry. His advice is to start small and get to know every facet of your business inside and out before delegating anything out to your employees. As the business grows and gets more complicated, you have to give up thinking that you know all the answers. At that point, he says, it is just as important to know who to ask as it is to know the answers yourself.
McLean is also a firm believer in being involved and keeping on top of changes in your industry. For four years, he served as president of the Illinois Tax Purchasers Association, a group of ten Illinois companies who have a lobbyist in Springfield on retainer. He has testified in front of the House Revenue Committee with regard to different bills that have been put forward affecting the industry. Scott says “if you aren’t tapped into that type of group and information, being in this business becomes even more difficult.”
Assembling an Advisory Team
Essential for any business is assembling a team of capable people, both on your staff and among the companies you hire to perform services for you. When it comes to his accounting, Scott has Diel & Forguson on his team. When he started his company, he used a large St. Louis accounting firm that his family’s business had used for years. He became frustrated because each time he met with them, there seemed to be a new person to deal with. He’d spend time educating them on his business, only to be faced with another new person the next time. Since 2001 when Scott hired Diel & Forguson, the staff has made an effort to get to know Prairie State’s business. “Polly Stover has done the businesses’ and my personal tax returns year after year.” Scott likes the fact that even if someone else at Diel & Forguson gets involved in the work, Polly will be the one to teach them about his business – “and I won’t receive a bill for being the instructor!”
Likewise, Michael Brokering and the accounting service support staff handle Prairie State’s financial statements, QuickBooks® training and support, and after-the-fact payroll. Ken Diel has worked with Scott to approach banks regarding their line of credit. Over the past several years, Diel & Forguson has become a reliable resource for any issues that Scott and his staff may encounter, helping Prairie State grow and prosper. Their collective knowledge about his business is reassuring.
As for the future of Prairie State, Scott doesn’t know how much bigger he wants it to get. He is content having a mid-sized company and keeping things simple as the Hedgehog Concept dictates. “There’s a place in life for business and a place in life for other things” he says. “I don’t want to be a slave to the office.” He enjoys spending time with his wife and sons Alex and Max. Alex will be a freshman at Carthage College this year, attending with a tennis scholarship like his dad, and his son Max will be a sophomore at Belleville West High School. He is uncertain if they will want to take over the business some day and he is not planning to push them. “I realize that this is my thing and may not be what they want. I hope they find their own way – their own thing like I did.” u
Prairie State is located at 7801 West Main Street in Belleville, Illinois. For additional information, call 618-397-4427, or visit their website at www.prairiestate.com.
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