Sam Zell got his start in real estate as a junior at the University of Michigan. A friend’s landlord bought an adjacent house and planned to tear down both properties to build a 15-unit apartment building. Zell pitched the owner on managing the new building. The owner said yes. Zell and his friend got a free apartment out of the deal, a management business, and the rest is history.
By the time Zell graduated from law school, he managed about 4,000 apartments and owned over 100 more. After graduation, he sold the management business to Bob Lurie and headed to Chicago to play in a bigger market. Three years later, Lurie partnered with Zell in Chicago. They would go on to build one of the largest real estate portfolios in the country.
In 1973, the real estate market was in the tank. Too much building led to oversupply. Inflation was sky-high. Zell saw an opportunity. He and Lurie switched gears to focus on distressed properties.
They bought $4 billion worth of real estate by convincing lenders the only way they could carry the property was by paying an interest rate below inflation. They created an arbitrage play. In total, they took on $4 billion in debt at an average fixed rate of 6% while inflation was 9% to buy apartments at half the cost to build them new. That ability to buy property below replacement cost was a staple throughout his career. When the market turned, the property values rose, and they made their first fortune.
Zell switched gears again in the 1980s. The opportunity was a change in the rules around net operating loss (NOL) that allowed losses to be carried forward 15 years, from 3 years. The value was in the extra 12 years.
Zell bought control of companies with massive losses, used the losses to offset income from cash flow-positive businesses they acquired, and dropped the tax hit to zero. In the end, he bought a couple of billion dollars worth of NOLs and used it to consolidate rail car companies, build a chemical business, and more. Zell was playing outside of the real estate and hitting it big again.
The late 1980s real-estate bubble created another opportunity for distressed buyers. Only lenders were not as generous as last time. Cash was king. Zell raised almost $3 billion across multiple opportunity funds to buy quality properties at a discount to replacement costs.
At the same time, with the real estate market in the dumps and the S&L crisis in full swing, the lending market dried up. Zell needed liquidity. He turned to the public markets and IPO’d his real estate business (one of many).
It grew to become the largest real estate company in the country. He sold it to Blackstone in 2007 for $39 billion, the largest deal at the time and the top of the market.
Sam Zell’s investing career is best defined by his ability to recognize change and find opportunities created by it. He had a knack for being contrarian.
I am very focused on understanding the downside. And I have a pretty good track record, but it’s not perfect. You can’t play at this level without some pretty big highs and lows.
I am a professional opportunist. What has always intrigued and attracted me are scenarios where I believe there is significant inherent value beyond the price I am paying.
I’ve always thought simply. I look at situations and act when I think the problems are temporary. I believed if you could buy assets with sufficient ability to carry them then over time you could not lose.
I have been a businessman all my life. I have been an investor all my life. I have had to measure investment potential against investment risk. That is what I do and that is what I continue to enjoy doing to this day.
The difference between a superior player and an average player in almost every business, is the difference between somebody who might be able to be very successful at process…but not necessarily successful at what I call the big picture.
People have always made money by taking advantage of inefficient markets.
I never viewed myself as being in the business of raising money. Rather, I viewed myself as a professional opportunist and real estate operator who identified a unique scenario and took advantage of it while the risks rewards were appropriate.
Reputation is your most important asset. Everything you do, everything you say, is part of the permanent record. Your name reflects your character. No matter how successful I got, I never forgot that lesson. I’ve always strived to be known as a man of my word.
Early on I adopted a philosophy I call the Eleventh Commandment, “Thou shalt not take thyself too seriously,” and it became a governing principle in my life. Big investment deals can get heady at times, and it can be easy to start thinking your brand is bigger than your performance. I never want that to be me.
In any negotiation, I believe in leaving a little bit on the table. And in any relationship, I believe in sharing the stakes. I’ve been doing deals with many of the same people for decades because the goal is for us to all come out ahead.
Discipline comes from the marketplace, from the fear of loss, and the consequences that come from overindulgence.
I don’t even really know what luck is. Is luck noticing there’s an oversupply and, therefore, potential opportunity in a certain industry? Is luck reading about changing legislation and seeing where it will cause disruption? I don’t know. I do know, at least in my business, luck must certainly be enhanced by a keen sense of awareness.
Real Estate Investing
Rather than focus on numerical indexes in investment decisions, the investor should focus on unique characteristics that protect the investment from competition.
The most intelligent investment may perform poorly if it is surrounded by too much supply. Quality, as a bar to access, only works if the quantity element of the equation is under control.
Real estate success has gone to those with deep pockets and the ability to take advantage of the cyclical nature of the business. The great fortunes made in real estate have come from buying property during market troughs and holding them through cycles.
I rarely look backward. I have never looked at it as wins and losses since some of the deals I have done have been perfect and still resulted in a loss since my assessment of what the downside was happened.
There is no substitute for discipline. When we invest in these countries around the world, we keep looking for discipline. The key question is “Do they have leadership?”
Growth, demographics and liquidity drive the real estate business.
Without exception since WWII, any time home ownership went above 64 percent, we’ve had significant oversupply and excessive encouragement to buy often, frankly, by people who couldn’t afford it.
1990 was the bottom of the real estate depression. It was a time where all of the dedicated lenders in the industry had just gone away. I mean, there was this massive industry, a huge capital consumer, and literally there was no money. One day I picked up Forbes magazine that told me I was worth a billion dollars, but I was scared to death about making payroll on Friday. So if you ask me what the single lesson I learned was, liquidity equals value. You have no value if you have no liquidity.
The investor in distressed property walks a thin line between the extremes of success and failure.
A basic tenet of an equity investor involved in a workout must be that under no condition should he undertake the financial risks of completing construction. Regenerating the construction of a project curtailed prior to completion is difficult, costly, and unpredictable.
Inflation bailout is the expectation that rents will rise faster than total expenses, because a large portion of expense is fixed debt service. The grave dance relies on the theory that a major increase in rents is probable because of a significant shift in the demand-supply equation for real estate.
From day one my company described itself as an operator rather than a developer. We focused on controlling the economics of the property, because taking development risks for limited returns made no sense to me.
I never got into hotels because hotels aren’t real estate; they’re operating businesses. Every night you have to promote and fill the rooms. Moreover, the hotel business suffers an immediate effect from changes in the economy.
Am I Being Too Subtle?
Profiles in Investing: Sam Zell and Zell’s Angels
Modern Sardine Management
Leading by Example
Passion and Purpose
Keynote Conversation with Sam Zell
Executive Profile: Sam Zell
The Grave Dancer
Real Estate: Past, Present, and Future