Same Zell_The Investment Zen of Sam Zell_ Inside the Grave Dancer's $4 Billion Business Empire -...

3/27/2014 The Investment Zen Of Sam Zell: Inside The Grave Dancer's $4 Billion Business Empire - Forbes

http://www.forbes.com/sites/morganbrennan/2013/09/18/the-zen-of-sam-zell-inside-the-grave-dancers-4-billion-business-empire/print/ 1/7

BUSI NESS | 9/18/2013 @ 8:00AM | 35,903 views

The Investment Zen Of Sam Zell:Inside The Grave Dancer's $4Billion Business Empire

Sam Zell takes FORBES inside his complex

distressed deal-driven empire. (Credit: John

Scortino)

When Sam Zell heard that Amazon

founder Jeff Bezos was splashing out

$250 million for the Washington Post

Co., he laughed out loud, he says. He

probably thinks hes buying it, but hes

just renting, says Zell, who knows a

thing or two about real estateand a few

things about the media business, too.

In 2007 Zell led a team of institutional

investors in an $8.2 billion leveraged

buyout of Tribune Co., a flailing

hodgepodge of websites

(CareerBuilder.com, Cars.com),

television stations (25 of them, including

the WGN superstation), newspapers

(nine broadsheets, including the Chicago

Tribune, Los Angeles Times and

Baltimore Sun ) and the (perennially

losing but highly profitable) Chicago Cubs. Pragmatic and long-tested by the

vagaries of rehabbing distressed companies sitting on quality assets, he saw

Tribune as a classic opportunityand one chock-full of juicy tax loopholes to

boot.

It didnt work out like that, of course. By 2008 the company, which he

chaired, was bloated with debt and filing for bankruptcy, kicking off a long,

ugly legal battle that would stretch out over the next four years. Along the way

there had been arrogance (a video of Zell cursing out a reporter from a

company newspaper), controversy (some investors sued, saying the deal was

fraudulent), scandal (tales of hypersexual workplace behavior among his

handpicked executives) and ultimately failurethe largest in his life. The

company Zell bought? Its effectively dead and being chopped up for

parts. The employee stock pension plan he created in the takeover is

worthless.

For Zell, the battleat least his part in itfinally came to an end in December

Morgan Brennan, Forbes Staff

I write about real estate markets, outrageous homes and cities.



2012 when the Tribune Co. emerged from bankruptcy. Zell walked away free

of liability, but out over $300 million of his own money and cursed with blood

enemies. Its been a rough few years here, mainly because of the jackasses in

Chicago who own us, Pulitzer Prize-winning journalist Dan Neil penned in

his 2010 farewell memo at the Los Angeles Times. To them I say, with as

much gusto as I can muster in an email, f you (Neil would also lead a

lawsuit over employees pensions). The feeling is entirely mutual. Theres

this illusion that they [journalists] are doing Gods work and therefore you

should get a pass on economic reality, Zell scoffed on national television the

day after the Bezos deal was announced.

The negative glare and bruising legal battles surrounding the Tribune disaster

have cast a deep shadow on the career of one of Americas most creative

dealmakers. The media love nothing more than writing about the media, and

the easy storyand the one that has been told the loudestpaints Sam Zell, a

72-year-old man with a penchant for both gold chains and profanity, as a

corporate barbarian who callously ransacked great journalistic institutions in

a greedy pursuit of short-term profit. It is also precisely the wrong story.

Over the course of his 50-year-plus career, Sam Zell has consistently sought

out and created value by buying into industries, companies and real estate

that others have written off as worthless. He invests at a discount, cleans shop

and stays in for the long haul. In the process he has mentored hundreds of

entrepreneurs and executives and created thousandsif not tens of

thousandsof jobs. Think of him as the poor mans Warren Buffett, if you can

consider a man worth some $4 billion poor.

Sam did Tribune, and it was a bad deal, but over time his track record is

impeccable because he is always looking to have an edge, and hes thinking

about what risk he is taking, says Equity Group Investments co-president

David Helfand, who has worked for Zell on and off since 1988. Adds Brad

Keywell, managing partner of Chicago venture capital firm LightBank, a

Groupon cofounder and a Zell mentee for the past 26 years: To me Sam is

one of the great entrepreneurial minds of our time.

And Zell, for his part, has definitely moved on. Im not very sensitive about

the Tribune, he shrugs. Even though everybody else is.

SAM ZELLS WARREN of Chicago offices, where hes operated since 1982,

are a lot like Sam Zell. Nearly everyone wears blue jeans, and nearly everyone

swears. Executive doors are always open. The wall just outside Zells office is

dominated by a painting he commissioned after he tried to offload a division

of Itel, a railcar business, to GE Capital in the early 1990s and found himself

stymied by federal regulators. Dubbed Dantes Inferno, it depicts the SEC as

the bitch from hell with Zell clothed in a jester outfit above the words

Saltator Sepulcri, Latin for Grave Dancer.

The nickname dates from the 70s, when Zell penned an article attributing his

success to dancing on the skeletons of other peoples mistakes. Were Zell to

update that article and expand it into a bookcall it Sam Zells Guide to Getting

Really, Really Rich it would rest on three basic principles: First, look for

bargains, typically assets that are out of favor, in bankruptcy or otherwise

distressed. Second, ensure that those assets are of a high intrinsic quality. And

third, structure the deal so that you pay as little in taxes as legally possible.

All three of those principles were on display in Zells February acquisition of

Archstone, a Colorado-based landlord and developer of luxury apartment



buildings. In that deal, Zell partnered with one of his competitors, AvalonBay

Communities of Arlington, Va., to pay $16 billion (including debt) for over

45,000 top-tier apartments. It was the largest real estate transaction since the

Blackstone Group shelled out $26 billion for Hilton Hotels six years ago.

But in reality, Zell got Archstone on the cheap, buying the company from the

bankruptcy estate of Lehman Brothersand paying $6 billion less than

Lehman did back in 2007. The Archstone apartments are of the highest

possible quality, commanding up to $4,000 a month in rent for a one-

bedroom in a Manhattan residential tower and clustered in metros with

extreme barriers to new construction (New York City, San Francisco,

Washington D.C.).

And Zell didnt forget to outsmart the taxman in the Archstone deal: The units

were purchased through Zells tax-advantaged Equity Residential REIT. In

the first five months of 2013 Equity Residential sold off billions of dollars

worth of lower-quality garden apartments, essentially swapping them for the

higher-quality, high-rise Archstone inventory and avoiding federal capital

gains taxes in the process.

The timing of the sales was no accident: Zell believed interest rates would

begin rising later in the year, a scenario that would translate into slower sales

for Equity Residentials legacy units. His hunch was dead on.

Zells hunches typically are. In 2007 he sold Equity Office, the countrys

biggest office building landlord, for $39 billion to Blackstone Groupthe

largest real estate deal everjust before the market went into a nosedive.

When he saw Americans piling into China in 2010, Zell began selling his

stakes in Chinese home builders and pivoted toward Brazil and Mexico.

Equity International, Zells privately held emerging market fund, recently

made its first ever investment in India after spending an entire decade looking

for the right opportunity. It finally came with a hotel developer priced nearly

60% below its 2006 level. If the point of entry is cheap enough and attractive

enough, we dont have hesitancy, says Zell.

Forbes 400: The Richest People In America The average net worth of Americas 400 richest rose

$800 million to a record $5 billion this year. The Youngest Billionaires On The Forbes 400 From Markand Elon to Larry and Sergey, these young billionaires have the world by the tail.

Thats his philosophy regardless of industry. Roughly 70% of his holdings

have nothing to do with real estate. He has significant stakes in publicly

traded electrical wiring distributor Anixter (salvaged from the remnants of the

Itel deal), specialty bioproducts maker Penford Corp. (think processed

cheeses, pet foods, natural adhesives), oil and natural gas concern Exterran,

and Covanta (formerly Danielson), which converts garbage into energy. He

also holds big shares in private companies, many held through his core firm

Equity Group Investments, including a restaurant marketing concern called

Rewards Network, Sirva Worldwide (an executive relocation service) and two

energy companies: Wapiti Oil & Gas and Kuwait Energy.

Since the 1980s Zell has been attracted to troubled companiesoften

emerging from bankruptcywith carried tax credits on their balance sheets

from past losses (net-operating-loss carryforwards in tax-speak). These so-

called NOL deals, which Zell continues to scout out today (Par Petroleum, a



publicly traded oil and natural gas exploration company, being one recent

example), allow him to fix broken companies while shielding profits from

taxes.

He has combined his distressed deals with very favored tax strategies, says

Stan Ross, a former vice chairman of Ernst & Young who advised Zell on

besting Uncle Sam on and off for nearly 30 years. Some of them are very

complex; dont ask me to explain them.

SAM ZELL WAS BORN in Chicago in 1941 to Jewish immigrants who,

sharing his knack for good timing, fled Poland just before the Nazis invaded in

1939. When Zell was 11 the family moved to Highland Park, and he would ride

the train back into downtown Chicago to attend Hebrew school. There he

discovered Playboy for sale at the newsstands under the elevated trains. Zell

would buy copies for 50 cents apiece and deliver then to his suburban peers

for a hefty $3, pocketing a 500% profit. I recognized a need common in all

13-year-old boys, saw a restriction on supply and I took advantage of it, says

Zell with a laugh. Fifty-odd years later Im still doing the same thing.

At the University of Michigan in the early 1960s he got a gig managing a 15-

unit building for student housing in return for free lodging, later hiring his

first employee, a sophomore named Bob Lurie, to help. The two began

managing more buildings, and eventually Zell amassed a student housing

empire, culminating in his buying up and gutting of an entire block of Ann

Arbora time he happily recalls as extraordinary. By the time he graduated

from Michigans law school in 1966, Zell owned more than a dozen properties

yielding an annual income of $150,000, the equivalent of around $1.1 million

today. He sold the business to Lurie and headed back to Chicago to pursue

big-city aspirations. My last sentence to him was, When you get tired of

screwing around and you want to come play with the big boys, call me,

remembers Zell.

Three years later Lurie called, and the two became inseparable, both business

partners and close friends, until Luries death from cancer in 1990 at the age

of 48.

Through their private investment firm Equity Group Investments the duo

snapped up several billion dollars worth of distressed commercial real estate,

pocketing hundreds of millions in the process. But Zell and Lurie knew that

real estate could go bust just as easily as it could boom, so in the early 1980s

they began diversifying with the goal of having 50% of their money in non-

real-estate investments by 1990.

To help they enlisted Sheli Rosenberg, a Northwestern-trained lawyer who

would go on to work with them exclusively for the next two decades. Her first

impression was revulsion. Sam showed up wearing a lime green jumpsuit,

which was so unconventional at the time I quickly ushered him into a

conference room to get him out of sight, she remembers. It took eight more

months to convince her to come aboard, a decision she has never regretted.

One of Sams greatest gifts is his ability to look around corners. When people

were going one direction, Sam would think about going the other way, and

more times than not it worked.

In the early 1990s, still smarting from Luries death, Zell suddenly found his

company struggling to make payroll, despite his personal net worth of $750

million. A sharp recession had frozen the credit markets, leaving Zell unable

to refinance his real estate loans. He eventually clawed out of the ordeal by



selling off assets and offering key employees opportunities to invest in deals.

The lesson learned: Liquidity equals value. Its one of the many Sam-isms

Zell is fond of spouting. Its also one of 11 that grace an illustrated, palm-size

red booklet he uses as a business card. (Others include: Unless youre the

lead dog, the scenery never changes, We suffer from knowing the numbers,

and Zells personal favorite, Am I being too subtle?)

Before Zell the multifamily landlord business had been a mom-and-pop affair.

Very few people could afford to ownor have the capacity to managemore

than a handful of buildings. Moreover, the underlying real estate was fairly

illiquid. Zell changed everything. Starting in the 1970s he began assembling a

national portfolio of apartment buildings, which he then packaged together in

one massive real estate investment trust. Residential REITs not only gave

Wall Street-style liquidity to apartment buildingsthey also allowed him to

distribute 90% of taxable income in dividends to investors through publicly

traded shares.

Zells REIT masterpiece, Equity Residential, debuted on the New York Stock

Exchange in 1993 with an $800 million valuation. Twenty years later it is the

largest publicly traded multifamily REIT, valued at more than $30 billion. Zell

has never sold a single share.

Hes a visionary in this industry, says Ross, who became chairman at the

University of Southern Californias real estate school after his tenure at Ernst

& Young. Some people think hes just a deal guy, but he looks far beyond

that.

Sam is the sort of person you can make a deal with very quickly because he

knows what he wants, says Jonathan Gray, Blackstones billionaire head of

real estate. He is not afraid to speak loudly or forcefully, and that has always

been a hallmark of his style. But in my mind, even though people focus on

that, the essence of his success isnt necessarily that he expresses things in a

strong way, its that he has a clear view of where he sees value and what a

company should or should not do.

ON THE SURFACE the Tribune deal had all the earmarks of a Zell classic.

Old-line media companies were being pummeled by the Internet and had

become radioactive to most investors. But the Tribunes underlying assets

were superb: Pulitzer Prize-laden big-city papers and a very valuable major

league sports team.

Zells buyout was a complicated affair, which saddled the company with $13

billion in debt, but it was carefully designed to thwart the IRS. In the process

of buying the company Zell transformed it into an S-corporation. These types

of corporationstypically small businesses with fewer than 100 shareholders

are exempt from federal income taxes, passing along their obligations to the

owners. But since Zell bought the Tribune through its employee stock

ownership planand since ESOPs are exempt from taxes on S-corp profitshe

had essentially rendered the company immune from federal taxation.

But while Zell had the tax game wiredand cushioned for 6% annual revenue

declineshe didnt account for a 30% plunge in advertising sales when the

economy tanked in 2008. We didnt have some wild-eyed idea. If it had

continued the pattern at the rate it had before, the deal would have worked

perfectly, insists Zell.



It didnt, and in 2009 secondary investors threatened a suit alleging that Zells

takeover was a fraudulent conveyance that left the company insolvent from

the onset. The allegations helped stretch the bankruptcy proceedings out over

years. Litigation relating to those suits is ongoing. In early 2012 another suit

leveled by Los Angeles Times staffers was also settled, with about 13,000

former and current Tribune employees awarded $32 million.

Although the Tribune emerged from bankruptcy in December, the newly

reorganized company is still suffering from Zells creative tax strategies. The

IRS has slapped the company with a hefty tax bill that could total as much as

$245 million relating to the 2008 sale of Long Islands Newsday. And in its

second-quarter financial report, Tribune disclosed that the agency is also

auditing the 2009 sale of the Chicago Cubs to TD Ameritrade founder Joe

Ricketts. That could result in another tax bill as high as $225 million before

interest and penalties.

There have been 14 newspaper bankruptcies over the three-year period since

the recession, but the Tribune bankruptcy stood out as the top of the cake

because of its size and the way it was done, says Ken Doctor, a media analyst

for both Newsonomics and Outsell. He thought he was buying at the bottom

of the market, even though he was using other peoples money, and it turned

out it wasnt anywhere close to it. That transaction stands out as the most

egregious example of funny money in newspapers of that era.

Its telling that Zells most recent deals have been heavily focused in what he

knows best: real estate. In addition to the mega Archstone deal, Zell has

splashed out $1.5 billion through Equity Group Investments on commercial

properties since the downturn. He snapped up Chicagos swanky Elysian

Hotel for $95 million (a 35% discount to its construction cost), and he paid

$95 million (a third of its replacement cost) for 200 South Wacker Drive, a

prime address inside the Loop. In New York City, Equity Residential has

teamed up with Toll Brothers to build (at a 20% discount from the

construction unions) a glass monolith called Sky Couture on 28th Street and

Park Avenue South.

The key to my success is that my focus is never on how good its going to get,

he says with a big smile. My focus is on the percentage that it doesnt work.

Sam Zell

Correction: An earlier version of this story incorrectly stated that the $8.2

billion buyout of the Tribune Co. raided the employee stock pension plan for

financing. The plan was established at the time of the buyout and allegations

that the creation of the ESOP violated federal pension laws have since been

litigated and settled. It also incorrectly stated that fraudulent conveyance suits

had been settled; they were consolidated and litigation remains ongoing.

-

You can follow me on Twitter or subscribe to my Facebook profile. Read my

Forbes column here.

Forbes 400: The Richest People In America The average net worth of Americas 400 richest rose

$800 million to a record $5 billion this year. The Youngest Billionaires On The Forbes 400 From Markand Elon to Larry and Sergey, these young billionaires have the world by the tail.



This article is available online at: http://www.forbes.com/sites/morganbrennan/2013/09/18/the-zen-of-sam-zell-inside-the-grave-dancers-4-billion-business-empire/

Same Zell_The Investment Zen of Sam Zell_ Inside the Grave Dancer's $4 Billion Business Empire -...

Documents

Transcript of Same Zell_The Investment Zen of Sam Zell_ Inside the Grave Dancer's $4 Billion Business Empire -...