The Investment Zen Of Sam Zell: Inside The Grave Dancer's $4 Billion Business Empire (2024)

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 he's buying it, but he's just renting," says Zell, who knows a thing or two about real estate--and 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 opportunity--and one chock-full of juicy tax loopholes to boot.

It didn't 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 failure--the largest in his life. The company Zell bought? It's effectively dead and being chopped up for parts.The employee stock pension plan he created in the takeover is worthless.

For Zell, the battle--at least his part in it--finally came to an end in December 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. "It's 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. "There's this illusion that they [journalists]... are doing God's 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 America's most creative dealmakers. The media love nothing more than writing about the media, and the easy story--and the one that has been told the loudest--paints 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 thousands--if not tens of thousands--of jobs. Think of him as the poor man's 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 he's 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. “I’m not very sensitive about the Tribune,” he shrugs. “Even though everybody else is.”

SAM ZELL'S WARREN of Chicago offices, where he's 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 Zell's 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 "Dante's 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 people's mistakes. Were Zell to update that article and expand it into a book--call it Sam Zell's 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 Zell's 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 Brothers--and 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 didn't forget to outsmart the taxman in the Archstone deal: The units were purchased through Zell's 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 Residential's legacy units. His hunch was dead on.

Zell's hunches typically are. In 2007 he sold Equity Office, the country's biggest office building landlord, for $39 billion to Blackstone Group--the largest real estate deal ever--just 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, Zell's 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 don't have hesitancy," says Zell.

That's 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 companies--often emerging from bankruptcy--with 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; don't 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 I'm 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 sophom*ore 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 Arbor--a time he happily recalls as "extraordinary." By the time he graduated from Michigan's 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 Lurie's 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 Sam's 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 Lurie's 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. It's one of the many "Sam-isms" Zell is fond of spouting. It's also one of 11 that grace an illustrated, palm-size red booklet he uses as a business card. (Others include: "Unless you're the lead dog, the scenery never changes," "We suffer from knowing the numbers," and Zell's 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 own--or have the capacity to manage--more 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 buildings--they also allowed him to distribute 90% of taxable income in dividends to investors through publicly traded shares.

Zell's 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.

"He's a visionary in this industry," says Ross, who became chairman at the University of Southern California's real estate school after his tenure at Ernst & Young. "Some people think he's 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, Blackstone's 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 isn't necessarily that he expresses things in a strong way, it's 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 Tribune's underlying assets were superb: Pulitzer Prize-laden big-city papers and a very valuable major league sports team.

Zell's 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 corporations--typically 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 plan--and since ESOPs are exempt from taxes on S-corp profits--he had essentially rendered the company immune from federal taxation.

But while Zell had the tax game wired--and cushioned for 6% annual revenue declines--he didn't account for a 30% plunge in advertising sales when the economy tanked in 2008. "We didn't 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 didn't, and in 2009 secondary investors threatened a suit alleging that Zell's 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 Zell's 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 Island's 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 people's money, and it turned out it wasn't anywhere close to it. That transaction stands out as the most egregious example of funny money in newspapers of that era."

It's telling that Zell's 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 Investmentson commercial properties since the downturn. He snapped up Chicago's 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 it's going to get," he says with a big smile. "My focus is on the percentage that it doesn't work."

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.

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