Sam Zell's 'real world' of real estate
Alexandra Compare, WG'06
Issue date: 9/26/05 Section: News
boasted an impressive 5.5% interest rate even when the country's inflation rate loomed around 13%.
By the 1980s, pension funds began to argue for an increased allocation to Real Estate assets, translating into trillions of dollars of capital surging into the industry and creating a developers' paradise. Zell, convinced that the market had lost all fundamental sensibility, raised the first Real Estate Opportunity Fund with Merrill Lynch which closed with $400 million in 1988. It focused on buying high quality Real Estate at discounts to replacement costs. The over-levered banks began to dump assets onto Zell and so the "grave dancer" moniker was born. The resulting lack of liquidity in the Real Estate market led to equitizations in the early 90s and the development of the modern-day REIT structure. By taking funds public, Zell was able to contribute over-levered property and tuck his negative basis behind securities held in the resulting public companies.
Zell was candid with his criticisms of top MBA programs such as Wharton for failing to teach students adequate people skills and instead "canonizing" empirical tools. Although Zell did not underscore the importance of quantitative problem-solving skills, "I don't think enough effort in graduate schools is devoted to the real world. The real world is a meritocracy. The real world has roles for leaders - leaders have to lead by example and by interfacing with people... the definition
of success or failure, if you are gifted with a minimum level of intelligence, is all about motivation, dedication, people skills and desire...the elitism that has been created is dangerous."
Audience questions solicited Zell's opinion about such issues as the worldwide housing bubble ("Does not exist...started by people who have nothing else to do") to the next big opportunity ("If I knew, I wouldn't tell you"). Zell did share his recipe for success: first understand that everything boils down to supply and demand constraints, then get on the ground and meet people, make mistakes and do not stop until you find opportunities where your dollar is worth the most. Zell claimed that the recurring theme in his life has been people claiming "You don't understand, Sam." As his impressive career and continued success have proven, if Zell does not get it, there is little hope for eager MBA students.
By the 1980s, pension funds began to argue for an increased allocation to Real Estate assets, translating into trillions of dollars of capital surging into the industry and creating a developers' paradise. Zell, convinced that the market had lost all fundamental sensibility, raised the first Real Estate Opportunity Fund with Merrill Lynch which closed with $400 million in 1988. It focused on buying high quality Real Estate at discounts to replacement costs. The over-levered banks began to dump assets onto Zell and so the "grave dancer" moniker was born. The resulting lack of liquidity in the Real Estate market led to equitizations in the early 90s and the development of the modern-day REIT structure. By taking funds public, Zell was able to contribute over-levered property and tuck his negative basis behind securities held in the resulting public companies.
Zell was candid with his criticisms of top MBA programs such as Wharton for failing to teach students adequate people skills and instead "canonizing" empirical tools. Although Zell did not underscore the importance of quantitative problem-solving skills, "I don't think enough effort in graduate schools is devoted to the real world. The real world is a meritocracy. The real world has roles for leaders - leaders have to lead by example and by interfacing with people... the definition
of success or failure, if you are gifted with a minimum level of intelligence, is all about motivation, dedication, people skills and desire...the elitism that has been created is dangerous."
Audience questions solicited Zell's opinion about such issues as the worldwide housing bubble ("Does not exist...started by people who have nothing else to do") to the next big opportunity ("If I knew, I wouldn't tell you"). Zell did share his recipe for success: first understand that everything boils down to supply and demand constraints, then get on the ground and meet people, make mistakes and do not stop until you find opportunities where your dollar is worth the most. Zell claimed that the recurring theme in his life has been people claiming "You don't understand, Sam." As his impressive career and continued success have proven, if Zell does not get it, there is little hope for eager MBA students.