You're listening to TIP. On today's show, we have the honor of interviewing legendary investor and entrepreneur, Sam Zell. He's the founder and chairman of Equity Group Investments, a leading private investment firm. Sam began his career in real estate in the 1960s, but over time, Sam has made many bold moves and investments, earning him a reputation as a savvy and fearless investor.
He did this by founding Equity Office Properties Trust in 1997, which became the largest office re in the United States. In 2007, he sold the company for a record-breaking $39 billion. And on today's show, he walks us through how the deal unfolded.
And of all the many investment books that I've read, Sam's book titled, Am I Being Too Subtle? Might be at the top of my list. In this episode, we'll dive into Sam's remarkable career and discuss his insights into real estate investing, entrepreneurship, and what it takes to succeed in business. Joining us today as a co-host is David Green, an accomplished real estate investor and host of the Bigger Pockets podcast, which is the number one real estate investing podcast and always a top business podcast as well.
If you haven't already done so, I highly encourage you to go check out the BiggerPockets podcast. David will be joining us in the interview with Sam Zell, bringing his expertise and experience to the conversation. So to kick things off, David and I are going to give a quick recap of our conversation with Sam. So without further ado, let's get to it.
You are listening to THE Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.
David, so excited to have you here and especially have both of us getting to ask Sam Zell, all the questions, all the burning questions we've always wanted to ask him. We just got off of the interview with him and we were both, I think, pleasantly surprised at just the amount of wisdom he was providing to us and the generosity is really, I think, the word that was coming to my mind with his time and he just seemed comfortable and giving and open and transparent as he usually is. But curious to get your initial feedback on how it went.
It was so rare to hear a perspective like what Sam shared with us. And I'm known for analogies on my podcast. And I was thinking as he was talking, most real estate podcasts, interviews that you hear involve a specialist in one area of something like the human body.
They zoom in on a microscope and they tell you about this fingernail or how this knee cap works and say i'm zoomed out and showed us the entire human body and how all the pieces fit together and that is one of the ways that he avoids risk or he sees angles and other people miss like we all.
Learn when it's too late once the market is crash or once the opportunity is gone or once you've lost. And Sam shared so much wisdom on how to foresee these things coming and if you understand these basic fundamentals or these principles you won't get caught off guard and as he was talking I just thought you never hear this this is so valuable to be able to hear it was an awesome interview what did you think tray.
You know, what stood out for me was his balance between drive and ego, right? Because it takes an incredible amount of drive to achieve what he did. And yet it seems like every deal, every step of the way, his decisions were never made by ego. It was always sort of removing himself, looking at it objectively, looking at the numbers, either the risk reward or the sale price or what have you.
And being able to override any sort of sense of, well, this is going to change who I am, or this is going to personalize it in any way, just to be able to remove himself like that, but also have an insane amount of drive, right? Those two things, I just feel like you don't often find completely separate like that, or he just didn't seem to have much of an ego at all.
No, and he also shared some really specific details of how he managed a huge sale with Blackstone, like literal negotiation strategies. I thought that was brilliant, that he found sort of a backdoor that other people might have missed and how he leveraged that.
same door several times to increase the purchase price. And he also had a phenomenally insightful point when we were talking about supply and demand. And you and I had the perspective of assets that we pursue. And he talked about the actual supply and demand of capital factoring into the way that real estate values have changed and certain asset classes have seen rise as well as have seen falls. And so make sure you listen all the way to that because that's a perspective I haven't heard anyone share before.
All right, so without further ado, here's Sam Zell.
Sam, did you do your hair like that today just for me? I spent an hour cooling. Sam, even though you're often referred to as a real estate investor, I know that you're actually an industry agnostic investor and entrepreneur, but you've really built this massive fortune in real estate and people, if you know, referenced that quite a bit. And you also pioneered the real estate investment trust industry. And you predicted its growth to over a trillion dollars, which is now done.
And we don't often cover reads on the show, David might on his, but in your opinion, I'm curious, have reads fully achieved what they set out to in the form of liquidity and transparency? And if not, what would you do to improve the industry from here?
The REIT concept was enacted as part of the last thing that President Eisenhower did in 1958. There was something called the cigar bill and they added the REIT clause to the cigar bill and that's how REITs got created.
Between 1958 and 1991, the re-industry grew from zero to about seven billion dollars. The justification to the creation of REITs was to let the little old lady from Pasadena have an opportunity to own part of, quote-unquote,
the last area called commercial real estate. To happen to that point, there was no way that anybody could own part of an office building or part of a major shopping center or
a big apartment complex because, in effect, there was no short pieces of it that were available. And the idea was to create a liquidy entity that would provide that kind of an opportunity. During that, it would take 30-year period. The rate of growth of REITs was inept to say the least. And the reason was frankly very obvious, and that is that
In terms of the attractiveness of real estate as an investment, the private market was dramatically more attractive than the public market. And the public rates that were created during that period of time were generally staffed by people who frankly couldn't make it in the private market. So he had a lot of guys who retired from insurance companies running rates.
The reads were very small. The reads had relatively little access to capital. And to be honest, even though the goal was to quote and quote, create an opportunity for the little little lady from Pasadena.
to own commercial real estate, the reality was there really wasn't significant demand, and there wasn't significant promotion to create that demand. Then in the ABS came, the Japanese came, the savings and loans went broke, the insurance companies came to the late 80s,
starting to go broke. And all of a sudden, the accessibility to the capital markets of real estate disappeared. And again, 1989, a guy named Clark,
became the controller of the currency. And she basically went around and asked all the banks, what's your exposure to the R-word and the R-word was real estate. And the beyond losing insurance companies and savings and loans, and by the way, taking advantage of the public through the creation of public limited partnerships,
all of which were designed to enrich the promoter and destroy the little guy. All of a sudden, you know, in 1991, there was no source of capital for the real estate industry. And yet you had all of these real estate players and people like me, people like Mouse Simon, people like
and I can go on and on. The people who basically ran the real estate environment, a real estate world, were basically in a position where they had no access to capital. And that led to, as somebody says, you know, convention is the, you know, the necessities the mother really had mentioned that the same kind of situation here
where followers said and everybody looked around and realized that the only source of capital for the real estate industry was the public markets. And at the time, there was a guy named Richard Salzman, who was head of real estate from Euroengage. And Richard took it upon himself to create and begin what we call the modern era of real estate, of the rich business.
And all of us, whether it was me, or Mao Simon, or who, or Tao Man, or whoever, felt that the only option was to access the public markets. I was very lucky in that I had been involved in the public markets.
really for 10 years at that point. And so I had a perspective, I had an understanding of what I thought it took to succeed during the tour of 1993.
The real estate investment industry in the reed world invited me to New Orleans to give a speech on quote the minor reed era. I went to New Orleans. I gave this speech and basically what I said to what at that time
was 1,500 people in the room. The previous year, I leak it with 15 people in the room. And I basically said, you got to stop screwing the public. You got to create a product that the public wants to own that solves the problems that the public has. You got to create the environment where it can grow.
In that speech, I basically said that if you achieve that, if you create a positive environment, then there's no reason why a Ford Motor Company can be a public company or other, you know, big, cat-backs, access-heavy industries can be public companies. There isn't any reason why real estate couldn't be the same.
It was a little doubt, in my mind, that there was an enormous demand for cash flow emanating from real estate if we delivered a product to the public that, in fact, met the needs and objectives, so the public wanted liquidity
public word transparency, the public wanted to be able to differentiate between the root network and the root that didn't, you know, analysts wanted to be right.
And so you've got to create an environment where, in effect, you're going to deliver enough information so that you can, in fact, be in a position to make a conclusion. And in that speech, I predicted that in 10 years or 20 years, I remember how long that this industry would meet 250 million in ultimately a trillion dollar industry. And that's, of course, what happened.
So that's kind of a little bit of a, you know, history of how the REIT era will begin, why it began. And frankly, why it's continued to grow, because there's still a demand for transparency. There's still a demand for cash flow. There's still a demand for participation in
in an area of the U.S. economy that's, I don't know whether it's 20% or something like that, but it's a very significant part of the economy that wasn't really available on the public markets until the minor re-era.
And there's a demand for yields. I'm wondering with all this talk with commercial real estate, if there's sort of a ticking time bomb and a lot of these freets that maybe a lot of people are just passively owning. I'd be curious, Sam, if you could weigh in on the risks may be involved that and how that might affect the market currently.
Well, first of all, you know, real estate is a business. It's a business like any other business, you know, and businesses go through cycles. We're sitting today in the situation where parts of the real estate business are in young big trouble. I mean, I sold equity office in February of 1907. I've left 2007.
I was the largest owner of office space in the world. Boy, I wouldn't like to be the largest owner of office space in the world today. Flynn, you confronted with a whole bunch of challenges. First of all, prior to entering the pandemic, we had a very unusual situation. And by the way, everything, whether it's real estate or automobile, let's have what we want to talk about.
Everything comes down to supply and demand. When supply and demand is in balance, the investor gets a return. When supply and demand are out of balance, somebody gets hurt. In the period prior to the pandemic, we had a very unusual situation where companies like WeWork and other providers of workspace
We're taking down huge amounts of office space in anticipation of demands coming five and seven years forward. So we begin the pre-pandemic period with office space being in oversupply. But nobody or not enough people understood
that we were dealing with a class of an asset class, where oversupply already existed. But since these companies took down the space, the statistics said that there was no oversuppart. Then in fact, there was a shortage when there's a shortage, you know, it's
developers will build buildings. So in the pre-pandemic period, we all of a sudden saw significant growth in the amount of space available because the perception was that everything was forward.
But in fact, because of we work and other workspace businesses, reality was just the opposite. And then there was a significant oversupply, but the oversupply was being eaten by these companies as opposed to being eaten by the market.
So when you men went into the pandemic period, you had all these new office buildings going up, whether it was Hudson Yards in New York. You know, we in the added, I think, six million plus square foot office buildings in Chicago in almost every market in the country, because this is six, Sarah.
The markets were sold and therefore needed new supply. So new supply was added to a market that was already oversupplied and the results were obviously predictable.
Now, it was then hit by the pandemic. The pandemic created this work from home that I don't endorse, that I don't think is any kind of a long-term thesis, nor do I think 10 years from now will be, you know, will be relevant in terms of the definition of Black Lives Space use.
But during the pandemic, a work from home became the way in which companies addressed the issue. They mad, of course, made it to office space, how I was valuable. If you were a student of office space or an investor in office space,
He would have recognized what was going on and would have avoided being in any way, shape, or form, part of the problem. Unfortunately, a lot of people didn't pay attention. I mean, we own one office bill. We used to own a couple hundred of them. That went on for spelling is our home office.
and we only for different reasons and just yield and appreciation. For us, it is a relatively simple analysis of understanding the supply and demand and understanding.
what was going on, understanding that the Fed has created a scenario of free money that, you know, skewed people's understanding of what opportunity was. I mean, we took over a REIT call back when it come in wealth, and I think 13, and it had 145 assets.
seven million dollars worth of assets, most of them office buildings, between them now, who sold everywhere. Except the two we needed to maintain our read status.
I can't remember a time in my life where I've sold 140 semi-assets and don't rule one transaction. Don't rule in saying, God, I wish we hadn't sold that one. I'm just thrilled and delighted.
had everyone we sold, frankly, not very sympathetic to the people who wore them, because they were drinking the Kool-Aid. And unfortunately, they're going to end up paying a pretty heavy price for being overly optimistic and not doing their homework during that period of time. But from our perspective, I mean, this is a perfect example of doing your homework and making decisions accordingly.
retail sales on the internet. Another example, I mean, if you looked at what was going on, I remember when you're watching sports programming in the early 19, whatever, 2000 and eight or nine.
and in companies when we are list WTCW or what their URL number was. And I'm looking at it and saying, Jesus, this is going to take the commodity side of Rachel out of the picture. And he took a while and took a while for people to get adjusted.
But the entry was obvious. Maybe you wanted to buy a fancy dress, you wanted to go feel it, we'll touch it, and that's fine. But the vast majority of retail sales were not fancy dresses. There's socks and underwear and shoes and all kinds of stuff that could easily be bought over the internet.
And as a result, you know, you go from Madison Avenue in New York at 56th Street to 87th Street, which used to be the prime retail in America. And now you got our vehicle stores. You got 28% of Michigan Avenue in Chicago, vacant, Union Square in San Francisco. And these were the citadels of retail sales.
These led and set the tone to the entire retail industry and to make it. And the owners of my real estate own a lot of making real estate. And we said to yourself, well, didn't they see this?
And I'm clearly not, because they continue trading these kinds of properties with relatively short-term leases left to go at prices that reflected, you know, the jack and the bean sock, and the bean sock just kind of keep growing.
And instead, they're saddled with, you know, dramatic losses. So those are two examples of if you did your homework, if you really understood supporting the man, if you really maintain a level of fear. And by the way, you know, I think that maintaining the level of fear
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You mentioned earlier this dynamic of supply and demand and understanding that will reveal the angle that you're looking at. I thought that was very insightful as well as simplifying of this overall cause. The people that bought these bad assets that you said you could see coming from changes in industry, do you feel that that's
A reflection of a monkey see monkey do approach to real estate investing or business in general where people listen to podcasts or read blog and say, oh, this person did it. So then I should go do it as well.
Well, then we're learning all of the above, all of the above. But number two, the words surround supply and demand also reflect supply and demand of capital. This all occurred not in a period of assurance of capital.
Not in a period of difficulty in getting a bank loan, not in a period of difficulty in getting a mortgage, just the opposite. It was as easy as possible. And the result was that we flooded the market with money.
We kept lowering the cost of the money. So came to me in the United States almost got to negative interest rates in the loud parts of the world. We got to literally make any of the interest rates. And then all of a sudden everybody says, well, what do I do?
You know, what do I do with the money? All of a sudden, I've gotten more money than, you know, than I ever, but I've passed away that access to all kinds of capital. And I've got to find ways to use it. We had institutions that were piling up money, looking for places to invest, and, you know, we're all subject to, you know, changing and flows. I mean,
When I first, in 1989, was the first time that I, quote-unquote, tapped into the institutional market to raise money for real estate, imagine how shocked I was to find out that daily personally institutions
that I'd call the bond to not have an allocation for real estate. They didn't have an allocation for stocks, bonds, municipal bonds, didn't let real estate wasn't a quote unquote, investable class.
facts forward 20 years, you couldn't find anybody who didn't have a real estate allocation. So they many had a real estate allocation. And the question is, how do they fulfill that allocation by more real estate? And they did. And I'm afraid they're going to be sorry.
So on that note, in this current environment of high inflation with low unemployment, how is that impacting or informing your current investing approach?
Well, I think that I'm 81 years old. So that means that I was around in the 70s. I remember in 1978, you know, we closed the loan in an apartment project. We had just walked in the inflation rate that day was 13 and three quarters. 13 and three quarters was the inflation rate.
So I was forced to learn how to navigate a very, very difficult and treacherous environment, even though it also was an environment that created opportunity to do really, really well. I haven't forgotten that experience.
And so despite all of the excitement and stuff that occurred over the last 30 years, I hadn't forgotten what it meant. I hadn't forgotten what it took to generate that kind of inflation.
I looked at what the Fed was doing, and I looked at what they were eating. What I saw in the fact that the interest rates were going significantly below the inflation rate. You don't need to see. All you need to know is that if the cost of money is four or five hundred basis points less than the inflation rate,
you know, things are going to get turned upside down. I don't think you need a PhD to figure that out. It's just another example of supply and demand. And with all of a sudden the supply became excessive. The result is that, you know, over the last 10 years, we sold a lot of real estate. We bought very little.
And I'm waiting and hoping that they'll be an opportunity to reload and buy a bunch more stuff.
But, you know, I made a fortune buying real estate at below its replacement cost, which therefore guaranteed me that the guy couldn't build something across the street at less than my basis. Everything today is still being priced.
to deal with it. Numbers that are above it. In fact, when we're allowed somebody to building compete with me at a lower cost, that doesn't make sense.
I love this point about the supply and demand of capital. You've got banks, parking money with the Fed. You've got depositors going to money market funds. I was telling David, I was at this dinner with a top four bank that the other night and I asked them, what are you going to do to discourage depositors from moving money to money markets? What incentives are you providing? And it was like this hush fell over this 20 person dinner and there was
because they were like, we don't really have an answer for it. And that's kind of a huge issue. And you're seeing the capital dry up and you're seeing even smaller banks becoming at risk of losing depositors. So I'm just kind of curious, have you ever witnessed anything like this? It's different from the savings and loan crisis to a degree in the GFC. And I'm just kind of curious how you see this playing out where the liquidity eventually does enter back into the markets.
Why is it different? You know, we only had no new census. The Silicon Valley deal occurred three or four weeks ago. We've had a run in the banks. We've had an enormous amount of deposits taken out of the banks and either taken out of the mid-sized banks can put into the to lead to failed banks or put into money market funds.
That's not a solution to anything. That's just moving the pegs in the game. And nobody's solving a problem. They're just finding temporary ways to overcome what is a significant challenge of not being able to safely put their money away today.
I wouldn't be surprised if really not, and I'm not projecting this, but I wouldn't be surprised if the next thing we see is some big money market finally getting in trouble. Why? It's a client demand. All of a sudden, we got so much supply.
All of a sudden, they have so much demand for their, quote, unquote, services that they can't afford enough to justify. So they'll come up with subprime loans or some other, you know, new methodology to, in effect, cause themselves their own problems. You've criticized the Fed and know what they've done to date. I'm kind of curious if Sam Zell was sitting at the helm of the Fed right now. What would be the next move you would make?
raise interest rates. We had to raise interest rates three or four or five percent, and we have to make it painful. Everybody's so worried about whether we're going to have a soft landing. I'm worried about what kind of landing we're going to have, because if we don't stop the inflation in some very, very deleterious
thing. I mean, it robs purchasing power of everybody. And you know, for until 1971, the world was protected from inflation by the fact that we didn't have fiat currencies, with currencies that were headed to price a gold.
In 1971, we, in effect, converted from cognitive currencies to food currencies. And today, you know, there's nothing backing the US dollar. We've increased, we've increased, pardon judge, seven, eight trillion dollars in three or four years.
How does that work? I don't know how that works. I know how, what's going to happen. Because I think that we just can't, just can't, you know, like, I was supplying the man. He just, he'd create that much new supply and he had it work. And you know, my big concern for the last five years has been loss of ELS because the reserve currency of the world.
I think that probably we would result in a 20-25% reduction in the standard of living in the United States. We have this extraordinary benefit of being able to issue paper if we couldn't issue that paper.
or we had to pay the real price of issuing that paper. So our life will be different. All you have to do is look at what happened to England after World War II, up until that time, sterling was the reserve currency of the world. And then it wasn't.
And then all of a sudden, when we came, you know, part of the sick man in Europe, as opposed to leading economic player in the world had sent the standard, as opposed to having come up with it to meet the standard.
It would appear that this ridiculous inflation we've seen paired with fears of more inflation coming, because I agree with you. I would love it if you were the head of the Fed, because we could put an end to this. But most likely, that's not the way the American populace votes. We tend to vote in the least in these countries. Really available.
I went to the University of Michigan and I took Econ 101 and I will never forget walking into that first classroom of that first day and on the blackboard, the professor had written supply and demand.
I've never forgotten that lesson and everything comes down to supply and demand. There is a little question that the lowering of cap rates, the increase in the price of real estate, and by the way, the increase in the price of a lot of things, not just real estate, hard thing kind of hard access is all been related to there is more supply of money than there is demand.
I'm critical of the fed, and I'm critical of the leadership of our country, because they, in effect, went over and allowed themselves to become the victims of too much supply, and therefore, they need me on the deterioration.
of the values of everything, because in effect, everything is measured in terms of dollars, as to the question of either places that I think are better, too less than others. Well, obviously, you know, they're not really long and slums as indexable, but the most helpful is the city of investment.
has always been that I've never tried to identify a market or a particular opportunity as being the quote-unquote right place. During the 70s, from about 1973 until about 1978,
I bought about $4 billion worth of real estate. And $4 billion worth of real estate at that time was a staggering amount of real estate. And I bought most of it and a dollar down in a hoax certificate, because the real estate industry at the time was suffering from the next civil war supply in fear of demand.
And at the end of that period, I appeared on a panel. And when we got to the question and answer period, this guy from one of the insurance companies raised his hand and he said, you know, Mr. Zell, you bought real estate everywhere in the country. And where do you should do the best?
Where was you? Where was the risk for reward highest? Nobody even ever asked me that question. And so I thought about it. I looked in and they said Toledo, Ohio. Shouldn't the guy looked at me? God, I had lost my mind. It isn't Toledo, Ohio, fixing gas.
He said, and later on, I know that he's losing population. Toledo and I was the competitor nation. Toledo and I was full of all these rustled companies that were going broke. She doesn't make any sense. She said, well, if he was sat on the board for the insurance company,
In 1975, can somebody brought through a apartment building or an office building or do some real estate activity before the board to approve a loan? You would sit there and say, I don't want to put any money in till New York, Ohio.
I don't want to be dependent on the car companies or part of the country that's growing. So you turned on the long. So the result was that what I did buy in Toledo.
I had built competition and that's another thesis that I very strongly believe. You and I all went to high school and we all grew up and we're all told how wonderful competition was. Competition kept prices low, competition created.
A competitive zeal. And by the way, the competition is terrific for you. Me, treat like a monopoly. I couldn't have a monopoly. At least in the middle of Godfully. So, when I bought two or three projects into little oil, I didn't have any money to compete with. It could raise rates, change the deal.
to find myself in a position where I didn't even have to worry about what the guy did across the street because there was no guy across the street. So rather than say, gee, I want to own stuff in Phoenix because Phoenix is growing. Well, there's a lot of people who bought a lot of real estate in Phoenix who wish they hadn't because there's
It's a limited ability to create demand. Places like Atlanta and Dallas and Houston. They grew developers. They grew people who wanted to build.
They grew savings in loans. They wanted to lend money. All of those were wonderful things unless you're an investor. If you're a slipper, it's a different story altogether. Then you're not an investor. Then you're just saying, okay, can I catch the minute when the market is very, very strong? I can buy something and sell it quickly and make a profit. That's very different.
Then being an investor whose real goal is long term appreciation. You know, people might go gains in Microsoft or build it Google or all of these people made great fortunes check Bezos. But the real reason we made fortunes, the real reason they're billionaires is because they didn't have to mark to market.
at the end of every year and pay his tax. So if our Bill Gates and I owned Microsoft stock, the stock could double and I didn't have to pay any tax on it. I only had to pay tax when I sold and that's a very important principle in terms of the creation of wealth on a long term basis. Let's take a quick break and hear from today's sponsors.
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All right, back to the show. I'm really curious about the selling aspect. One of my favorite quotes from your book is that you said, every day I own something, I'm choosing to buy it, begging the question, you know, would I buy it at today's price? And I think investors are often sold on this idea on buy and hold and you were even just, again, reaffirming the merits of
Doing that kind of thing and taking a passive strategy to a degree but when does buy and hold make sense and when do you consider the daily price as that you know what i buy at taste price in acting a decision to sell.
Well, you always ask yourself the question, you know, would I buy in at this price? Would I sell at this price? You have to consider the tax implications until Sam takes a big bite of everything you sell. So you need to be keenly aware of what you're at after tax.
Yield is not your pre-tax yield. And what you paid for is much less important than how much you get left with. It's to use this fire and proceed. Sam, you sold the equity office rate to Blackstone for $39 billion in 2007, speaking of selling. And that was one of the most insane bidding wars in history. Looking back on that transaction in your decision to sell, what memories or lessons have stayed with you?
Well, you're right, at least quite an experience. And what was interesting was that I had a bunch of really, really smart guys on the other side. And in the beginning, maybe six months before the transaction, someone approached me and wanted to buy a equity office. And I was really surprised because I thought that
Equity Office was just too big for anybody to buy. And then I really, at that time, fucked it. We probably owned this company forever. And when we passed on to other generations of investors, because just the scale was so large, that it just didn't fit, you know, anybody doing a buyout of it.
In that particular offer or inquiry, was there a price that frankly I didn't think was attractive even if I wanted to sell or could sell in selling.
didn't do anything about it. I said, no, and that was the end of it. And by the way, as with all of our companies, we continually have looked at our companies and done in the analysis of what they thought they were worth.
so that we never were in position where we weren't prepared to understand what we are and what we thought what we are always worth about six months later blackstone approaches can as opposed to giving us an offer.
They said, what would it take for Sam to sell equity office? And I remember my response being, yes, it would take a God and Father offer, which is, you know, from the Mario Puzio story of the God and Father. And I said, it would take a God and Father offer for me to consider selling equity office.
And remember responding to the broker and saying, that's what it would take. And much to my surprise, they came up with one and pilots extraordinarily shattered by what they thought the company was worked. And I said, well, I said,
I was willing to consider it, but I would only consider it if the breakup fee, which is the fee that was paid to a loser, if there was a competitive bid, was small enough.
that it would not discourage anyone from competing. Because obviously in time there is a sale, it's nothing more than price discovery. And I want to make sure
to protect my investors, to protect myself, that I could say that I had just, you know, gone through and identified what I thought the real value was. And so we ended up concluding in Peel, it was $10.36 billion, with a $200 million rate of fee. And normally, a break of fee and a deal like that would be to protect 3%.
So normally, that breakup fee should have been a billion, too, or something like that. Instead, the breakup fee was $200 million, which gave me comfort to that. And no one would be discouraged from bidding based on the fact that there was a humongous breakup fee, and that the price it's playing was so high. So that was one of the first and part of it.
strategy involved in the sales. By the way, I'm a great believer that there's always significant strategy in everything you do, whether you're selling or you're buying, there's a strategy involved in a thought process that's involved.
And so when we concluded a deal, I think it was, I think the first price was $48 a share, a $200 million break down fee. And then there were various people who expressed their interest or theoretically expressed their interest. One never knew you until you see the color of their running.
So the Blackstone people who are wearing a particular, you know, look at the situation and said, you know, we're vulnerable. Somebody could easily, you know, outbid us. And we didn't want to be outbid. And so he came back to us, even before we had a second pitch and said, you know, we'll raise the price if you raise the bright up fee.
Yeah, we'll pay a little more if you'll make it a little more expensive for anybody to compete with us. We agreed. So then the price went down. You remember exactly where they went from 48 to 51.
There was some discussion and speculation that there was another group that I was about to get involved in. But that other group had a problem. And the problem was that the banking system had been tied up by Blackstone. Blackstone had me in a one-long subtle fashion or another, suggesting that almost everybody could play.
And nobody wanted to quote me on the wrong side of a deal, so literally a potential competitor couldn't finance.
competing bid. So then it became my responsibility to sit down with Blackstone, which I did. And in a nice, you know, comfortable fashion, explaining to them that how we did have antitrust laws, didn't let, you know, turning up all of the sources of capital for a potential competing bid didn't really check the definition of what was quote acceptable behavior.
And they ultimately agreed in that let go over to financing sources that ultimately became the financing sources for a competing bid. We're applying the Blackstone people then looked at their situation and said, gee, maybe we ought to raise the bid a little more. We could get a higher rate of pay in more important
And rightfully was that the original provision did not allow Blackstone to have any contact with any potential buyer of the assets of the OP that Blackstone didn't want. And so they came back to us with still a higher bid with a higher break of fee. But most important allow
with us agreeing that they could engage in conversations with potential buyers who wanted to buy pieces of EOP that they didn't want to own. That's how we ultimately made the deal.
where they were given the right to negotiate with potential buyers for parts of the portfolio, we increased the break of $3 million to $700 million, and then we closed the deal of February 7. It was a great day. I was still smiling. Interestingly enough, Blackstone, to their credit, was able to liquidate almost two thirds of the portfolio.
at prices above what they were paying us for the whole. So the net result was that from our perspective, the deal is an enormous economic success from Blackstone's perspective, because they had stole two thirds of the portfolio at a previous year, when measurement of how they did, they did extraordinarily well.
The unfortunate part of the story was that almost every single buyer who bought anything but any poor part of it portfolio from Blackstone in their losing because they had basically crossed the line and paid too much.
So that was my experience with that particular transaction. I was learning a lot of lessons from it. Most significant lesson is, you know, to fear a seller, create competition.
sellers who don't create temptation don't get the highest grace. And at the same time, being the last guy from the totem pole divides something, also doesn't likely produce a positive result.
My question that comes up, I have a couple of, one is, you know, I'm curious how you celebrated on that day. And I remember hearing that you, you bought your partners or maybe with the Blackstone folks. I can't remember some watches that were engraved, timing is everything. And I just, I thought that was such a great little anecdote from that transaction. And you're right that timing was everything. And of course, that was right before the great financial crisis. And
The other thing, the only room with your story is that the watches went to the losers in the bidding war. I see. Gotcha. It's not subtle at all. Right. Yes. The watch went to Barry Stern, like the watch went to Steve Rott.
That's right. Okay. Thank you for that correction. It's not uncommon for people to get a sense of or lack of purpose after something like that. And you were already a very successful man, even before EOP. But I'm curious how much of your identity was wrapped up in that group and that sale. And were you ever fearful of, you know, oh my gosh, what?
What is my purpose going beyond this transaction? Or at any point in your career, have you ever experienced anything like that? You know, I think it's a very interesting question. I don't think I've ever tried to answer it. Nor do I think I've ever really thought about it. Next Monday, I'm closing another transaction.
where I'm the majority beneficiary of the transaction. And I'm getting $500 million. And I never thought about it as anything other than part of the goal and the flow of what I do.
Our numbers are bigger. I don't think that I got smarter because the numbers got bigger here, or younger because they didn't. I'm challenged by the opportunities that are, you know, given to me. I'm blessed by the fact that I have the skill set and the credibility to be able to achieve the objectives.
But I don't really think I've ever really thought about it as competition between me and somebody else. I've always thought about it as, well, this is what I do. I'm very lucky that society places a very high value.
running the peculiar skill set that I was born with. And thanks also for the opportunity. But I've never really thought about this climbing a mountain and you know this transaction or that transaction.
represents, you know, some kind of a peak. I've done a lot of transactions in my life. Most of them from a numerical overview are real estate transactions. But I've done non-real estate transactions that are significantly smaller than, say, the OP sale, that I'm equally as proud of.
and equally as satisfied with, because they represent a challenge, a challenge that I've overcome. I think historically, I've always believed that I have a responsibility to society, to everything that I do, to be the best at what I can possibly be the best at.
Yes, society has rewarded me with enormous financial rewards. I think that's wonderful, but it's not what drives me. What drives me is, can I do it? Can I achieve the intention?
Can I do so legally and with pride that I consider today and describe a transaction to you and feel very comfortable that I tested my limits? Mind out, you, could I do it? In my doing it, I'm in great satisfaction. I certainly have made more money.
that I can ever spend. Money was never really the driver. Other than money creates freedom. Money creates an environment where you can do what you want to do.
maybe without asking permission. So I guess to look at what I do differently than maybe somebody who's very early staging their career and an opportunity to make a head is a real, real satisfaction. And I'm both sympathetic and appreciative of that position. I'm just not in that position today and haven't met him for a long time.
Do you mention that money equals freedom? You've also said liquidity equals value. Can you explain that philosophy and how that's led your investment decisions throughout your career?
come through your helmet to realize that you're in total control of what you're doing. There's a sense of freedom that's irreplaceable in the same manner, having the resources to not start a reconversation.
What can I afford it, whether I want to do it? How are two very different things? There's nothing more important to me than freedom. I'm a great student. I read an enormous amounts, a very understanding and knowledgeable about loss of freedom to all kinds of people, you know, from all kinds of different situations, many of them.
frankly, you know, hearing negative. So I guess what I would say to you is that I review money as a way of eliminating a step to achieve my objectives.
but not be constrained by limitations. In the same manner, when it comes to liquidity equals value, that's something that I coined for my own path to remind me of the fact that I'm constrained
only by the exterior events that occur around me. To the extent that I have liquidity, I can make choices. If I can make those choices, I can also, without the constraints,
of liquidity, you know, is I don't have to start by saying, where am I going to get the money? But I'm going to start by saying, how do I want to stand the money? What do I think is important? I think those are those are criteria that define what I call freedom, you know, certainly that big part of my life.
Sam, we are so privileged to get to talk to you today. I really appreciate all the wisdom you shared with us. Thank you so much for coming onto our show and sharing all of this with our audience. We really appreciate it and we wish you well and hope to do this again someday soon, but appreciate the time today. Thank you.
Well, thank you very much. I'm glad that you chose to make me part of this process. I've tried to answer you as uncertainly as possible. I mean, you made reference to the fact that I wrote a book. And as you know, the
When I got to the point where I was attempting to describe or come up with the name to the book, then I had a lot of questions from names. There was only one that really made sense. Janelle was, am I being too several? Because all my life, the one thing that's governed the way I act,
Because I want people to know where I stand. I don't ever want anybody to leave a meeting with me in saying, do you think he meant? And so always been very direct. You have tried to be very direct today and certainly made a pleasure. Thank you very much for the privilege.
Thank you, Sam. David, Sam, this was a fantastic interview. I've interviewed lots of real estate investors and I think you gave the most unsettled direct and still valuable advice that I've maybe ever heard. There is a shortage of people in our space that have been through several different market cycles that have such a broad perspective that you have. So many people are trying to be gurus after doing two or three deals and
Raise this money that's very easy to raise and giving bad advice. So thank you very much for taking some time out of a very busy day to share some wisdom and hopefully prevent some other people from getting hurt. It was an honor. Truly my pleasure. Thank you, gentlemen. Good night.
All right, everybody, that's all we had for you this week. If you're loving the show, don't forget to follow us on your favorite podcast app. And if you'd be so kind, please leave us a review. It really helps the show. If you want to reach out directly, you can find me on Twitter at Trey Lockerbie. And don't forget to check out all of the amazing resources we've built for you at theinvestorspodcast.com. You can also simply Google TIP Finance and it should pop right up. And with that, we'll see you again next time.
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