How Sam Zell Became a Real Estate Mogul

Worth $6 Billion, Zell's Success is Based on Real Estate Investing Principles

Equity Group Investments LLC Chairman Samuel Zell Interview. Credit: Bloomberg / Contributor / Getty Images

 Although Chicagoan Sam Zell is best known for owning such famous media properties as the Los Angeles TimesChicago Tribune and New York's Newsday, Zell's fame and $6 billion net worth ultimately originate from his mastery of real estate investing principles. This mastery, demonstrated repeatedly over a 40-year career, results from Zell's acute understanding of real estate market mega-trends and his dedication to turning around troubled properties.

Zell's Do-It-Yourself Attitude

Even in childhood, Zell combined canny entrepreneurial sense with do-it-yourself determination. As a young boy in Chicago, where he was born to Polish refugees in 1941, Zell began his business career by buying copies of Playboy magazine and reselling them to neighborhood boys at a 600 percent markup. He applied the same principles when he entered real estate investing in the 1960s. Zell, who received his bachelor's and law degree from the University of Michigan, talked himself into a property management role with a local landlord. Soon Zell began to buy distressed properties, fix them up and rent them to students. Zell was a hands-on landlord who put a lot of energy into scouting and fixing up locations.

Zell's Belief in Diversification and Opportunity

In 1969, Zell and his partner Robert Lurie formed Equity Properties Management Corp. to centralize Zell's rapidly diversifying investments in real estate.

In the 1970s, Zell expanded beyond his initial interest in residential real estate and began to acquire office space under the aegis of Equity Office Properties Trust, or EOP. Zell structured his business as a series of real estate investment trusts, or REITs, under the Equity umbrella. EOP was one REIT; Equity Residential Properties Trust was another.

The REIT structure allowed Zell to radically reduce his corporate income taxes. In addition to exploiting the REIT tax structure, Zell polished his skills as a salesman and convinced an increasing number of investors to entrust their money to him.

Equity Properties Management grew throughout the 1970s, but it was not until the 1980s that Zell saw his opportunity to become a big-time real estate mogul. In the mid-1980s, US real estate crashed, and Zell swooped in to acquire office and residential properties at fire-sale prices. He also got more deeply involved in the manufactured-home business, which would become another branch of Equity Properties Management. When real estate rebounded, Zell realized vast profits from his investments. He began to spread the wealth, for example by buying Anixter, best known for manufacturing computer and Ethernet cables, in 1987 for $600 million. Anixter is worth eight times that amount today.

The Anixter investment was typical of Zell's strategy, as he tended to invest in relatively anonymous properties. Zell's real estate portfolio remained remarkably undistinguished over the years, a workaday collection of individual properties that were not necessarily spectacular in themselves.

Zell's Shortfall of the Equity Brand

Zell's crowning vision in the early part of this decade was to turn all of his Equity Properties Management REITs into strong national brand names. Previously, the only real estate mogul to get branding right was Donald Trump, but Trump's aspirations were limited to higher-end residential and commercial tenants and moneyed casino enthusiasts. Zell wanted his brands to appeal to residential and commercial customers at various income levels across the country.

The primary purpose of the branding exercise was to leverage Zell's gigantic office-space holdings. The idea was that the Equity name would persuade enterprises with many locations to buy all their office space from EOP. This did not prove to be a winning strategy, as EOP discovered that enterprises tended to buy office space based on local differentiators such as price and management, not on national differentiators such as brand name.

Zell had to sell some office space for less than what he paid for it, but this did not cost him his whole empire.

Zell: Budding Media Magnate

Zell sold EOP to Blackstone for $36 billion in 2006, signaling the end of an era in his professional life. In his mid-60s, he could have rested on his laurels, but the competitive lure of business proved too great. In 2007, Zell acquired a portfolio of newspapers owned by the Tribune Co., including the Chicago TribuneLos Angeles TimesNewsday and Baltimore Sun. Making this move despite the Tribune Co.'s debts as well as its declining newspaper readership and advertising revenue indicated that Zell was still a maverick determined to churn out value from investments that everyone else had written off.