Accurate Predictions That No One Would Believe

Last week on Methods of Prosperity

The US economy under President Jimmy Carter, was rough. Can you say “stagflation”? It was a great era for opportunistic investors. Sam Zell capitalized on distressed companies. Zell identified companies with large Net Operating Losses (NOLs) as undervalued assets. The Economic Recovery Tax Act of 1981 extended NOL carry-forwards. Zell acquired struggling firms like Great American Mortgage and Investment (GAMI). Then he acquired Itel Corporation. Zell turned GAMI into a diversified holding company. GAMI acquired and improved underperforming subsidiaries. He became chairman and CEO of Itel. Zell eliminated redundancies thereby increasing profitability. Zell transformed Itel into a leading transportation company. Itel evolved into Anixter International, a global wire and cable distributor. Revenues exceed $6 billion. By the early 1990s, Zell structured a notable $2.3 billion leasing agreement with GE Capital. Sam Zell and Bob Lurie had been partners for 20 years. That was about to come to an end.

Do you know about my livestream podcast? It’s called Hidden Secrets Revealed Live (HSRL), and I record it live on 𝕏 every Wednesday. 

Part 82. Sam Zell (continued).

You can find this week’s TL;DR here.

Key Lessons:

• An economic downturn is a great opportunity.

• Use leverage (debt) carefully.

• Buy when assets go on sale.

• Recognize warning signs.

• Always be raising capital.

• Take care of your health.

• Establish a meritocracy.

• Do more.

Now there’s a collectible version of this newsletter! Methods of Prosperity newsletter number 45 is available to collect as of January 3, 2025. If you’re so inclined you can permanently own it!

Sam Zell and his business partner Bob Lurie cultivated a meritocracy in the early days. Sam sold him the property management business based in Ann Arbor, which Bob helped to build. When Sam liquidated to move to Chicago, he sold it to Bob and said:

“When you get tired of screwing around, and you want to come play with the big boys, call me.”

About 3 years later, Bob called him. “Sam, do you remember the last thing you said to me?”

“Yes” Sam replied.

“Well I’m ready” Bob answered.

Without hesitation, Sam said, “C’mon!”

Sam didn’t want Bob to be his employee. Instead of paying a salary, Sam gave him a piece of the deal, until they became 50/50 partners. 1969 marked the beginning of a successful business empire. It would expand from real estate into other industries over the following decades.

Doctors diagnosed Bob Lurie with advanced colon cancer in 1987 at the age of 46. They estimated that without treatment, he had six months to live. Throughout his battle with cancer, Bob Lurie maintained a positive outlook. He urged his friends to “stop and smell the roses.” Bob told Sam about his diagnosis in September of 1987. They kept on doing business around Bob undergoing treatment. Sam expected a painful process but never assumed Bob’s life would end.

Bob fought against the disease for two and a half years. In February 1990, he came down to the office on a Saturday. He hadn’t been to the office for a month.

He told Sam, “I came down today because I wanted to talk to you.”

“OK,” Sam replied.

Bob informed him, “I want you to know that I’m going to die.”

Sam didn’t understand. “You’re going to die?” That wasn’t on his list of possibilities.

“You don’t understand,” Bob explained, “I’ve been trying to tell you for a couple years now that this is very serious and very rampant and not too many people survive this.”

He continued.

“It was obvious to me that you just didn’t accept that as a possibility, and you needed to know that we’re at the end here now and I’ve got to prepare for it.”

Bob Lurie passed away on June 20, 1990, at the age of 48.

From that point on, all Sam could think about was their legacy. He wanted to do more. Everything that he did represented Sam and Bob. Later on, when he endowed the Real Estate Center at Wharton, he endowed it under Samuel Zell and Robert Lurie. When he did the Entrepreneurial Center in Michigan, he did it under Samuel Zell and Robert Lurie. Everything he did, he did for Sam and Bob. Sam wanted the world to remember who Bob was.

Before Bob died, he and his wife decided to involve themselves in philanthropy. Bill Gates and Warren Buffett founded The Giving Pledge. It encourages the world’s wealthiest people to charitable causes. They commit more than half of their wealth, either during their lifetime or in their will. Bob and his wife committed to this idea before the campaign had a formal announcement in 2010. They founded the Ann and Robert H. Lurie Family Foundation in 1986. In 2000, Ann changed the name to Ann and Robert H. Lurie Foundation.

On October 22, 1986, President Ronald Reagan signed into law the Tax Reform Act of 1986 (TRA 86). It destroyed one of the primary motivators of real estate investment. Capital gains and other tax benefits. Until that law passed, most real estate investors were passive. Syndicates consisting of doctors, lawyers, or similar investors pooled their money. They could buy property and hire property management to run them. They used depreciation as a tax break (and still do to this day). It offsets their other income. TRA 86 reduced those benefits.

Recession hit the real estate market in October, 1987. Investors had been borrowing from the future, and now the bill was due. Real estate tends to lag the greater economy. The full impact to real estate was years away, but Sam knew it was too late. This time it was more than cyclical. It would be a seismic collapse. He told people it was coming, but no one listened. 

It was March 1988. Sam wrote an article which Journal published titled, From Cassandra With Love. It was about the massive oversupply crisis in U.S. real estate during the mid-1980s. The title references the Greek mythological figure Cassandra. The gods cursed her to make accurate predictions that no one would believe. Published by Journal of Applied Corporate Finance, Spring 1990, the article appeared. It presented a dire warning to the real estate industry, which they ignored. Sam cited the fragmented panic he was seeing. It was spreading. They underestimated the downturn, expecting it to end. This time, Sam warned, there was a structural change that went deeper than normal. Over supply was a factor. Other emerging realities compounded the damage. Easy money led to over building. S&Ls made risky, speculative loans, and in some cases, fraud. 

In 1986, all the action in real estate was on the private side. People weren’t buying shares of REITs. It was difficult for ordinary, non-real estate investors, to buy commercial real estate. The idea was an individual who wanted to own a piece of a New York office building could invest in a REIT. Compared to private real estate, that was unattractive. There tended to be not enough capital to make it attractive.

Then, in 1989 there was a serious over supply of real estate. That led to many institutional investors going broke. Insurance companies, savings and loan institutions went broke. All that capital funding the private side started to dry up. That’s when Sam became involved in advancing the process of modern REITs of the modern era, around 1991. Prior to that time, real estate was illiquid. That was a big problem. Restructuring the REIT sector was the solution.

In 1958, lawmakers wrote REIT laws with no foresight. Second order consequences like lack of liquidity in the real estate market did not occur to them. The National Association of Real Estate Investment Trusts had one mission. It was to protect those laws. In 1992, they held a conference with twenty attendees. By October 1993, fifteen hundred people attended their conference. They asked Sam Zell to give the keynote speech in New Orleans. In his speech, he said, “Guys, we have a horrible track record as a real estate industry, dealing with the public.”

Sam collaborated with Merrill Lynch to create an opportunity fund. Investors put up cash to become their partners in the purchase of distressed real estate. This was a first. Merril Lynch put up 5% of the funds. They would raise the balance of the capital. After 6 months, no one bit. So, from May 10 through June 30, 1989, Sam went on tour to raise capital. He raised $400 million ($785 million in today’s numbers). 

Going into the 1990s, the devastation to the real estate market became apparent. And the dot com bubble was about to blow up.

To be continued…

I like you,

– Sean Allen Fenn

Methods of Prosperity newsletter is intended to share ideas and build relationships. To become a billionaire, one must first be conditioned to think like a billionaire. To that agenda, this newsletter studies remarkable people in history who demonstrated what to do (and what not to do). Your feedback is welcome. For more information about the author, please visit seanallenfenn.com/faq.