[00:02:51] David Greene: 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, and it was an awesome interview. What did you think, Trey?

[00:03:07] Trey Lockerbie: 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, personalizing it in any way, just to be able to remove himself like that, but also have an insane amount of drive.

[00:03:46] Trey Lockerbie: Those two things, I just feel like you don’t often find completely separate like that or the, he just didn’t seem to have much of an ego at all.

[00:03:53] David Greene: 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 back door 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 rises while others have seen falls.

[00:04:32] David Greene: And so make sure you listen all the way to that because that’s a perspective I haven’t heard anyone share before.

[00:04:37] Trey Lockerbie: Alright, so without further ado, here’s Sam Zell.

[00:04:41] David Greene: Sam, did you do your hair like that today, just for me?

[00:04:43] Sam Zell: I spent an hour combing it.

[00:04:47] Trey Lockerbie: 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, referenced that quite a bit.

[00:04:59] Trey Lockerbie: And you also pioneered the real estate investment trust industry, and you predicted its growth to over a trillion dollars, which it’s now done. And we don’t often cover REITs on this show. David might on his, but in your opinion, I’m curious, have REITs 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?

[00:05:24] Sam Zell: 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 had in the REIT clause to the cigar bill, and that’s how REITs got created. Between 1958 and 1991, the REIT industry grew from zero to about 7 billion.

[00:05:54] Sam Zell: The justification to the creation of reefs was to let the little old lady from Pasadena have an opportunity to own part of quote unquote, the vast area called commercial real estate. And up until that point, there was no way that anybody, you 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 liquid entity that would provide that kind of an opportunity. During that give or take, 30 year period rate of growth rates 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.

[00:07:02] Sam Zell: And the public REITs that were created during that period of time were generally staffed by people who frankly couldn’t make it in the private market. So you had a lot of guys who retired from insurance companies running REITs. The REITs were very small, the REITs had relatively little access to capital.

[00:07:26] Sam Zell: And to be honest, even though the goal was to quote unquote, create an opportunity for the little old lady from Pasadena, to own commercial real estate. The reality was there really significant demand and there wasn’t significant promotion to create that demand. Then in the eighties came, the Japanese came, the savings and loans went broke.

[00:07:54] Sam Zell: The insurance companies in the late eighties started to go broke, and all of a sudden, the accessibility to the capital markets of real estate disappeared. And in 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?

[00:08:25] Sam Zell: 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 we’re designing to enrich the promoter and destroy the little guy. All of a sudden come 1990 or 1891, there was no source of capital for the real estate industry.

[00:08:57] Sam Zell: And yet you had all these real estate players, people like me, people like Mel Simon, people like Don Bran, and I can go on and on. The people who basically, ran the real estate department, a real estate world, were basically in a position where they had no access to capital. And that led to, as somebody says, mention is that the necessities the mother of had mentioned had the same kind of situation here, where all of a sudden everybody looked around and realized that the only source of capital for the real estate industry was the public markets.

[00:09:38] Sam Zell: And at the time there was a guy named Richard Saltzman. Who was head of real estate for Merrill Lynch, and Richard took it upon himself to create him begin what we call the modern era of real estate, of the REIT business. In all of us, whether it was me or Mel Simon or who or management or whoever, felt that the only option was to access the public markets.

[00:10:10] Sam Zell: 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 a, I had an understanding of what I thought it took to succeed during the tour of 1993, the real estate investment industry. When the REIT world invited me to New Orleans to give a speech.

[00:10:39] Sam Zell: Time, quote, the modern REIT era. I went to New Orleans, I gave the speech and basically what I said to the world at that time was 1500 people in the room. The previous year, there was 15 people in the row, 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, and you got to create the environment where it can grow.

[00:11:15] Sam Zell: Getting that speech, I basically said that if you achieve that, if you create a. A positive environment, then there’s no reason why a Ford Motor company can be a public company or other, big CapEx asset. Heavy industries can be public companies for isn’t any reason why real estate couldn’t be the same.

[00:11:43] Sam Zell: And there was little doubt in my mind that there was an enormous demand for cash flow emanating for real estate if we delivered a product to the public that in effect met, that met the needs and objectives. So that public wanted liquidity. The public wanted transparency. The public wanted to be able to differentiate between, the re network and the REIT that didn’t.

[00:12:19] Sam Zell: The analysts wanting to be right. And so you got to create an environment where in effect you dis 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 don’t remember how long that this industry would be, 250 million and ultimately a trillion dollar industry. And that’s of course what happened.

[00:12:50] Sam Zell: So that’s kind of a little bit of a history of how the REIT era began, why it began and frankly why its 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.

[00:13:15] Sam Zell: An area of the US 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 modern REIT era.

[00:13:32] Trey Lockerbie: 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 in a lot of these fleets that maybe a lot of people are just passively owning. I’d be curious, Sam if you could weigh in on the risks, maybe involved that and how that might affect the REIT market currently.

[00:13:48] Sam Zell: Well, first of all, real estate is a business. It’s a business like any other business, then, and businesses go through cycles. We’re sitting today in the situation where parts of the real estate business are in, big trouble. I mean, I sold equity office in February of 1907.

[00:14:13] Sam Zell: 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’re 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 automobiles or what, however you want to talk about.

[00:14:43] Sam Zell: 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 were taking down huge amounts of office space in anticipation of demands.

[00:15:24] Sam Zell: Coming five and seven years forward, so we began 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 oversupply.

[00:16:01] Sam Zell: Then in fact, there was a shortage. When there’s a shortage, it’s you 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 full. But in fact, because of WeWork and other workspace businesses, the reality was just the opposite and that there was a significant oversupply, but the oversupply was being eaten by these companies as opposed to being eaten by the market.

[00:16:47] Sam Zell: So when you then went into the pandemic period, you had all these new office buildings going up, whether it is Hudson Yards in New York, we added, I think, 6 million plus square foot office buildings in Chicago in almost every market in the country because the two six said the markets were full and therefore I needed new supply.

[00:17:15] Sam Zell: So a new supply was added to a market that was already over supplied, 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, will be irrelevant in terms of the definition of office space use.

[00:17:50] Sam Zell: But during the pandemic work from home became the way in which companies addressed the issue, and that, of course, made it RFA space a lot less valuable. If you were a student of office space or an investor in office space, you would’ve recognized what was going on and would’ve avoided being in any way, shape, or form part of the problem.

[00:18:21] Sam Zell: Unfortunately a lot of people didn’t pay attention. I mean, we own one office building. We used to own a couple hundred of them. That one office building is their home office and we own it for different reasons and just yield and appreciation. For us, it was a relatively simple analysis, understanding the supply and demand, understanding what was going on, understanding that the Fed is created back a scenario of free money that, skewed people’s understanding of what opportunity was.

[00:19:06] Sam Zell: I mean, we took over a REIT called Equity Commonwealth in I think 13, and it had 145 assets. 7, $8 billion worth of assets. Most of them office buildings between men now who sold everywhere except the two we needed to maintain our reed status. I can’t remember a time in my life where I’ve sold 140 semi assets and don’t rule one transaction.

[00:19:44] Sam Zell: Don’t rule and saying, God, I wish we hadn’t sold that one. And we were thrilled and delighted and everyone we sold, frankly was not very sympathetic to the people who wore them because they were drinking in 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.

[00:20:12] Sam Zell: But from our perspective, I mean, and this is a perfect example of. Do your homework and make decisions accordingly. Retail sales on the internet are another example. How, I mean, if you looked at what was going on then, I remember, watching sports programming and the early, 19 whatever, 2008 or 9 and in companies with, list, W T C W or what their, what their U R L number was.

[00:20:46] Sam Zell: And I’m looking at it, I’m saying, Jesus, this is, it’s going to take the commodity side out of the picture. It took a while and then took a while for people to get adjusted. You. But the entry was obvious, and maybe he wanted to buy a fancy dress, he wanted to go feel it and touch it, and that’s fine.

[00:21:13] Sam Zell: But the vast majority of retail sales were not fancy dresses. They’re socks and underwear and shoes and all kinds of stuff that could easily be bought over the internet. And as a result, you go from Madison Avenue in New York at 56th Street to 87th Street, which used to be the prime retail in America in stores.

[00:21:42] Sam Zell: He got 28% of Michigan Avenue in Chicago, vacant, Union Square in San Francisco. I mean, these were the citadels of retail sales. These led and set the one to the entire. Retail industry and the owners of my real estate own a lot of making Real estate. And we say to yourself, well, didn’t they see this?

[00:22:10] Sam Zell: And apparently not. cause they continue trading these kinds of properties with relatively short-term leases left to go at prices that reflected, the jack and the beanstalk. The beanstalk was just going to keep growing and instead they’re saddled with dramatic losses.

[00:22:33] Sam Zell: So those are two examples of, if you did your homework if you really understood supply and demand, if you really maintain a level of fear. And by the way, I think that maintaining the level of fear is an incredible element in the creation of wealth. I think any many lanes afraid you’re going to end up holding in the bag.

[00:23:03] David Greene: 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.

[00:23:22] David Greene: Do you feel 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.

[00:23:35] Sam Zell: Well, number one, all of the above, all of the above. The number two, the words, supplying demand, also reflect supply and demand of capital.

[00:23:49] Sam Zell: This all occurred not in a period of a shortage of capital, not in a period of difficulty in getting a bank loans, 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.

[00:24:15] Sam Zell: So until we in the United States almost got to negative interest rates in loud parts of the world, we got to literally negative interest rates, and then all of a sudden everybody says, well, what do I do? What do I do with the money? All of a sudden, I’ve got more money than, than I ever with Casper.

[00:24:35] Sam Zell: I’ve got access to Pulse Capital and I’ve got to find ways to use it. The institutions that were piling up money looking for places to invest, and we’re all subject to changing flows. I mean, when I first started in 1989 was the first time that I quote unquote, tapped into the institutional market to raise money for real estate.

[00:25:06] Sam Zell: Imagine how shocked I was to find out that 80% of the institutions. That I called upon did not have an allocation for real estate. They didn’t have an all allocations for stocks, bonds, municipal bonds, didn’t let, real estate wasn’t a quote unquote investible class. Fast forward 20 years, you couldn’t find anybody who didn’t have a real estate allocation.

[00:25:40] Sam Zell: So they then had a real estate allocation. And the question is, how do they fulfill that allocation? Find more real estate and they did. Afraid you’re going to be sorry.

[00:25:53] David Greene: So on that note, in this current environment of high inflation with low unemployment, how is that impacting or informing your current investing approach?

[00:26:04] Sam Zell: Well, I think that. I’m 81 years old, so that means that I was around in the seventies. I remember in 1978, we closed the loan earning apartment project. We had just bought Kenley 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 difficult and treacherous environment, even though it also was an environment that created opportunity to do really well.

[00:26:46] Sam Zell: I haven’t forgotten that experience. And so despite all of the excitement and stuff that have occurred over the last 30 years, I haven’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, what they, what I saw in the fact the interest rates were going significantly below the inflation rate.

[00:27:17] Sam Zell: You don’t need to see. All you need to know is that if the cost of money is four or 500 basis points less than the inflation rate, 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 where all of a sudden, the supply became excessive.

[00:27:45] Sam Zell: The result is that, 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 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.

[00:28:19] Sam Zell: Everything today is still being priced and dealt with at numbers that are above, in effect, that will allow somebody to build and compete with me at a lower cost. That doesn’t make sense.

[00:28:36] Trey Lockerbie: 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.

[00:28:44] Trey Lockerbie: 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? So what incentives are you providing? And it was like this hush fell over this 20 person dinner and there was, they were like, we don’t really have an answer for it.

[00:28:59] Trey Lockerbie: 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 loans crisis to degree than 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.

[00:29:22] Sam Zell: Why is it different? Do you know, since this Silicon Valley deal occurred three or four weeks ago, we’ve had a run in the banks. We’ve had an enormous number of deposits. Taken out of the banks and either taken out of the mid-size banks can put into the too big to fail banks or put into money market funds.

[00:29:47] Sam Zell: That’s not a solution to anything that’s just moving the, moving the pegs in the game and nobody’s solving a problem. They’re just finding temporary ways to overcome. What is it, the significant challenge of not being able to safely put their money away today. And I wouldn’t be surprised if nearly and I’m not predicting this, but I wouldn’t be surprised if the next thing we see is some big money market funds get in trouble.

[00:30:20] Sam Zell: Why supply and demand all of a sudden, they got so much supply. All of a sudden, they got so much demand for their services that they can’t earn enough to justify it. So they’ll come up with subprime loans or some other, new methodology to, in effect cause themselves their own problems.

[00:30:48] Trey Lockerbie: You’ve criticized the Fed and 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?

[00:30:57] Sam Zell: Raise interest rates and we had to raise interest rates. 3 or 4 or 5% of you, we have to say. We have to make it painful. Everybody’s so worried about whether we’re going to have a soft landing, and I’m worried about what kind of landing we are going to have, because if we don’t, we’ll stop the inflation in some very deleterious thing.

[00:31:20] Sam Zell: I mean, it robs preaching power of everybody you know, you for until 1971, the world was protected from inflation by the fact that we didn’t have fiat currencies, we had currencies that were heading to the price of gold. Maybe 1971, we in effect converted from TEG currencies to feed currencies, and today, there’s nothing backing the US dollar.

[00:31:53] Sam Zell: We’ve increased our debt seven, $8 trillion in three or four years. How does that work? I don’t know how that works. Now I know how what’s going to happen? Because I think that we just can’t, again, supplying the demand. You just can’t create that much new supply and have it work.

[00:32:18] Sam Zell: I’m, my big concern for the last five years has been loss of less as the reserve currency of the world. I think that probably would result in a 20 or 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, our life would be different.

[00:32:51] Sam Zell: 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 England became, part of the sick man of Europe as opposed to full leading economic player in the world had set the standard as opposed to how to come up with it can meet the standard.

[00:33:18] David Greene: It would appear that this ridiculous inflation we’ve seen paired with fears of more inflation coming. Cause 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 populist votes.

[00:33:33] Sam Zell: We tend to vote for the least reason. I’m not really available. I went to the University of Michigan and I took Econ 1 0 1 and I will never forget walking into that first classroom of that first day.

[00:33:50] Sam Zell: 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 little question that the lowering of cabarets, 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 any kind of hard asset has all been related to, there’s more supply of money than there is demand.

[00:34:25] Sam Zell: Jen, I’m critical of Fed and I’m critical of the leadership of our country because they have, in effect, meant over and allowed themselves how to become the victims of too much supply and therefore they need, the deterioration of the values of everything because the n effect, everything is measured in terms of dollars.

[00:34:51] Sam Zell: As to the question of, are there places that I think are better to and less than others? Well, obviously, I’m not really longhand slums as an example, but my whole philosophy of investment has always been that I’ve never tried to identify a market or a particular opportunity as being the right place during the seventies from the law.

[00:35:23] Sam Zell: 1973 until about 1978, I bought about 4 billion worth of real estate. Getting 4 billion worth of real estate at that time was a staggering amount of real estate, and I bought most of it at a dollar down in a Hope certificate because the real estate industry at the time was suffering from massive lower supply in fear of demand.

[00:35:54] Sam Zell: 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, Mr. Zel, you bought real estate. We were in the country. Where did she do the best? Where was you? Where was the risk reward?

[00:36:21] Sam Zell: Highest? Nobody had ever asked me that question, and so I thought about it, said Toledo, Ohio. The guy looked at me, I had lost my mind, and he said, Toledo, Ohio. I said, yes. He said, Toledo, Ohio is losing population. Toledo, Ohio was the armpit nation. Toledo, Ohio was full of all these rust companies that were going broke.

[00:36:56] Sam Zell: It doesn’t make any sense. She said, well, if you were sat on the board from an insurance company in 1975, can somebody bring the apartment building near an office building or do some real estate effectivity before the board to approve a law? You would sit there and say, I don’t want to put any money in Toledo, Ohio.

[00:37:25] Sam Zell: I don’t want to be dependent on the car companies or, I’m a part of a country that’s growing and so you turn down the along. So the result was that what? I didn’t buy in until I had built competition. That’s another thesis that I very strongly believe who you and I all went to high school. We all grew up and we’re all told how wonderful competition was.

[00:37:58] Sam Zell: Competition kept prices low competition created a competitive zeal. And by the way, the competition is terrific for you, me keep like a monopoly. I couldn’t have a monopoly, at least inly. So when I bought two or three projects in Toledo, Ohio, she didn’t have any line to compete with. It could raise rates.

[00:38:31] Sam Zell: Could find myself in a position where I didn’t 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, cause 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

[00:38:58] Sam Zell: To create demand places like Atlanta and Dallas and Houston. They grew developers, they grew people who wanted to build it. Think Bruce Sabens and Lungs that wanted to say, I wanted to, lend me, all of those were wonderful things, unless you’re an investor. Now, if you’re a flipper, that’s a different story altogether.

[00:39:23] Sam Zell: Then you’re not an investor then you’re just saying, okay, can I catch the minutes win? The market is very strong and I can buy something and sell it quickly and quote, make a profit. That’s very different than being an investor whose real goal is long-term appreciation. People like Bill Gates and Microsoft, or Bennett, Google, or all of these people made great fortunes, Chuck Bezos, but the real reason they made fortunes, the real reason they’re billionaires is because they didn’t have to mark to market.

[00:40:08] Sam Zell: At the end of every year and pay a tax. So if I were Bill Gates and I owned Microsoft Stock, the stock could double and I didn’t have to pay any tax on that. I only had to pay tax when I sold. And that’s a very important principle in terms of the creation of wealth on the long term basis.

[00:40:32] Trey Lockerbie: 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, 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.

[00:40:55] Trey Lockerbie: But when does buy and hold make sense? And when do you consider the daily price as that, would I buy it a today’s price, enacting a decision to sell?

[00:41:05] Sam Zell: Wow. You always ask yourself the question, would I buy it at this price? Would I accelerate at this price? You have to consider the taxing locations until Sam takes a big bite of everything you sell.

[00:41:22] Sam Zell: So you need to be keenly aware of what you’re 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 after use.

[00:41:41] David Greene: Sam, you sold the equity office rate to Blackstone for 39 billion in 2007. Speaking of selling. Yes. 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?

[00:41:58] Sam Zell: Well, you’re right. It was quite an experience and what was interesting was that I had a bunch of really smart guys on the other side, and in the beginning, maybe six months before the transaction, someone approached me and wanted to buy equity office.

[00:42:18] Sam Zell: And I was really surprised because I thought that equity office was just too big for anybody to buy. And that I really at that time thought that we’d probably own this company forever, and we passed on the other generations of investors because it’s just the scale was so large that it just didn’t fit, anybody doing a buyout of it.

[00:42:48] Sam Zell: In that particular offer or inquiry was at a price that frankly I didn’t think was attractive. Even if I wanted to sell or couldn’t sell, didn’t sell, think, didn’t do anything about it, I said No, and that was the end of it, give or take. And by the way, as with all of our companies, we continually have looked at our companies in done, in analysis of what they thought they were worth, so that we never were in a position where we weren’t prepared to understand what we owned and what we thought what we owned was worth.

[00:43:32] Sam Zell: About six months later, Blackstone approached us in 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, they would take a Godfather offer, which is, from the Mario Puzo story of the Godfather. And I said, they, a chicken godfather offered for me to consider selling equity office.

[00:44:05] Sam Zell: And I remember responding to the broker and saying that’s what it would take. And much to my surprise, they came up with one. And I was extraordinarily flattered by what they thought the company was worth and why. And I said I was willing to consider it, but I would only consider it if the breakup fee.

[00:44:35] Sam Zell: 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 anytime there is a sale, it’s nothing more than price discovery. And I wanted to make sure to protect my investors, to protect myself, that I could say that I had this, gone through and identified what I thought the real value was.

[00:45:10] Sam Zell: And so we ended up concluding in is then 36 billion with a 200 million break fee there. Normally a breakup fee in a deal like that would be to or take 3%. So normally that breakup fee should have been. 1,000,000,002 or something like that. Instead, the breakup fee was 200 million, which gave me comfort in that.

[00:45:39] Sam Zell: And no one would be discouraged from bidding based on the fact that there was a humongous breakup fee and that the price of playing at this plane was so high. So that was one of the first and part of the strategy involved in the sales. And 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.

[00:46:10] Sam Zell: There’s a strategy involved and a thought process that’s involved. And so we concluded a deal, I think it was, I think the first price was $48 to share. 200 million breakup fees then. Then there were various people who, expressed an interest or theoretically expressed an interest. One never knew, until you see the color of their money.

[00:46:38] Sam Zell: So the Blackstone people, John Gray in particular, looked at the situation and said, we’re vulnerable. Somebody could easily, outbid us and we didn’t want to be outbid. And so he came back to us even before we had a second bid and said, we’ll raise the price if you raise the breakup fee, we’ll pay a little more if you’ll make it a little more expensive for anybody to compete with us.

[00:47:12] Sam Zell: We agreed. And so then the price went throwing. Can’t remember exactly, but I think it went from 48 to 51. And then there was some discussion and speculation that there was another group that was about to get involved. And, but that other group had a problem. And the problem was that the banking system had been tied up by Blackstone.

[00:47:42] Sam Zell: Blackstone, Agni in one lung, subtle fashion or another, suggested that almost everybody could play and nobody wanted to quote, be on the wrong side of a deal. So literally a potential competitor couldn’t finance competing bit. So then it became my responsibility to sit down with Blackstone, which I did.

[00:48:09] Sam Zell: And in a nice, comfortable fashion. Explained to them that how we did have antitrust laws, tying up all of the sources of capital for a potential competing bid, didn’t really institute the definition of what was quote, acceptable behavior. And they ultimately agreed in that let go. A whole bunch of financing sources that ultimately became the financing sources for a competing bid we’re upon the Blackstone.

[00:48:46] Sam Zell: People then looked at their situation and said, gee, mainly we ought to raise the bid a little more if we could get a higher freight of fee. And more importantly, A breakup fee 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.

[00:49:18] Sam Zell: And so they came back to us with still a higher bid with a higher breakup fee. But most important, allow with us agreeing that they could engage in conversations with potential buyers who wanted to buy pieces of E O P that they didn’t want to owe. That’s how we ultimately made the deal where they were given the right to negotiate with potential buyers for parts of the portfolio.

[00:49:53] Sam Zell: We increased the breakup fee to $700 million. And then we closed the deal on February 7th. It was a great day. I’m 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 was an enormous economic success from Blackstone’s perspective because they had stolen two thirds of the portfolio, had a previous, well, their measurement of how they did extraordinarily well.

[00:50:41] Sam Zell: The unfortunate part of the story was, and almost every single buyer who bought anything but any poor part of the portfolio from Blackstone ended up losing because they had basically crossed the line and paid too much. So that was my experience with that particular transaction. I learned a lot of lessons from it.

[00:51:09] Sam Zell: Most significant lesson is, to fear a seller, create competition. Sellers who don’t create competition don’t get the highest grace, and at the same time, being the last dive on the totem pole to buy something also doesn’t likely produce a positive result.

[00:51:34] Trey Lockerbie: My question that comes up, I have a couple. One is, I’m curious how you celebrated on that day and I remember hearing that you bought your partners, or maybe it was 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.

[00:51:57] Sam Zell: The only thing wrong with your story is that the watches went to the losers in the bidding war.

[00:52:05] Trey Lockerbie: Ah, I see. Gotcha. It’s not subtle at all. Right?

[00:52:09] Sam Zell: Yes, the watch went to Barry Stern, and the watch went to Steve not to John Gray.

[00:52:16] Trey Lockerbie: That’s right. Okay. Thank you for that correction.

[00:52:18] Sam Zell: I figured you didn’t remake enough on the deal that he could buy his own watch.

[00:52:24] Trey Lockerbie: That makes so much sense. 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, oh my gosh what is my purpose going beyond this transaction or at any point in your career, have you ever experienced anything like that?

[00:52:48] Sam Zell: 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.

[00:53:21] Sam Zell: Numbers are bigger. I don’t think that I got smarter because the numbers got bigger here, or dumber because they didn’t unchallenged by the opportunities that are, given to me. I’m blessed by the fact that I have the skillset set and the credibility to be able to achieve the objectives, but I don’t really think I, I’ve never really thought about it as a competition between me and somebody else.

[00:53:54] Sam Zell: Oh, I’ve always thought about it as, oh, this is what I do. I’m very lucky that society places a very high value. On the peculiar skillset that I was born with, and I’m thankful for the opportunity, but I’ve never really thought about is climbing a mountain and, this transaction or that transaction represents, some kind of a peak.

[00:54:25] Sam Zell: I’ve done a lot of transactions in my life. Most of them from a numerical point of view are real estate transactions, but I’ve done non real estate transactions that are significantly smaller and then say the ell b sale, that I’m equally as proud of and equally as satisfied with because they represent Gil a challenge.

[00:54:53] Sam Zell: And a challenge that I overachieved. I think historically, I’ve always, believed that I have a responsibility to society in 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.

[00:55:23] Sam Zell: What drives me is, can I do it? Can I achieve it? Can I do so legally? Then with pride that I can sit here today and describe a transaction to you and feel very comfortable that I texted my limits, found out you could I do it, and then by doing it, In great satisfaction. I certainly have made more money than I could ever spend.

[00:55:54] Sam Zell: The money was never really the driver other than the money creates freedom. Money creates an environment where you can do what you want to do, maybe without asking permission. So I guess I’ll look at what I do differently than maybe somebody who’s, hit a very early stage in their career. And, in the opportunity to make a hit is a real, real own satisfaction.

[00:56:28] Sam Zell: 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.

[00:56:37] David Greene: You mentioned 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?

[00:56:47] Sam Zell: I, as a sport or as a hobby, I ride motorcycles in when you ride a motorcycle and you feel the wind come through your helmet, he realizes 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 every conversation with can I afford it, whether I want to do it, are true.

[00:57:24] Sam Zell: Very different things. There’s nothing more important to me than freedom. I’m a great student. I read enormous amounts. I’m very understanding and knowledgeable about loss of freedom to all kinds of people, from all kinds of different situations. Many of them, frankly, very negative.

[00:57:49] Sam Zell: So I guess what I would say to you is that I view 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 benefit to remind me of the fact that I’m constrained only by the exterior events.

[00:58:27] Sam Zell: That occur around me to the extent that I have a liquidity, I can make choices. And if I can make those choices, can, so without the constraints of liquidity, is I don’t to start by saying, well, where am I going to get the money? But I’m going to start by saying, how do I spend the money? What do I think is important?

[00:58:56] Sam Zell: I think those are criteria that define what I call freedom in it. Certainly not a big part of my life.

[00:59:05] Trey Lockerbie: Sam, we are so privileged to get to talk to you today. I really appreciate all the wisdom you’ve shared with us. Thank you so much for coming onto our show and sharing all of this with our audience.

[00:59:14] Trey Lockerbie: We really appreciate it and we wish you well and hope to do this again someday soon. But appreciate the time today. Thank you.

[00:59:22] Sam Zell: Well, thank you very much and glad that you chose to make me part of this process. I’ve tried to answer you as unsubtly as possible. I mean, you made reference to the fact that I wrote a book, and as you know that when I got to the point where I was attempting to describe or come up with a name to the book and I had a lot of potential names, there was only one that really made sense, and that was, am I being too subtle?

[00:59:58] Sam Zell: Because all my life, the one thing that’s governed the way I act, is I want people to know where I stand. I don’t ever want anybody to leave a meeting with me in saying, what did you think he meant? And so I’ve always been very direct and have tried to be very direct today and it certainly made a pleasure.

[01:00:27] Sam Zell: Thank you very much for the privilege.

[01:00:29] Trey Lockerbie: Thank you, Sam. David?

[01:00:31] David Greene: Sam, this was a fantastic interview. I’ve interviewed lots of real estate investors and I think you gave the most unsubtle, 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 raised this money, this very easy to raise and giving bad advice.

[01:00:56] David Greene: 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.

[01:01:03] Sam Zell: Truly my pleasure. Thank you, gentlemen. Good night.

[01:01:07] Trey Lockerbie: 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.

[01:01:16] Trey Lockerbie: If you want to reach out directly, you can find me on Twitter @TreyLockerbie 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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