Am I Being Too Subtle – Review, Summary, & Notes


I would give “Am I Being Too Subtle” by Sam Zell 5 stars, I would highly recommend it for every real estate investor. Sam is a great storyteller and it’s a good mix of being entertaining, inspirational, and educational. It’s a quick read and well worth the $10-20 to buy it on Amazon.

It strikes me reading “Am I Being Too Subtle” that on many big investment deals the real winner wasn’t Sam Zell. It was his investors and employees. He is an example of a person who created tremendous value for everyone around him, and while he has a high net worth ~$5B it is modest in comparison to his accomplishments and the total return created by his deals.

“I read risk for a living. I am very focused on understanding the downside.”

Summary, Notes, Quotes:

Sam starts “Am I Being Too Subtle” by telling the story of his Jewish parents fleeing Poland, hopping aboard the last train out of their city before the nazis bombed the railroad tracks. They needed to travel at the breakout of WWII through both the Soviet Union and then Japan in order to get to Curaçao (controlled by the Dutch). The visas to get through Japan were provided by Sugihara, who worked in the Foreign Service and saved over 6,000 Jews against direct orders.

When Sam was 24 he bought 12 adjacent single family homes near The University of Michigan, and then sold them to a developer to put a large multifamily student housing complex. To get the last house he had to work extensively with the older lady, whose uncle in Chicago owned it. To get the deal he had to work with an architect to design a new addition for the lady’s drunk brother, and keep the house within 8 blocks of a bar so he could get drunk and walk home.

He focused on investing in growing second tier cities, I.e Reno, Ann Arbor, etc. At the time real estate investors like his dad were focused on low risk NYC, SF, Chicago real estate that returned a steady 4% return via syndications. There wasn’t much capital in the smaller cities, despite high growth in many.

He quit his job at a law firm when he was 25 to make deals. He applied to 43 jobs and consistently got rejected without realizing why, later a partner at a law firm told him that he’d never hire him since he’s just want to do real estate deals rather than law (which was true) based on his early real estate success being listed on his resume.

His first large multifamily was a 99 unit in Toledo, OH which cost 1 mill in 1966 and returned a 20% return.He was presented with an offer to buy a 160 unit in Reno, which was fully occupied and returning 20% cash on cash, was fully occupied, and Reno was growing quickly.

He did only two ground up development deals – first was a Lake Tahoe ground up development deal where the contractor made the eaves too long, as a result the beautiful mountain views were replaced by windows looking at the inside of the roof (they eventually cut windows into the roof). His other deal resulted in had an improper building plan for a waste pipe, which the contractor followed resulting in some units being larger than expected and others smaller.

“I was cured of any inclination to become a developer. I think that to stay in that business, most developers must get 50 of the return from real cash flow and the other 50 percent from the intangible benefit of seeing their phallic symbols rise out of the ground. Otherwise I can’t see the reward.”

He recommends the Zeckendorf real-life monopoly book, which will lead to another future review! I had not heard of William Zeckendorf or this book prior.

His partnership with Bob Lurie (friend who helped him start his student rental property mgmt business in college) was based on absolute trust. No written agreement, shared checkbook that could also be used for personal things such as building a home for their own families.

In 1973 the commercial real estate market was roaring with new development, in many cases building where no additional supply was needed. Sam stopped buying anything, and instead started accumulating capital and starred a property management company to handle distressed assets when occupancy was at >90% and everyone thought the market would continue to roar. The market crashed hard in 1974, and he was able to buy assets for $0.50 on the dollar.

“We believed the real money in real estate came from borrowing long-term, fixed rate debt in an inflationary scenario that ultimately depreciated the value of the loan and increased the position of the borrower.”

In 1980 they saw another bubble starting in commercial real estate, and decided to diversify from 100% real estate to 50% real estate, 50% non-real estate investments including asset intensive businesses such as agricultural chemical manufacturing

“There’s no substitute for limited competition. You can be a genius but if there’s a lot of competition, it won’t matter.”

He focused on buying companies with NOL (net operating loss) carryforwards after the passage of a tax law that extended their use from 7 to 15 years. These had complex requirements that had to be met but represented $0.25 on the dollar if used to offset cashflowing acquisitions.

When he started attending public company board meetings in the early 1980s many of the members resembled “potted plants”. They were more interested in the lunch/dinner menu than the profitability of investments the companies were making internally.

“People love focusing on the upside. That’s where the fun is. What amazes me is how superficially they consider the downside. For me, the calculation in making a deal starts with the downside”

By the 1990’s after the Savings & Loan Crisis he was no longer the upstart with tons of cash looking to buy assets on the cheap. His company was rich in assets but cash poor. “There were weeks when our billion dollar company was scrambling to scrape up enough money to make payroll.” Banks had the ability to call loans that were in danger of failing, so if one went another bank would do the same and the dominos could’ve taken down the whole company. “Liquidity equals value” became Sam’s new mantra as he took spin out companies to take them public in the early 90’s to raise capital.

“I focus less on specific industries and more in seeing opportunity in anomalies or trends that catch my attention.”

In 1993 Sam took two REITs public. The first was Equity LifeStyle Properties (NYSE: ELS), which was the first mobile home park REIT. Long before Brandon Turner started touting the benefits on BiggerPockets, Sam saw the opportunity in buying into a high cashflow asset with diminishing supply due to NIMBY (not in my backyard) zoning regulations. ELS IPO’d at 193 million, and is now worth over $10B and is the highest returning REIT ever with a 17%+ compounded annual return. Later that year he took Equity Residential public (NYSE: EQR) which now has 79,065 units, primarily in top tier cities like NYC, SF, Denver, Seattle.

In 1987 he started a separate “distressed real estate assets” fund while the real estate market was booming (after the 1986 tax reform act cutting the tax benefits for syndicators, and just before Black Monday, and the Savings & Loan Crisis). At the time many investors were getting steady 12%+ returns so convincing them to invest almost $1B in today’s dollars took hundreds of presentations with a Merrill Lynch banker in tow. When the market crashed in the early 90s, he once again was able to buy up assets at $0.50 on the dollar.

“When I negotiate, I spend a lot of time thinking about the person across the table, their motivations and priorities.”

Sam was one of the early promoters of the UPREIT structure, which allows owners of real estate to sell their assets to a REIT in exchange for stock. As long as the REIT doesn’t sell the original asset, the owner does not need to pay capital gains taxes on the property. This allows property owners with substantial holdings to defer their tax payments indefinitely (depending on control of the REIT). Interestingly an example given is the 1992 Taubman Centers IPO, which is currently in a legal battle with large mall operator Simon Property Group. Given the tax consequences for the Taubman family if they tie the knot with their new rivals at Simon, I have a feeling the failed merger will end amicably (as a result I am currently long SPG).

I am not a reckless person, but taking Risks is really the only way to consistently achieve above average returns as well as in investments.

In 2001 EOP (Equity Office Properties) had the chance to bid on the World Trade Center. Sam declined for two reasons: (1) As a Chicago investor he thought it would get “home-towned” by a New York buyer, and (2) he “didn’t really want to own a target”. He had a hunch that as an important symbol of New York the attacks from 1993 would continue. He later sold EOP in 2007 for $39B, the largest leveraged buyout in history at that point.

Sam attributes much of his success to the culture he built at his companies which started with an emphasis on occasional practical jokes and wearing business casual when everyone else was wearing full suits. He has an “open kimono” policy, no secrets, everything is on full display. He fired people who disrupted the environment by being political, hoarding information for their own advantage. “The concept of using information as leverage just doesn’t work for me.”

“Over the past thirty years, I’ve had to try to get people to not treat me like the boss. To let their guard down so ideas can flow. I don’t want to be surrounded by sycophants.”

His deal structures were setup such that employees could invest in deals in a leveraged fashion (I.e invest $30k, Sam Invest’s $150k, but positive returns are based on the aggregate sum). As a result he’s made “hundreds of millionaires” of his employees.

“I have always known that success for me would be guided by principles.”

Sam had the opportunity to invest in payday loans in the 90s but declined. “It’s a fine business model, and probably very profitable, but I can’t put my name on this. I can’t charge a laborer 300 percent to borrow money for two weeks and live with myself.”

“What I’ve done is not the example I wanted to set; it’s the way I’ve done it that I hope you can emulate, through focus, effort, and commitment.”

Check out “Am I Being Too Subtle” on Amazon.

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