Monday, February 16, 2009

Sam Zell's 'Trickle Down' Empire

This blog editor has a few things in common with Sam Zell. We're both Jewish and we both got our start as businessmen as adolescent youth selling Playboy magazines to our friends for profit. Unfortunately for me, the similarities end there.

Yet wherever and whatever Zell has had his hand in, there has been a remarkable pattern of disaster once he has washed his hands clean of it. Call him the Reverse King Midas. Call him Real Estate's Reagan. Zell seems to scoop up every bit of fortune with a massive fisherman's net, and all the misfortune shakes out, and trickles down on the rest of us.

Whether its 1960's adolescents getting scolded by their mothers upon discovery of their literary indiscretions, or real estate moguls getting burned by their acquisitions of Zell's massive Equity Office Properties Trust real estate portfolio, if you have done business with Sam Zell, directly or indirectly, you probably wish you hadn't.

In 2007, Zell sold a 573 building portfolio to Blackstone Group for $39 billion, resulting in the largest private equity deal in history. Blackstone, almost immediately spun off hundreds of the buildings for $27 billion. It probably wishes it had spun off even more, as the value of what they still hold from the acquisition has lost 20% of its value since they bought it. It's been even worse for the flipees.

Harry Macklowe narrowly avoided personal bankruptcy after over-leveraging his $6 billion acquisition, and lost 7 trophy office towers to creditors in the process. The founder of Maguire Partners was forced to step down as CEO last year after dealing with crushing debt amassed from the acquistion of 24 buildings from Zell's portfolio. The list of those negatively affected by acquiring some piece of Zell's portfolio reads like a whose who of commercial real estate giants. RFR Properties' acquistions from the Equity Office Portfolio are now worth less than the mortgages on them. Tishman Speyer has unsuccessfully tried to flip three of the four buildings it acquired. Even the investment banks that financed many of these transactions (you know, the smart guys on Wall Street) have collapsed as a result of Zell's trickle down effect.

One can only wonder if Zell's most recent highly publicized sale of the Chicago Cubs, a wholly owned subsidiary of the Tribune Company, will be as tumultuous for the buyer (Larry Ricketts, founder of TD Ameritrade) as it has been for the buyers of his real estate empire. If I were a Chicago Cubs fan, I'd be more worried about the curse of Sam Zell than I would about the curse of the black cat, a billy goat or Steve Bartman. Then again, as Cubs fans are so fond of reminding us failed season after failed season, there's always next the mean time, I'd switch my account to E-Trade just in case.

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