This book would not be complete without including the most renowned real estate professor in the world, Peter Linneman, who pioneered the academic study of real estate and was named by the National Association of Realtors as one of the 25 most influential people in the business. I have so much respect for him not only because he did the research on real estate for decades, but also because he executed as a professional and carried out large investments and dispositions. In the real estate industry there are so many people that you encounter who express their opinions as if they were truths, and I am not a fan of this practice. I believe that opinions should be based on facts. Peter Linneman makes shrewd conclusions based on research, on evidence, and real-world facts. So, of course, do the Titans interviewed in this book.

In His Own Words

I wasn’t born into real estate, and it certainly wasn’t something that I grew up expecting to become a part of my life. I stumbled into it through the world of finance. Earlier in my career, I was working leveraged buyouts (LBOs) at Wharton, which is where you buy out a company by making use of debt.

When you’re in the LBO world, the expectation is that the return generated on the acquisition will more than outweigh the interests that you have to pay on the debt, making it a good way to experience high returns while only risking a small amount of capital.

The Dean of Wharton at the time asked me to create a real estate curriculum at the school.

I didn’t know much about real estate and I was probably a little bored at the time with what I was doing at the university. Therefore, I accepted and said, “Okay, let’s put together an advisory board of Al Taubman and a bunch of other leaders from different parts of the real estate industry.”

In the process, I started to learn about real estate from Al Taubman, who became an amazing friend and teacher.

Taubman is most well known for being the father of the modern shopping center and for owning Sotheby’s.

I learned a great deal from him, and together, we created a program that we call “System.” I slowly moved toward real estate assignments, and instead of doing buyouts for paper bag companies or whatever, I would focus on doing it for a real estate company.

At the time, real estate was all about details and not a truly professional business.

Ultimately, I ended up in the real estate industry, and it was a time when you were able to leverage an unbelievable 93 percent. We would put up 7 percent of the value in cash and the other 93 percent was debt.

With the collapse of the late 1980s and early 1990s, you had millionaires and billionaires who had no idea what was on their balance sheets. They didn’t know what an income statement was, as crazy as that sounds.

I rose through the real estate ranks because I understood both classroom and real-world business. Since the early 1990s, real estate has changed dramatically. Now you’ve got public companies and private equity firms, and because of my background evaluating companies, I knew which ones were good bets and which ones weren’t.

Real Estate Deals

My first deal was a condo for my family. I was renting, but I wanted to mess with the place, knock down walls, and build it like a home. We wanted to double the size of the apartment. It’s hard to find two adjacent owners who will let you tear things up like that.

We bought two adjacent units and we got it right. It’s hard to find a unit that’s big where we were living. We bought because it gave us control, not because I thought it was an exceptional investment.

My first large transaction, however, was the Rockefeller Center in New York in 1994 and 1995. There was a foreclosure because the Japanese owners during the early to mid 1990s were trying to restructure and sell off the building.

I was chairman of a public company, so I wound up as chairman of the company that owned that particular debt. I was lucky to have an excellent board with people like Peter Pearson, who was one of the co-founders of Blackstone, and Benjamin Holloway, who was chairman of Equitable, the second largest insurance company in United States. A couple of other amazing people were also on the board and one of the lead partners of Goldman Sachs as well.

I learned so much in that process. It was pretty successful in the end, and in an odd way, I learned that the smart guys really are smart.

Personally, I’ve never been a “deal person.” My main contribution over the years has always been one of two things. First it’s on the education side, including my publication of a book and developing a program in teaching; this has been a big part of the professionalization of real estate industry over the last 30 years. My second major contribution is that I helped a lot of people think through their business strategy analytically, and I provided an intellectual framework and vocabulary they could use to make their own deals.

Looking back on my deals, my favorite one is the Rockefeller Center deal. Another was in Europe, for a public company called Atrium European Real Estate. It was a complex situation, and everyone was at each other’s throats. The company was getting liquidated and there were several institutional investors involved.

I led a restructuring on behalf of the other shareholders, so you can imagine how many people wanted a piece. It took about a year and two different negotiations to get it resolved.

One of my companies is called American Land Fund. My main lesson, as a result of owning this business, is that timing is everything, and you don’t control the timing. We felt the housing market was going down. We thought land would be available at distressed prices. We thought we would get a perfect entitlement during the down phase because we would have capital and then, as things recovered, we would sell into the recovery.

We were right about the distress occurring. We were right that there would be distressed opportunities. We were right that we could add amenities that would add value during the down period, but we were wrong about the depth of the job, which was twice as deep as I predicted.

I thought we’d only be in a recession for three to four years, but things still aren’t back to normal, and you can’t do anything to make somebody buy your land.

If nobody wants to build houses, it’s because nobody wants to buy them, and it doesn’t matter how cheap your land is.

Compare selling land with owning an apartment. If you own an apartment, you can cut the rent. You can be aggressive because people have to live somewhere. Eventually, someone will show up, but with land, someone has to come and build on the land. That’s a second investment. It’s a tough asset in that way, and timing is everything in the land business.

It’s taken me a decade to do what I thought would take three years, and you can do the math on that. Some people ask me whether they should leverage their own deals when investing in land. My advice is no; in land you should leverage as little as possible, with a maximum of 30 percent.

When you’re buying raw land, the value of homes going up or down will affect the value of the land as well. If home prices are going down, the value of your land goes down, and if prices go up, you’re lucky enough that your land price goes up. That’s enough leverage and risk to have in the deal.

You don’t need to add a second layer to that leverage because when you do, that’s a recipe for disaster.

Unfortunately, so many of our peers get greedy and take on a lot of debt in order to get their hands on a lot of land. When it takes longer than expected to flip that land, then they get wiped out of their investment.

We were patient and used cash rather than leverage, so we’re still standing now.

I know everybody isn’t into doing massive deals like that. A lot of people are regular guys working 9 to 5, and they should implement a diverse strategy.

If you can scrape together a little money to put into real estate, you might be better off buying some REITs. For example, $10 worth of assignment, $10 worth of equity residential, $10 worth of regency, and $10 worth of a nitty gritty supply-chain company like Prologis. Why? That’s because they’re really well managed. They’re good portfolios. They’re highly diversified, and you get a nice return. I trust these REITs a lot more than development groups.

On the other hand, if you’re looking to have a long-term career, my view is that you should start by working for the one of the bigger companies just so you can get some experience around people who know what they’re doing: companies like Related, Blackstone, Starwood, Simon, and others. You don’t have to work for a household name, but you want a big, stable brand with managers who know what they’re doing.

I suggest that for three reasons. One, it’s better to lose someone else’s money than to go out and invest your own. When you start out, you’re going to make mistakes, and people will avoid you. You’re going to lose your own money if you start out that way. But if you work for a big company, there are other people who already made those mistakes, and they will stop you from doing the same. You’ll learn the reason why it’s not good to do that.

Second, it’s great to see how a successful firm operates, and the third thing is that you’ll see what big firms do. Big firms are big because they do certain things excellently, and these things allow them to scale. By working for those big firms, you’ll see what they do so well, and then you can focus on those areas of excellence. If you’re entrepreneurial, or you want to work with a smaller firm, seeing what the big firms will still allow you, with your smaller entrepreneurial firm, to avoid the things they do poorly and take advantage of the things they do well.

The Next Generation

What if you’re a young person trying to get involved in real estate?

If you’ve ever seen one of those movies where the guy takes apart his machine gun and then puts it back together wearing a blindfold, that should be how you run and operate Excel. You should become a spreadsheet master because the better you are with Excel and understanding numbers, the better you’ll be in this business. Learn how to make it look good and presentable, so you can build a model that someone else can look at and immediately understand.

Bosses don’t want to do these financial models themselves. It’s an inefficient use of their time, and this is a great way for you to get your foot in the door. The other skill is to read, study, listen, and master your trade. Read about the markets, supply, and things that cause demand. Understand who the major players are, even if you’re not in a public company. How much of their success is just riding momentum, or are they doing something really different? Is it bullshit “PR” value-add, or is it real? If you’re in town, look at the market. Who’s renting what? Why?

Become an expert on your region and the part of the market you’re focusing on. Depth of knowledge is always superior to breadth of knowledge. Everywhere you go, there is an opportunity to pay attention to real estate. If you’re heading to a building for a meeting, look around and ask, why is the lobby like this? How could they have made the floor plan better? What materials did they use for the construction? Why are the ceilings a certain height?

Be intellectually curious and think about the way different pieces of real estate are tied together.

If you’re interested in warehouses, make sure that you study what’s happening in retail, because the retail businesses in your area affect what’s happening in warehouses and parts of the industrial sector. Most of the stuff you read in the newspapers is not 100 percent true. Most newspaper articles were written to draw attention and attract readers rather than to inform.

In addition to taking newspaper articles with a grain of salt, I recommend that you have good taste in choosing who you decide to work with for the first five to seven years of your career. Make sure you work for a good teacher, and I don’t mean you should choose from among university professors. I mean you should choose people who pass on their knowledge and feed their wisdom to you. They can be mentors even if nobody’s ever heard of them.

Some people are just instinctively good teachers. They share what they’re doing, they share their questions and their answers, and they share their own experiences. Be open to learning and work for somewhere who has the same values as you do.

If you value long-term relationships, don’t choose a high turnover company. Find a company that matches your belief, your family’s schedule, and your lifestyle.

As much as these ideas are important, the most critical element is mindset, which begins with intellectual curiosity.

Across the board, the most successful people I know read a lot. They’re always looking for new knowledge and new information. Each of them excels in a different way. They have different areas of excellence, both in how they interpret data and analyze real estate sectors in the regions where they invest. But one thing they have in common is possessing excellent skills for analyzing something.

The ability to analyze is what creates greatness. Success in this business is always data-driven.

Bad Partners

One common mistake I made was to partner on a deal even though I knew the partners weren’t up to their part of the bargain. I knew they didn’t have the capital. I knew they didn’t have the bandwidth. I knew in my heart of hearts that they didn’t have the expertise.

I knew it, so why did I do the deal?

Part of it is that you decide to give potential partners an opportunity—you reach out a hand to bring them up to your level and partner with them—but it ends in tears, and this especially happens when you have employees. You promote people because they’ve done a great job at their level, and you want to give them the opportunity to move up to the next level. You want to give them a chance to grow and show that they’re capable of that next level, but it turns out they’re not. This is where the phrase “people are promoted to the level of their incompetence” comes from.

There are other big mistakes in real estate, like over-leveraging. Those are big mistakes, but with leveraging, it’s really about a risk assessment. When the mistakes involve employees or partners, it’s often because you trust somebody that you shouldn’t be. That’s a much more personal mistake.

Heroes

One of my biggest heroes is Lucille Ford, a woman who is 96 years old as I am writing this book. If she lived in New York instead of Ohio, she would be a legend, and everyone would know her name.

She received an MBA from Northwestern in 1946, at a time when women did not get MBAs. She ran her family business, then sold it, got a PhD in economics, started teaching, and eventually became a dean at Ashland University.

I’ve learned more from her than anybody about how to ask yourself hard questions and how to live a quality life. She’s living proof that you can become something beyond what anyone might expect. I needed that inspiration as I moved through my career.

I also had the blessing of being a student of Milton Friedman. As one of the three top economists of the 1900s, he taught the “markets over mandarins” theory; he was my professor at University of Chicago, and a close friend for years after.

My third mentor was Al Taubman, who was a giant of real estate, the father of the modern shopping center, and a person of quality. He didn’t just teach me real estate; he taught me how to do business.

Lessons

One of the lessons I’d like for you to take away, and this is something that I learned from the book The Rational Optimist by Nicholas Redley, is that we should try to be loved, to love, and to be productive.

As much as I’m excited about this book and the way you’re going to learn from all these principles, I hope you will always remember what it felt like when you were starting out, so that you can be in alignment with people.

Make the world a better place and make sure that you are remembered as a great real estate person, not a villain.