Long Before There Was Sam Zell

As part of RRA’s Summer Reading List, several employees and I read Zeckendorf: The Autobiography of the Man who Played a Real-Life game of Monopoly and Won the Largest Real Estate Empire in History. Despite my father’s recommendation years ago, I regrettably prolonged reading it because it was not available in audio or digital form. After dusting off a hardback copy purchased by my father in the 1970’s, I have thoroughly enjoyed every page of it.

William Zeckendorf, the great grandson of a famous Arizona settler in the 1860’s (like the Dunlaps), was the Sam Zell of the 1940’s and 1950’s. During this period, he built some of the most ambitious projects across the United States and Canada. Zeckendorf played a pivotal role in revitalizing the Wall StreetFinancial District and was instrumental in the United Nations choosing New YorkCity as its headquarters, effectively making it the capital of the world.

One key takeaway was Zeckendorf’s ability to make bold bets ahead of fundamentals with the belief that a project of enough scale and excellence would create the necessary fundamentals to support itself. Stephen Ross’s Hudson Yards in NewYork City is an excellent recent example of this.

As lenders with a capped upside and unlimited downside, we repeatedly praise and reward cynical underwriting – so much so that we often miss great opportunities and, even worse, risk evolving into eternal pessimists. Perhaps that is needed to survive as a lender today, but it also risks commoditization of our lending program by not being as skilled an underwriter as some of the best borrowers who can plot a path to unlocking unforetold value. As a result, RRAhas always been mindful to hire professionals who spent time in the trenches of real estate leasing and development with the hopes of being able to better understand our borrowers loan opportunities.

A second takeaway was the creativity of the financing markets during thePost-WWII Age (1940 – 1970). Long before CMBS was invented, real estate sponsors were creating and selling their own tranches of securities for their projects. This was done by carving up a property while under contract into numerous property tranches such as ground lease interests, leasehold interests, subdivided interests, condo interests, and even operating lease interests.Before closing, the real estate sponsor would secure financing (senior, mezzanine, debentures) for every property interest including factoring loans on leases.Having capitalized most of the project, the sponsor would separately sell each of the ownership interests (in entirety or in shares) with the pre-arranged financing which were all assumable (extremely rare for today) at significant premiums in parallel with the transaction closing.

The “Hawaiian Technique”, as Zeckendorf called it because he conceived it while fishing in Hawaii, created as many contracts with payment obligations possible then treated each contract as a private business that could be financed, and even sold the loan commitments when profitable. Zeckendorf was the first CRE developer to look at real estate capitalization through the lens of corporate investment banking and issue numerous tranches of securities backed by real estate debt and equity. While allowing him to capitalize deals with no money out of pocket, his aggressive and broad implementation of this strategy, combined with a string of bad luck, eventually forced him into bankruptcy, despite a relatively healthy portfolio, resulting in the decline of his empire.

Zeckendorf’s bold vision and innovative financing strategies were ahead of their time, but they offer valuable lessons for today’s lenders and developers. At RRA, we strive to balance risk with opportunity by hiring professionals with real estate experience who can see beyond the surface of complex deals. Just as Manhattan’s skyline is filled with reminders of Zeckendorf’s creativity, our lending program remains grounded in the idea that, sometimes, great risks lead to even greater rewards.

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