Real Estate Titans

7 Key Lessons from the World's Top Real Estate Investors

Erez Cohen

• Editorial: Wiley
• Año: 2019
• ISBN:
  9781119550075
• Edición: 1
• Categoría: Business
• Categoría: Real Estate

In Real Estate Titans, Erez Cohen shares the advice and learnings of the world's leading real estate experts to create a guide for becoming a savvier real estate player.

Cohen draws on his experience as a research and teacher's assistant at Wharton Business School with an investment expert—and his mentor—Dr. Peter Linneman. Throughout his career, Cohen has collected first-hand knowledge from meetings with such real estate titans as Ronald Terwilliger, Sam Zell, Joseph Sitt, and numerous others. Cohen wanted to understand how these real estate giants became so successful, so he refined his quest into three critical questions: What inspires these titans to work so hard and reach such extraordinary levels of success? What are the main elements and traits inside of them that propel them to be so grandiose?How have these individuals, who had less resources, succeeded on a much bigger scale than so many of their competitors?

Real Estate Titans contains the 7 key lessons distilled from interviews with several of the world's greatest real estate investors. These critical lessons offer insight into the mindset, tactics, and habits that each of the interviewed titans possess. Once you implement these key ideas—which you won't find anywhere else—into your business, it will grow exponentially within a matter of months.

Real Estate Titans offers an insider's view into several of the most successful investors on the planet. The book's compelling stories and lessons show why real estate is such a wonderful and important business, and it also offers a roadmap for becoming a world class real estate player.

Part I
Interviews with Real Estate Titans

The following interviews are intended to share the wisdom of some of the best and most successful real estate investors in the world; however, as you read their compelling stories understand that real estate is driven by logic and experience, and what has worked for one person might not work for another. There is never only one answer or one approach to a real estate deal or a problem. My goal for you is to use their knowledge as a base to embark upon—or continue in—the long and exciting journey of real estate.

These interviews assume that you have the basic knowledge of real estate terms such as yield on cost, internal rate of return (IRR), cap rates, leverage, and more. But if these terms are unfamiliar to you, please refer to the Glossary at the end of the book for definitions and explications.

Chapter 1
Richard Mack

Mack Real Estate Group, New York, New York, USA

Understand the potential downside of a deal

It is a rudimentary principle of portfolio management theory to incorporate alternative assets as part of a diversified portfolio. One of the most popular alternative investments for sophisticated investors is real estate. While it serves as a partial hedge against inflation, it is also a way to enjoy the potential of a steady cash flow stream.

Within the real estate space, institutional investors are probably most attracted to the private equity arena. Real estate private equity funds have been attracting large amounts of capital with assets under management reaching an all-time high as of the end of 2017 of $811 billion.¹ One private equity real estate giant is Richard Mack.

In His Own Words

I was at the top of my class in high school, but not in college. I guess I wanted to have fun, experience being in a fraternity and think creatively away from my major, but I was a hard worker and later regretted my lack of academic discipline in college. By the time I entered college, my father had established himself as a very successful developer. I graduated at a time when people commonly assumed that the son of a successful businessperson was not capable. When I started working, I felt that I had a lot to prove.

I graduated from the Wharton School at the University of Pennsylvania and was very lucky to get a job with Shearson Lehman Hutton. Despite expectations, I didn’t always work for my father, and he did not find me my first job. I was fortunate to meet Bill Kahn, a managing director at Shearson Lehman Brothers, in their real estate investment banking group. He took a chance on me. Maybe he saw that I was passionate about hard work and real estate investments. Maybe he wanted a relationship with my father. Either way, he offered me a job, and real estate investment banking seemed a natural fit. I always enjoyed doing things that required self-motivation, creativity, and hard work. I also felt that growing up I had learned a lot about development at the dining room table and that I had an aptitude for real estate. That’s pretty much how I ended up getting into the business.

In real estate investment banking in the late 1980s, profit was driven by tax syndications, powered by accelerated depreciation rules for real estate or tax arbitrage. Those loopholes all closed in 1986. By the late 1980s real estate investment banking was in retrenchment. I was forced to restart my career in 1990 just after getting started. Within six months, there was a massive firing across the real estate investment banking division at Shearson. Four of five managing directors and their teams were let go. The one remaining managing director would not even interview me because I was “a rich kid.”

Fortunately, I preemptively made two moves: (1) I reached out to my old boss from when I was a summer intern in the facilities department at Shearson, and (2) I applied to law schools. I got the job and shortly after that got into law school.

Shearson was then owned by American Express and their facilities departments were combined. While my experience was brief, I will never forget the lessons that I learned there. The most interesting experience I had in the facilities department, and the one that was the most exciting, occurred during a very weak real estate leasing market. I was sent to Long Island in New York to negotiate with a landlord a renewal for American Express, one of the largest companies in the world. American Express had backup computer systems in a Long Island distribution/office building. The landlord could have tripled the rent and American Express would have stayed: the cost to move the equipment was prohibitive. Instead, I was able to negotiate a significant rent reduction based upon market rents having fallen. This experience made me realize the power of information in real estate, what it means to be a tenant, and what corporations/users see when looking at real estate.

The Big Opportunity

The early 1990s was a really bad time for real estate. As I was graduating from law school, my father invited me to join him in his foray into real estate private equity with Leon Black. They were forming Apollo Real Estate. With an initial $500 million fund, this untested real estate private equity concept would pursue “distressed” investment opportunities in the United States and Europe. I enjoyed this experience because I got to live through all the initial stages of creating a real estate investment company, the advent of the real estate private equity business, and the highs and lows (but predominantly highs) of successfully closing on many dozens of equity and debt investment opportunities.

So far in my career, I’ve been involved in the investment of more than $16 billion of equity in real estate transactions all over the globe that I would estimate to have a value of more than $80 billion. While the fund business would prove to be tremendously interesting and lucrative, I always remember the first significant money I made for myself, which was not through the equity fund business. It was something I did on my own, and taught me the value of being opportunistic and the importance of not relying on others (i.e., fund investors) to take a risk that I was not prepared to take on my own.

In my mid-twenties, I bought land with three radio towers on it, paying ground rent, in Montauk, New York. The towers on the land were owned by the tenants, but the land lease was very short. Other buyers at the time were concerned that the tenants would move the towers or that satellites would replace cell towers completely. I was not sure about the technology, but I was pretty sure that the town would not allow these towers to be moved to another location. As a result, I was able to buy the cash flow at a six multiple, a very attractive number to me. I was betting that the underlying demand for users of those towers would increase because cell phone usage would have to increase and that satellite would be too expensive. It was the beginning of the mobile communications era.

I was able to put up the money myself with another partner who wanted to invest. I had to borrow recourse debt, which meant I had to pledge personal collateral to the bank. Fortunately, after all my diligence and efforts, it turned out that our investment thesis was correct, and demand for these towers skyrocketed.

More importantly, there were no competing radio towers anywhere nearby, and the town was not going to approve new ones. Because of this, I took title to the towers and quadrupled the EBITDA by converting subtenant income into direct income from the telecommunications companies. In retrospect, the investment seems straightforward, but at acquisition this seemed a risky proposition. In fact, I could not get a nonrecourse loan. I had to leverage my whole life in order to get help from the bank. So, I put my guts on the line and I was lucky. Not only was I was able to dramatically increase the NOI, I eventually sold the towers at a 14 multiple.

The lesson to learn from the radio tower deal is that sometimes real estate is mispriced, and for a short period of time, the market players will overlook this. Sometimes, you will see a shift in the market or realize that technology’s going to make a change, and you can be one of the people who realize early that the shift will eventually lead to a shift in real estate value. The success of this project left me brimming with confidence and I have tried to leverage these lessons for the benefit of the many partners who have entrusted me with their capital over the years.

The Polish Job

One of my favorite deals took place in Poland in 2004, just before the country joined the European Union. A company called Metro had built a large portfolio of shopping centers all across the nation and was looking to exit. They wanted to take their money out of Poland and start investing in China.

These shopping centers were purpose-built to be occupied by Metro’s several large big-box/category killer concepts. Metro had a hypermarket tenant, an electronics retailer tenant, a “do it yourself”/Home Depot tenant, a “dress for less” tenant, and a big-box sports concept. Metro would add a McDonalds, a video store, and other service tenants to the mix and create a big-box center/mall. They built these centers as a way to have a first mover advantage and launch their retailers in Poland quickly. Metro had no reason to own the real estate long term; they had better uses for their capital than real estate and therefore, they just wanted out of the Polish hard assets. They had tried to list the portfolio on the Polish stock exchange as a REIT. When this failed, they valued certainty. This allowed us to negotiate a good deal. We bought these shopping centers for €775 million, refinanced them at €840 million a year later, when Poland formally entered the EU, and then sold 50 percent of the properties at an even higher valuation. We were able to generate an annualized rate of return of more than 100 percent on that deal over a long hold period and a multiple on equity of more than 5x—not because I’m a genius, but becau...