Zell Returns to Grave Dancing With $625 Million Distressed Fund

Zell Returns to Grave Dancing With $625 Million Distressed Fund
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By Miles Weiss

Sept. 1 (Bloomberg) -- Sam Zell, undaunted by his failure to keep Chicago-based publisher Tribune Co. out of bankruptcy, put together a $625 million fund to buy distressed securities backed by assets including commercial real estate.

The 67-year-old billionaire filed a private-placement notice last month for Zell Credit Opportunities Fund LP, described as a private-equity fund that received its initial backing from a pair of unidentified investors.

The fund represents Zell’s return to distressed investing after his $8.3 billion buyout of Tribune culminated in a December bankruptcy filing by the publisher of the Chicago Tribune. Investors expect trillions of dollars in maturing debt on commercial real estate to trigger a wave of bank foreclosures and loan sales.

The Zell fund “is a harbinger of what is to come,” said John Goff, who co-founded Crescent Real Estate Equities Co. with billionaire Richard Rainwater. “A lot of loans are coming due and there are going to be a whole host of opportunities.”

Zell’s sale of Equity Office Properties Trust to Blackstone Group LP for $39 billion in February 2007 marked the peak of the commercial real estate boom. Investors such as Zell, who dubbed himself the “Grave Dancer” for turning a profit on troubled assets, are betting they will profit from the downfall of developers who borrowed heavily to buy property at record prices. U.S. commercial real estate debt outstanding was $3.6 trillion at the end of 2008, up from $1.3 trillion 10 years earlier, Goff said.

So-called vulture investors profit by purchasing debt for pennies on the dollar and negotiating for higher prices or equity stakes as troubled companies reorganize in bankruptcy.

‘Wiped Out’

“If you want to own real estate long term, chances are you are going to need to be acquiring the debt,” said James Corl, the head of distressed real estate investments for Siguler Guff & Co. in New York. “Most of the equity in the industry is wiped out.”

Terry Holt, a spokeswoman for Equity Group Investments LLC, Zell’s Chicago-based investment firm, declined to comment on the new fund, comprised of a series of partnerships incorporated in March. The fund began raising money in July, according to an Aug. 7 filing with the U.S. Securities and Exchange Commission. The document doesn’t indicate whether the backing came from Zell, outside investors or both.

The banking industry may be a source for distressed securities and loans. The U.S. “problem bank” list increased by 111 to 416 institutions with combined assets of $299.8 billion, the Federal Deposit Insurance Corp. said last week.

‘Kicking the Can’

“You haven’t seen a lot of wholesale dumping yet because institutions are kicking the can down the road and hoping things will get better,” said William Mack, founder and chairman of AREA Property Partners, a New York-based manager of real estate investment funds. “Over time, they will be writing loans down and getting rid of them.”

Loans and bonds backed by overleveraged companies could be one area of interest for Zell, who teamed up with David Schulte in 1990 to form the $1 billion Zell-Chilmark Fund LP. Zell- Chilmark invested in companies such as mattress maker Sealy Corp., Carter Hawley Hale Stores and Schwinn Bicycle Co. The fund’s internal rate of return averaged 18 percent, according to data from the Oregon Public Employees’ Retirement Fund, which invested about $29 million.

Commercial Mortgages

Zell expressed interest in May in mortgages secured by commercial real estate, a category that includes land, hotels, office buildings, and apartment and condominium complexes. By purchasing mortgages at a discount, vulture investors can foreclose on the underlying property should the borrower default, a strategy known as “loan to own.”

“On the debt side, the opportunity is extraordinary,” Zell told Citigroup Inc. clients and guests at the Citi Private Bank 2009 Real Estate Dialogues meeting. “If you’re buying a high-quality piece of paper now, it will be more likely to rise in value than fall,” according to a marketing brochure on the conference.

About $1.5 trillion of commercial real estate loans are expected to come due during the next five years, according to Goff, who now runs Goff Capital Partners LLC, a real estate investment firm in Fort Worth, Texas. Meanwhile, building prices, rents and occupancy rates are falling, delinquencies and defaults are rising, and banks are tightening credit standards, making it more difficult for borrowers to refinance loans.

“The banks are requiring much more interest-rate coverage, higher loan-to-value ratios, in conjunction with rents that have gone down and asset values that have gone down,” said Richard Kincaid, a private investor who previously served as chief executive officer of Zell’s Equity Office Properties. “When you put all that together, that is pretty lethal.”

http://www.bloomberg.com/apps/news?pid=20601109&sid=aiM0qVKDpGP8

 

Zell is simply the smartest RE investor on the planet.

 

A good article

 

$625Million doesn't seem like a lot of money for the amount and quality of deals that most likely will be coming to the market in the near future.

http://online.wsj.com/article/SB125201979656584901.html#mod=article-outset-box