Last year, I had a fascinating conversation with my mentor and friend, Sam Zell, a self-made billionaire and a titan in the real estate industry. Sam, recognized by Forbes as one of the 100 Greatest Living Business Minds, shared insights into his real estate investment philosophy, particularly his renowned 8-page paper, “The Grave Dancer“. This paper, published in the New York University Real Estate Review in 1982, unveils a strategy that’s as relevant today as it was then.
The genesis of “The Grave Dancer” strategy came from Sam’s observation in the late 1960s and early 1970s. He noticed a pattern missed by many: real estate development was more driven by the availability of funding than actual market demand. Easy loans from banks fueled a surge in construction, leading to oversupply even as demand weakened.
Sam witnessed this firsthand when he bought a fully-occupied apartment building in Orlando, Florida, in the early 1970s. Within two years, a wave of new developments flooded the market, and his occupancy rates plummeted from 100% to 68%. This experience sparked a crucial realization: “They’re gonna oversupply the whole country.” This pivotal moment led Sam to pivot his investment approach towards acquiring distressed properties, becoming a “grave dancer” in the real estate market.
The iconic “Grave Dancer” cover art, symbolizing a contrarian approach to real estate investment.
In his seminal paper, Sam Zell articulates his brilliant strategy for investing in distressed assets. “The Grave Dancer” provides a roadmap for analyzing distressed properties, starting with a comprehensive assessment of the property itself. This includes evaluating its physical condition, marketing strategy, competitive landscape, management quality, and, crucially, its ability to generate cash flow. Beyond property analysis, Sam outlines three essential rules for structuring the financing of distressed deals, focusing on risk mitigation and financial prudence. These rules are: avoiding “guillotine clauses” (clauses that can prematurely trigger loan repayment), carefully considering investor liability, and importantly, abandoning the assumption of readily available long-term financing in uncertain times.
“Grave dancing is an art that has many potential benefits. But one must be careful while prancing around not to fall into the open pit and join the cadaver.” – Sam Zell, “The Grave Dancer”
Sam’s “grave dancer” philosophy presents a stark contrast to the conventional investment wisdom of relying on “inflation bailouts.” Traditional real estate investors often anticipate profits driven by inflation, expecting rent increases to outpace fixed debt expenses. However, Zell’s strategy is about identifying and capitalizing on opportunities arising from market distress, not just riding inflationary waves. He also emphasizes the inherent risks, cautioning, “Grave dancing is an art that has many potential benefits. But one must be careful while prancing around not to fall into the open pit and join the cadaver.” This metaphor underscores the delicate balance between opportunity and peril in distressed asset investing.
Ultimately, the concept of “grave dancing” perfectly encapsulates Sam Zell’s broader investment philosophy: seeing opportunity where others see only despair. In essence, it’s about daring to go left when the crowd is heading right, a hallmark of successful contrarian investing.
This article is based on my insightful interview with Sam Zell, a self-made billionaire consistently featured on the Forbes 400 list since its inception in 1982. A true pioneer in real estate, Sam chairs seven NYSE-listed companies and his private investment firm, Equity Group Investments. His landmark achievements include the monumental $39 billion sale of Equity Office to Blackstone in 2008. Further solidifying his legacy, Forbes recognized him as one of the 100 Greatest Living Business Minds. Sam is also a celebrated author, with his best-selling book “Am I Being Too Subtle?“, and a dedicated philanthropist focused on promoting entrepreneurial education. For a deeper dive into Sam’s perspectives, listen to the full podcast episode here.
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Randall Kaplan is a serial entrepreneur, venture capitalist, philanthropist, and podcaster. He is the founder and CEO of JUMP Investors, a venture capital firm. Randall is a Co-Founder of Akamai Technologies and Founder/CEO of Sandee.
Randall hosts “In Search of Excellence“, featuring guests like Mark Cuban and Sam Zell. He founded The Justice Ball and co-founded The Imagine Ball, supporting poverty and homelessness alleviation.
Read Randall’s full bio at www.randallkaplan.com.
