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Risk and reward: A conversation with Sam Zell, founder and chairman of Agricultural Real Estate

Sam Zell used to joke that his father made a life-or-death decision when he was 34 years old, and then never made another mistake again. Zell, founder and chairman of Agricultural Real Estate, was inspired by his father’s confidence.

That’s one of the many takeaways from Zell’s wide-ranging interview with Land Report Editor Eric O’Keefe at the 2022 Land Investment Expo sponsored by Peoples Company earlier this week.

His father brought his sister and mother to the United States from the German-Polish border through Japan. During the more than 40 years he lived in the U.S., his father maintained the belief that the streets were paved with gold and filled with opportunity. 

As the child of an immigrant, Zell saw the United States as a combination of golden streets and shadows over his shoulder. It also shaped his perspective of risk and reward. 

“I’ve always operated on the thesis that if whatever I do is profitable, I’m pretty well protected,” says Zell. “The real question is when you initially make the decision — when you initially take the risk — do you understand what the downside is? Do you have enough staying power to, in fact, be able to succeed in an environment that meets your downside definition?”

A first step into risk

Zell’s first foray into real estate happened by accident. He was in law school at the time, and his college roommate mentioned that his landlord was developing new property. Zell thought running an apartment complex couldn’t be that difficult.

“I had plenty of faith in my own, what I call salesmanship,” says Zell. “I could rent them and most important of all, I was a student, and it was student housing. I thought I could relate. In return for running and maintaining the building, this friend of mine and I each got an apartment.”

Despite his first real estate success, Zell still wanted a career in law. He graduated in the top 25% of his class and sent out 44 job applications. During an interview with a large corporation, the interviewer told Zell he wouldn’t hire him because he believed Zell would be gone in three months.

“[He said] you have entrepreneurial talents and that’s what’s going to drive you,” Zell recalls. “If you can be successful, your talents will be much more appreciated in the entrepreneurial world.”

All about supply and demand

In the late ’80s, Zell purchased an agricultural chemical company that was closing. His business partners went to a bankruptcy sale and bought a nitrogen plant. They also purchased a potash company in Canada. 

“We rolled the three elements together and basically created a process where we covered all three steps of fertilizer production, and we eventually provided and sold fertilizer,” says Zell. “We sold the company to the public first, then we sold out to International Minerals and Chemicals, which is called Mosaic today.”

Zell says the agriculture industry, much like every other industry he has experienced, is all about supply and demand. In the world market, the amount of available farmland is not growing, so as an investment, farmland isn’t a bad choice. On the other hand, Zell says that farmland tends to have a lot of emotional attachment to it, which makes it hard to see it as an investment. 

“I think that emotional attachment makes prices perhaps higher than they might otherwise be,” says Zell. “When interest rates are 0% or 1%, a 2% return may not be great, but it certainly is plausible. You must be able to produce a lot more. Farmland’s problem from my perspective is just inadequate cash flow and income to justify rising asset prices.”

One of the most overlooked assets, in Zell’s opinion, is what he calls the generational space. As businesses are beginning to shift leadership from one generation to another, there is opportunity for modernization and new ideas in the business.

Despite the need for new ideas, Zell also thinks many old ideas will stick around as the generations change. Though he says many workplaces have been changed by the pandemic, there is one point that will keep good businesses afloat: motivation.

“It’s about motivation,” says Zell. “It’s about creating a community. Those companies that have been most successful have had togetherness as one of their strong points. I don’t know how to motivate my modem. I haven’t found anybody else who has.”

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