JMB Realty Corporation

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JMB Realty Corporation

900 North Michigan Avenue
Chicago, Illinois 60611
U.S.A.
(312) 440-4800
Fax: (312) 915-2310

Private Company
Incorporated: 1969
Employees: 4,500
Sales: $2.20 billion

The history of JMB Realty Corporation reads like a fairy tale for young entrepreneurs. From its modest inception in 1969, JMB has risen to become the largest and most widely respected noninstitutional manager of real estate in the United States. No longer a mere syndicator of packaged real estate deals, JMB also develops, manages, and owns an astonishing variety and number of the largest real estate projects across the United States and in Great Britain. Perhaps most remarkable of all is that JMB, which in 1990 controlled or owned outright some 21,000 apartment units, 150 shopping centers and malls, 15 deluxe hotels, and 65 million square feet of the most prestigious office space in the country, remains under the personal control and majority ownership of two of its founders, Judd Malkin and Neil Bluhm.

Malkin, Bluhm, and a third friend, Robert Judelson, grew up together in Chicago’s west Rogers Park. All three were of modest, middle-class backgrounds and attended the same high school. Bluhm and Malkin became roommates and best friends at the University of Illinois at Champaign, Illinois, whence they both graduated in 1959 with accounting degrees. After obtaining their CPAs, Malkin became the head of a Chicago Toyota distributorship while Bluhm went on to a law degree from Northwestern University and a job at a Chicago law firm, Mayer, Brown & Platt. Robert Judelson, in the meantime, had become a real estate broker, and when Malkin began dabbling in the suburban markets the two of them decided to form a new venture devoted exclusively to real estate. Malkin then wooed his old friend Bluhm away from the comforts of Mayer, Brown, where he had quickly become a partner specializing in taxes. In 1969, Bluhm agreed to join the new company, JMB, the first letters of each of the partners’ last names.

Malkin’s determination to include Bluhm in JMB soon proved prescient. In 1970 the company convinced Continental Illinois Venture Company to invest $130,000 in JMB for 10% of the latter’s equity. Continental Illinois Venture was a venture capital offshoot of Chicago’s Continental Bank, created just the year before with the legal advice of Mayer, Brown’s Neil Bluhm. In helping the venture capital company with its tax structure Bluhm had greatly impressed the company’s president, John Hines, and when Bluhm in the following year asked Continental on behalf of JMB for seed money, Hines felt confident that the investment would be successful. Hines later said that he had only a vague understanding of JMB’s proposed business, the syndication of real estate packages, but he knew that Bluhm would do well in any venture.

Real estate syndication was at that time a relatively unknown practice. Its basic theory is simple. Instead of turning to banks for between 80% and 100% of the capital needed for a particular real estate project, the developer in a syndication sells off pieces of his equity to a multitude of small- and medium-sized investors. He is thus able largely to bypass the banks, put up very little of his own money, and by packaging subsequent, similar deals build a large portfolio of real estate that he controls and may either sell or continue to manage. As general, or managing, partner, the developer bears nearly all of the risks associated with the project.

The advantages of this scheme for the investors are many. As limited partners, they cannot be held responsible for more of the project’s debt than the amount of their equity investment. On the other hand, investors share in the profits generated by the partnership, as well as the property’s long-term appreciation in value, which in the case of some real estate projects is enormous. Finally, as the tax laws were structured in 1970, even limited partners could deduct interest and depreciation expenses of the partnership from their personal income on a pro-rata basis. Because the ventures were highly leveraged, interest deductions were very high for the first few years of the project, as was depreciation, resulting in substantial savings for those individual investors saddled with large incomes and few available deductions.

By allowing the small investor to buy a piece of prime real estate while sharply increasing the investor’s real income, JMB and the other syndicators springing up around the country were able to attract thousands of eager clients. In 1971 the firm launched the first of its Carlyle public partnerships. When the partnership almost overnight raised $7 million, it allowed JMB to reward Continental Illinois Venture’s investment with a fivefold profit after a single year. This gave solid evidence that real estate syndication was an idea whose time had come. Continental finally sold its 10% equity back to JMB in 1978 for $4.3 million, a move that the bank now cheerfully admits was a blunder.

Unlike many of their fellow syndicators, Malkin, Bluhm, and Judelson made a policy of not pursuing tax-driven ventures structured solely on the basis of their potential tax benefits. Many such deals found themselves in trouble when the absence of a sound underlying economic logic overshadowed the tax benefits and threatened the entire venture’s survival. By avoiding tax-driven deals, JMB built an asset base more secure than most of its competitors as well as a reputation—critical in a business dependent on investor confidence—for having a generally cautious investment policy. JMB would buy only those properties that made money, regardless of the tax benefits.

A second important difference between JMB and its rivals was JMB’s preference for expensive, top-of-the-line properties. The partners were convinced that in a recession the last buildings to feel the pinch were the exclusive ones, and they planned their investments accordingly. 1MB also regularly borrowed bank funds for the initial down payments on their new properties, and only then went to investors with their offer of equity in a well-defined, verifiable project. In this way, investors felt that they knew what they were getting into, and 1MB knew that it had suitably placed the money thus raised.

The result of JMB’s prudence was nothing short of spectacular. Though Judelson left the firm in 1973 to found Balcor Company with Jerry Reinsdorf, JMB grew at a frenetic pace during the 1970s. It soon began a series of fruitful collaborations with Aetna Life and Casualty’s Urban Investment and Development Company, raising capital for Urban’s major mixed-use developments such as Chicago’s Water Tower Place and Boston’s Copley Place. Until the end of the decade, most of JMB’s funds were invested by individuals in relatively modest amounts, $10,000 to $100,000, but the passage by Congress in 1974 of the Employment Retirement Income Security Act (ERISA), gave the nation’s big pension plans the go-ahead to invest more heavily in real estate. Sensing an imminent rush into real estate on the part of pension managers, JMB created a pension advisory division, JMB Institutional Realty, in 1978. Division manager John Lillard had soon enlisted the pension funds of a half-dozen leading corporations, including CBS, Inland Steel, Xerox, and Chrysler.

Pension funds invest enormous sums of money. With the addition of this new financial muscle JMB made further innovations. In 1979, the company formed JMB Development to research and manage the firm’s own real estate developments. Some observers questioned the prudence of this move, as it would take JMB from the abstract financial world of syndicating to the more practical realm of construction and leasing. JMB’s philosophy of finding the best available individuals and giving them equity incentives, however, proved to work equally well in the development end of the business. In effect, JMB did not enter the development industry; it bought up already successful developers and paid them handsomely to continue with their work. In 1983 JMB teamed up with Federated Stores, the leading department store operator and developer of shopping malls, to form JMB/Federated Realty Associates; and in the following year spent $1.4 billion to buy out its frequent former partner, Urban Investment and Development.

The impact of these two acquisitions substantially altered the nature of JMB’s business. In addition to the investments it managed on behalf of its 146,000 individual limited partners, JMB found itself thrust into the role of a major U.S. real estate developer, with a host of projects already built, under way, or on the drawing board. Its collective properties, owned and/or managed, were now valued at $10 billion, and in order to maintain effective control over this growing empire Malkin and Bluhm encouraged the top managers at Urban to remain with the newly named subsidiary, JMB/Urban Development Company. Many of them did, lured by the equity bonuses offered by the two founders, and JMB was able to assimilate its two new partners with nary a hitch.

Although its Carlyle syndications were now raising hundreds of millions of dollars, JMB continued to widen the range of its other activities. This became especially important when tax code amendments in the mid-1980s scared many investors away from syndication, and a number of the less savvy operators went out of business or were forced to retrench. Even JMB, which suffered less than most, saw total syndication dollars slip from the 1985 high of $619 million to $452 million in the following year. Given this investment climate, in 1986 JMB further expanded its development assets by purchasing for $600 million Alcoa’s properties in Century City, Los Angeles; and 1987 it added Walt Disney’s Arvida Corporation, paying $400 million for the giant resort developer. With the purchase of Arvida, JMB had built a strong presence for itself in three different segments of the real estate market: shopping centers, office and industrial space, and resorts.

The biggest was yet to come, however. In 1987, JMB successfully bid $2 billion for the Toronto-based Cadillac Fairview Corporation, a developer of both shopping malls and office space. To reduce its debt burden, JMB subsequently sold about $450 million worth of Cadillac’s less attractive properties. The Cadillac purchase, which brought with it some 42 shopping malls and a handful of prime office structures, was most likely the largest commercial real estate deal ever transacted. Upon its completion, JMB owned or operated approximately $20 billion in assets on behalf of some 350,000 individual investors, 95 corporate pension funds, and 65 endowments and foundations. None of its 30 public partnerships had ever failed to make a quarterly distribution to investors, who on average had realized annual pretax returns of 13.2%—versus an industry standard of 6.7%. JMB had become not only the largest but also the most successful syndicator.

Since then, JMB has hardly slowed down. In 1988 it paid $950 million for Amfac Inc., a diversified owner of Hawaiian sugarcane plantations, resort developments, retail chains, and electrical distribution. Amfac’s beachfront acreage will likely prove to be a long-term gold mine for JMB. In 1989 the firm gobbled up Great Britain’s Randsworth Trust P.L.C. for $800 million, including the refinancing of debt, and Eastern Corporation’s Houston Center, a large mixed-use development. Practically lost in this blizzard of deals were failed bids for Bloomingdales and Hilton Hotels, a 1983 attempt to rescue the Chicago Sun-Times from the clutches of Rupert Murdoch, and the successful purchase of 20% of the Chicago Bears in 1987.

At the start of the 1990s, some 30% of JMB’s $22 billion portfolio was owned outright by the company, and Bluhm and Malkin each retain about 33% of JMB’s stock. These two men were yet only in their early 50s, still eager for action, and apparently unafraid of taking on any challenge.