How Real Estate Developers Think. Peter Hendee Brown

that we were experts in our neighborhood, so we said, ‘What the hell, let’s go for it.’” The seller was a group of investors led by a big Chicago developer named Arthur Rubloff who together owned everything on both sides of Wells Street but who wanted to sell the whole portfolio at once, rather than piecemeal. But to Ruttenberg the seller was Arthur Rubloff, the person. Rubloff had bought up all of this property for the purposes of developing a higher-density project on the east side of Wells Street, closer to the park, but he didn’t want the old property on the west side of the street. “So Rubloff signed a contract for all of it and then flipped the old stuff to us.”

      Rubloff was selling all 108 apartments, 12 rental houses, and 12 stores for an average price of $15,000 per unit but Ruttenberg divided the portfolio into different property types and found hidden opportunities. “We got some homes, some apartments, and some stores, and I took a look at the asset pool and thought, ‘Once again, it is a matter of breaking the rules and thinking creatively.’ I thought that we could fix up the twelve rental houses and sell them as separate homes, and I knew that the market value for these homes was $70,000. The difference between $15,000 and $70,000 is $55,000 per home, and if you multiply that times twelve homes, it is a lot of money and 30 percent of the deal. On the day I signed the contract the average price was $15,000 but I knew that those twelve houses were worth $70,000, so I said to myself, ‘Now I am a corporate raider.’”

      Better still, Ruttenberg had a sense that the current tenants of the houses would be ready buyers and indeed they were. “We sold them all as is to the tenants and most of them were thrilled to buy them so it wasn’t a big effort. We didn’t have to do any renovating or spend any money on marketing so it was the perfect deal.”

      As for the apartments, there was another reason why Arthur Rubloff and his investor partners did not see what Ruttenberg saw. “They were guilty of living in downtown office buildings but there is no substitute for being the guy in the field with on-the-ground experience.” Because they lacked that experience, Rubloff and his partners believed that the rents were maxed out. But Ruttenberg had worked his way through law school as a janitor and property manager: “I knew how to rent buildings, I knew what people wanted, and I knew what they didn’t want. I also knew that the problem here was that these owners had never reinvested any money in these properties, so the carpet, hallways, and appliances were all tired and needed to be freshened up.” This time, Ruttenberg went up a notch from the two-brush rehab to include some more significant improvements.

       Table 2. An Example of Entrepreneurial Profit

      Note: Buzz Ruttenberg made a huge profit because when he divided the asset pool, he realized that the twelve houses were worth $70,000 each, whereas Rubloff had not differentiated between units and had priced them all at $15,000 each. Buzz earned a paper profit of more than $600,000 ($55,000 multiplied by twelve houses) in one transaction because he understood the value of the property better than the seller did.

      Lease turnover dates in Chicago were typically May and October and the closing was going to be in March, which was close to lease renewal time. Rubloff was sensitive to the fact that if the lease renewals did not go out on time it could cause problems for the buyer but because they knew the Ruttenbergs they allowed them to send out the leases one month before the closing. “So we sent out our leases,” says Ruttenberg, “and with them we sent a long letter outlining everything we were going to do and informing the tenants that, by the way, your rent is going up 40 percent.

      “Well, the tenants wanted it—they were starving for it—and nobody knew. Half of the leases that were up were renewed by the time we got to closing. In the end we looked like we had outsmarted Rubloff, and we had. We closed on March 1, 1971, we made a big paper profit, and I was thirty years old. To this day we still own a part of that asset although we have sliced and diced it a lot of ways, sold off some of the homes, some of the apartments, and kept some of the retail. For us, Crilly Court was the goose that kept laying golden eggs and it gave us a revenue source on refinance and disposition that has been useful ever since.”

      Cautious Risk Takers

      By the late 1960s it had become apparent to the Ruttenbergs that in addition to rehab projects, there were new construction opportunities. There were plenty of vacant lots and the demand for new housing in the city was increasing, so they started by building new six- and eight-unit infill buildings and that gave them the experience they needed to do twenty- and thirty-unit buildings. They continued pushing west and then north, to an area near Wrigley Field. “We thought of ourselves as ‘cautious risk takers’ and while those areas were rough—there were drugs and gangs—we also knew that Chicago tended to evolve on the basis of contiguity. So if your new neighborhood was contiguous with your old neighborhood, you could generally get people to migrate to the new community. But not if there was a four- or six-block gap—there are plenty of examples of people who went too far west and became isolated and in those cases it took a long time for development to catch up.”

      In the late 1970s the Ruttenbergs started converting loft buildings into offices in the River North area one mile west of Michigan Avenue. “We could see the activity picking up, there were more people living downtown, and since development is about adaptation rather than innovation, we started looking to New York for inspiration.” But by the 1980s they were finished with loft conversions. “Other people started coming in and paying more for loft buildings, so we stopped. We had lived through the run-up but when the office market became supercompetitive in the 1980s we exited, and when we sold our office portfolio it comprised almost one million square feet.”

      At around the same time, Ruttenberg had come to feel that developing, owning, and managing office space was simply not what they did best. “Apartments are easier—when they turnover, you just paint them. With offices, the new tenant wants more walls, less walls, a different arrangement of space, and so you need to change everything else too—the lights, the heating and cooling, and the sprinklers—and you need to pay brokers all the time. With an apartment you just put a sign on the door and have the janitor show the apartments.” So while offices and apartments may look similar, Ruttenberg learned that they are really quite different and he simply felt that he knew how to do apartments better. He also felt that zip-code development was still the best approach.

      Figure 8. Buzz Ruttenberg (left) and his father, David C. Ruttenberg, in 1993. Courtesy of Belgravia Group, Ltd.

      “My father and I believed in being in the center of activity and relying on our own judgment. Both of us had always lived in town and we had never hired someone or paid $5,000 or $10,000 for a market study to tell us how to invest $100,000 or more of our own equity. It was our money, we were not syndicators, we were not going anywhere, and certainly not in a hurry. Instead, we were going to creep, crawl, and be cautious risk takers, and this takes incredible discipline that is hard to develop.”

      Business Transactions Are About “What Is Best for Me”

      In the late 1980s the Ruttenbergs started several new construction projects farther west, beginning with one important purchase. A college friend of Ruttenberg’s called to let him know that his factory—the old Butternut Bread factory at Clyborn and Webster—in the core of Lincoln Park might be for sale. The Ruttenbergs bought it, demolished it, and redeveloped the site into a retail center. By this time, residential density had increased in the city but retail had not followed, so urban dwellers had to drive to the suburbs to shop at the mall. The importance of being able to park in the city had grown too, and in housing projects the Ruttenbergs were providing off-street parking for one and even two cars per unit. So the Ruttenbergs decided to borrow the model of the suburban shopping mall and bring it downtown. The two-story, 150,000-square-foot Webster Place shopping center was the first new retail center in Lincoln Park. It was anchored by eight movie theaters on the second floor and supported by seven hundred parking spaces. The movie theater was one more case of “breaking the rules.”

      At the time downtown theater owners had agreements with the movie distributors that