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Chapter 2

Deal Makers

Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.

—Victor Kiam, American entrepreneur¹

Entrepreneurs and Entrepreneurship

Rather than working for other people and earning a salary in an established business that makes a marginal profit, real estate developers seek to create and sell entirely new products in the hopes of earning a much larger entrepreneurial profit. They do this by purchasing property, construction services, and professional services—the project costs—and combining them together into a new product that can be sold for a price that is greater than the sum of those costs. The difference between the total cost and the price is the entrepreneurial profit.

This is not as simple as it sounds. Not everyone has the risk tolerance to try it, and of those who do try, not all succeed. Many successful developers, however, seem to have certain traits in common. People who work closely with developers often describe them as visionary, creative, open-minded, optimistic, persistent, tenacious, and charismatic. Developers use these traits, their ample interpersonal skills, and their social, political, and business connections to structure a series of arrangements with individual landowners, consultants, contractors, elected officials, community members, and other interested parties. Then they assemble these many and varied arrangements into a single real estate development project or “deal.”

Table 1. Profit = Sale Price Less the Sum of Costs

Note: This table shows how entrepreneurial profit can vary widely. In the first, pro forma version, if everything goes according to plan, the developer can expect to earn a healthy 15 percent profit. If the developer can successfully raise prices 15 percent, then profit doubles to 30 percent. If, on the other hand, prices drop just 10 percent, then the developer’s profit drops to 5 percent or just one-third of the original pro forma profit. If prices drop 15 percent or more, profits disappear and the developer’s invested capital is at risk.

Because deals are the basic product of entrepreneurial behavior, this chapter will consider how economists, geneticists, and sociologists think about “the entrepreneur” and the field of entrepreneurship. I will discuss their observations about the entrepreneur’s role in the economy, why some people are genetically predisposed to entrepreneurial behavior, and what entrepreneurs really do on a day-to-day basis—the social and political work they engage in as a part of doing deals. I summarize these characteristics through a portrait of the entrepreneur and then introduce a Chicago developer whose career story illustrates and brings these ideas to life. First, let’s begin with the basic character of the entrepreneur.

The Economist’s View

In his 1942 classic Capitalism, Socialism, and Democracy, the economist Joseph Schumpeter equated the capitalist entrepreneur with medieval warlords and generals from the Napoleonic era. For these men, “generalship meant leadership, and success meant the personal success of the man in charge, who earned corresponding profits in the form of social prestige.” The nature of warfare at the time—before mechanized armies—meant that the individual decision-making ability and driving influence of the leading man, including “his actual presence on a showy horse,” were essential to success in the strategic and tactical implementation of warfare. So too for the entrepreneur, says Schumpeter.²

This militaristic metaphor may seem extreme but in fact the word “entrepreneur” has military roots. In their book about successful business people, From Predators to Icons, the French sociologists Michel Villette and Catherine Vuillermot traced the origins of entrepreneurship to thirteenth-century France. Then, the noun “entreprise” meant a military action and the verb “entreprendre” meant “to attack a person or a castle for pillage or to take prisoners for ransom.” By the early eighteenth century, “entrepreneur” had come to mean an individual who engaged in risky economic behavior by relying on a self-interest-based strategy and by using skills and trickery to achieve his objectives. He cared little about social, cultural, and professional norms and was somewhat of a deviant, operating at the margins of society. By the late eighteenth century, however, all reference to pillage and deviance had disappeared as a more positive meaning emerged, and the entrepreneur became “a man of action who achieved something or accomplished a task—an activity that was highly valued in protestant thinking.”³ This new entrepreneur, according to Schumpeter, was someone who used an invention or new technology to create a new product or to revolutionize production methods, or who created a new market, opened a new source of supply of materials, or reorganized an industry. And like his militaristic forebears, say Villette and Vuillermot, he was motivated by a desire for independence, he sought a field that would allow for the full expression of his creativity, and he had a great need for public achievement. The entrepreneur, however, is just one half of the equation, and he cannot realize the full scope of his ambitions without one other key factor—an opportunity.⁴

Enterprising Individuals + Lucrative Opportunities = Profits

In “The Promise of Entrepreneurship as a Field of Research,” the economists Scott Shane and Sankaran Venkataraman emphasized that, despite a prevailing “cult of the entrepreneur” that overemphasizes the role of the individual, entrepreneurship actually requires two ingredients: “enterprising individuals and lucrative opportunities.” Entrepreneurship involves finding new ways to combine goods, services, materials, and methods in what economists call “joint production.” The entrepreneur buys different resources at one set of prices, combines them together, and sells them for a total price that is greater than the sum of their original prices. Success requires making different assumptions about the values of those resources than providers and competitors who would otherwise raise their prices to capture a share of the entrepreneurial profit. Entrepreneurship therefore requires people to value resources differently, and there are two reasons why that might happen. First, estimating the value of individual resources—as well as their final combined value—requires guesswork. People will guess differently, however, so the individual who guesses correctly stands to profit. Second, ongoing technological, political, regulatory, and social changes ensure that all participants have imperfect information and people who possess information earlier than others have an advantage. But while asymmetrical information creates opportunities for some, it rarely lasts. As information and knowledge spread throughout the community of consultants, vendors, and materials suppliers, they will all raise their prices as they try to capture a share of the entrepreneurial profit for themselves. Competitors and imitators will enter the market too, and over time, the diffusion of knowledge will lead to ever-increasing competition between suppliers, competitors, and imitators until the entrepreneurial profit becomes divided among so many actors that the incentive to enter the market is eliminated. This cycle applies to the development of every type of product from condominiums and automobiles to cell phones and personal computers.⁵

How Entrepreneurs Identify and Exploit Lucrative Opportunities

But where do entrepreneurial ideas come from? Usually from very smart people. Each of us possesses different types and amounts of information, say Shane and Venkataraman, and the sum of a person’s information and life experience serves as the mental framework through which they view the world. A person who obtains a new piece of information before others do may have a brief advantage but, more important, they are able to fit that piece of information into their thinking in a way that complements their existing mental framework and helps them identify a new entrepreneurial opportunity.⁶

This underscores an important difference between managers, who work at optimizing an existing business, and entrepreneurs, who, according to Shane and Venkataraman, identify new “means-ends relations” and “combine existing information and concepts into new ideas.” The latter is more difficult to do, and people who are very intelligent and have the right set of cognitive skills are simply better at it. Intelligence may even influence how different people assess risk. Numerous studies have shown that entrepreneurial people see opportunities in situations where other people see only risks, and this may be because highly intelligent people are better able to accurately assess risk while the average person overvalues the downside risk as compared to the potential upside gain. In other words, according to the behavioral psychologist Daniel Kahneman, for most people, losing a dollar feels twice as bad as winning a dollar feels good. Those who are able to value the upside and the downside equally are better at assessing risk and reward and exploiting entrepreneurial opportunities.⁷

Studies have identified several other attributes common to entrepreneurs. First, they are optimists who perceive their chances of success to be much higher than they really are and much higher than those of their competitors. They are likely to be overly optimistic about the value of the opportunities they discover. This optimism, while driving them forward, can become a disadvantage if taken too far as they undervalue the downside risk. Entrepreneurs must also possess a higher-than-average tolerance for ambiguity because, unlike established businesses, entrepreneurial ventures take shape through a messy, uncertain, and fluid process. Finally, people with a high need for achievement are more likely to engage in entrepreneurial ventures because they offer greater opportunities for wealth creation and public acclaim.⁸

Entrepreneurs make their money by conceiving of new combinations of resources and ideas and creating new products and new markets for those products. They also share certain characteristics—intelligence, optimism, drive, and comfort with ambiguity, to name a few—that are further illuminated by recent research in the area of genetics.

The Geneticist’s View

In Born Entrepreneurs, Born Leaders, Scott Shane summarizes a growing body of scientific research that proves that our genes influence whether or not we are likely to become entrepreneurs, and that the genetic indicators of our tendency to engage in entrepreneurial behavior fall into three areas.⁹

First, genes influence an individual’s predisposition to entrepreneurship through a number of personality traits. Each person falls somewhere on a range of high to low for each of what are called the “big five,” or OCEAN, personality traits: “openness to new experience,” “conscientiousness,” “extroversion,” “agreeableness,” and “neuroticism.” Entrepreneurial people typically rank very high on the first three of these traits and very low on the last two.¹⁰

Entrepreneurs are more likely to be open to new experience, which is helpful because each entrepreneurial venture is new and different from the last. They are also more likely to be extroverts, and extroverts are also more likely to start their own businesses. Entrepreneurs are usually very conscientious, which translates into determination, discipline, organization, and perseverance in the face of obstacles, challenges, and uncertainty. Entrepreneurs are less likely, however, to be neurotic, to be insecure, or to be worriers. Rather, the entrepreneur must remain emotionally stable, flexible, and positive in the face of stress, financial risk, social isolation, setbacks, and the uncertainty that is inherent to any entrepreneurial activity. Finally, although they can be very charismatic and socially skilled, entrepreneurs are less likely to be agreeable—they do not need to be liked. Indeed, being agreeable—“cheerful, courteous, trusting, cooperative, kind, and altruistic”—is of little benefit to the entrepreneur who must “pursue his own interests, often at the expense of others, and drive hard bargains.”¹¹

The Influence of Genes on Other Personality Traits and Correlations Between Traits

There are several other personality traits through which genes predispose an individual toward entrepreneurial behavior. The idea of “locus of control” has to do with how much a person believes that he or she can control the world—or that the world controls him or her. A person can have either an internal or an external locus of control but entrepreneurs typically possess a high internal locus of control, which translates into a strong belief in their own ability to influence outcomes through their own behavior. Entrepreneurs must also have a high degree of self-esteem, which translates into high self-efficacy and confidence in one’s own ability to achieve goals even in the face of obstacles and uncertainty, and at times when others don’t believe in you. Finally, genes influence our predisposition to “novelty seeking,” a high “need for autonomy,” and “risk-taking propensity,” all three of which correlate with entrepreneurial behavior.¹²

There are also correlations between the OCEAN personality traits and these other personality traits that are driven by genes. Extroverts, for example, often also possess the “impulsiveness” and novelty-seeking personality traits that correlate with entrepreneurial behavior. Further, conscientious people often have the persistence, impulsiveness, and novelty-seeking traits. And people who are open to new experiences are also typically imaginative, creative, curious, and inventive.¹³

The Influence of Genes on Intelligence and Energy Levels

Beyond our personalities, genes influence several other important sets of traits that correlate with entrepreneurial behavior. First, genes influence intelligence, and entrepreneurial people are more likely to be highly intelligent. Second, all people are active at some level, ranging between sedentary and hyperactive, and genes influence this “activity level.” Entrepreneurial people tend to be more active than others, and people with ADHD (attention-deficit hyperactivity disorder) are more likely to become entrepreneurs than to pursue other professions, in part because, despite their high intelligence, they are less able to focus enough to excel in areas that require hours of reading, study, and concentration, like engineering, law, and medicine. Finally, ADHD and reading disorders such as dyslexia both correlate positively with high intelligence and people with these conditions are also more likely to be entrepreneurs. Many entrepreneurs have neither ADHD nor dyslexia but for those who do have them and who can put these traits to work, the combination can lead to wild success as evidenced by entrepreneurs such as Sir Richard Branson of Virgin Enterprises and David Neeleman, formerly the CEO of JetBlue.¹⁴

This biological perspective reveals much about the personality of the entrepreneur but genetics is not the only influence on the entrepreneurs’ behavior. Environment, upbringing, and life experience play equally important roles in creating and shaping the entrepreneur. Stepping away from the microscope, where do entrepreneurs come from, how do they get their start, what other factors influence their development, and what is it that they actually do all day long?

The Sociologist’s View

According to Villette and Vuillermot, the entrepreneur’s goal is to identify and exploit a “market imperfection,” earning a large, one-time entrepreneurial profit before others involved in the transaction are able to properly value their own contributing resources. This is called a “good deal,” which is when “you get a lot for a little” while minimizing your own exposure to risk. Success in exploiting a good deal requires the entrepreneur to use know-how, social position, and reputation to engage in a political pursuit that involves culturing relations with important government representatives, businesspeople, and others who can help him or her succeed. But a good deal happens only once, so the entrepreneur is in a perpetual hunt for the next good deal. Each good deal increases the amount of capital under the entrepreneur’s control, paving the way for still larger deals in the future. So for each good deal, the entrepreneur’s success depends not on economic or technological innovation but rather on a social framework, “created by real human beings using an informal web of transactions.”¹⁵

Villette and Vuillermot then debunk a handful of common misconceptions about entrepreneurs, most important their attitude toward risk. Rather than taking huge, crazy risks, as is commonly believed, successful entrepreneurs succeed by taking measures to mitigate, minimize, and even eliminate their exposure to risk, sometimes shedding risk onto other partners and providers. They avoid innovation, which is costly on the front end and slow to show returns, and instead they tinker at the margins, producing goods that are rarely very different—or better—than those of their competitors. Rather than making grand plans, entrepreneurs try many things, pursuing those that show promise, abandoning those that do not, and adapting to whatever the market sends their way. And while some entrepreneurs claim to be “self-made,” they are often more privileged than others and their backgrounds give them advantages that others lack and that play a central role in their success.¹⁶

Five Common Characteristics

Indeed, in their study of nearly ninety very wealthy and successful entrepreneurial businesspeople, most of whom were men, Villette and Vuillermot found only five widely shared personal characteristics. First, the entrepreneur was raised in an enterprising environment where parents and other family members were business creators and owners. Second, the entrepreneur benefited from having more education than the average person, and his academic upbringing also provided access to a network of alumni, friends, and family of friends that supplemented family connections. Third, the entrepreneur gained experience in business very early in his career, through experience in sales, negotiations, or the creation of small companies. Fourth, when starting out, the entrepreneur benefited from privileged financing—access to capital—from family and friends. And fifth, the entrepreneur had the support of a mentor who helped him make his first “good deal.”¹⁷

Looking through the overlapping lenses of economics, genetics, and sociology helps to bring into focus how personality traits, background, upbringing, and lucrative opportunities combine to create the entrepreneur. Throughout the rest of the book we will look at the entrepreneur through a series of more personal lenses—the career stories of individual developers. The next is a Chicago developer named Buzz Ruttenberg whose story brings these ideas to life, from his start in the business and his first good deal to his approach to risk management through the design of a condominium project that would soon face a turning market.

Zip-Code Development

David “Buzz” Ruttenberg was born in March 1941 and was raised in a six-flat walkup in downtown Chicago until he was ten, when his family moved into a co-op a few blocks away. He attended a private school in the city that was a short walk from his home and then he enrolled at Cornell University and graduated in 1962. After completing some graduate work at the London School of Economics, Ruttenberg went on to Northwestern Law School and graduated with honors in 1966. Ruttenberg initially practiced law for the renowned Chicago firm of Kirkland and Ellis and then moved to a family law firm while he was “developing his craft” as a developer. He left law in the mid-1980s and became a full-time developer in his early forties. But his career in real estate development really started in the 1950s, when as a child he would accompany his father on visits to the various rental properties that his father owned.¹⁸

Ruttenberg’s maternal grandfather was an immigrant from Russia named David Wolf who came to Chicago in his early teenage years. He opened a wholesale dry-cleaning business that served hotels and other institutional laundry users. As his business prospered, he became interested in property. Ruttenberg’s parents married in 1940 and his father, David C. Ruttenberg, was an attorney who “scratched out a living” after the Depression and then during World War II. But the Ruttenbergs lived relatively comfortably although they drove old cars and initially lived in a walkup apartment in the city. By the late 1940s the rush to the suburbs was under way but Ruttenberg’s parents had no interest in moving there, and his mother knew that his father could never ride a train every day, so they stayed downtown.

In the late 1940s, Ruttenberg’s father was introduced to a rooming-house operator named Louis Supera. The two men were close in age—born in 1909 and 1910, respectively—and at the time they met they were in their late thirties. “My father had a creative itch and an interest in real estate that he had picked up from his father-in-law, who had since passed away, and Supera knew how to collect rents and maintain B and C class buildings.” So the two men bought a nine-flat on Hampton Court, just around the corner from the Ruttenbergs’ home at 450 West Wrightwood and two blocks west of Lincoln Park. At the time, says Ruttenberg, “Lincoln Park was green but a little tired and the upscale community now known as ‘Lincoln Park’ had yet to arrive.

“So they did what I call a ‘two-brush rehab,’” says Ruttenberg, “which means they swept it with a broom and repainted it with a brush.” David C. Ruttenberg kept on practicing law and Lou Supera kept on running rooming houses, but they collected rent from their nine-flat, and, although it wasn’t much, it supplemented the incomes of both families. The Superas and the Ruttenbergs each had two children, all of whom were close in age, and the two families both stayed in the city—the Ruttenbergs in Lincoln Park and the Superas a little to the north, in Rogers Park.

Breaking Rules

About 1950, Ruttenberg and Supera decided that for their next investment they would go farther west and “venture into no-man’s land.” The two men bought a twenty-unit apartment building two blocks west of Clark Street and four blocks west of Lincoln Park. The area was a little dangerous but there were no gangs, and yet people saw Clark Street as a big psychological barrier. “At the time, going west of Clark Street was like Christopher Columbus in 1492—it was unchartered and you could fall off the edge,” says Ruttenberg. “Everyone thought they were crazy but in the end they were right, and they didn’t need a market study, it just made sense. After all, in Chicago, east is in the water, which is a real barrier, so any development that is going to happen is going to go west, and if anyone had thought about this it would have been obvious. You start to say, ‘Gee, I think I see a pattern here.’”

Figure 7. David C. Ruttenberg (left) and Lou Supera in 1965. Courtesy of Belgravia Group Ltd.

Ruttenberg and Supera continued to buy and develop properties west of Clark Street. In the 1960s they began to copy what was happening in SoHo in New York City, exposing brick to make things more “cool and hip” for the artist community that was starting to live in Lincoln Park. Ruttenberg and Supera had been working together for about twenty years when, in 1971, two young restaurateurs named Rich Melman and Jerry Orzoff opened a restaurant in Lincoln Park called RJ Grunts. “Everyone told them that they couldn’t succeed but RJ Grunts went on to become one of the most successful restaurants in Chicago.” By the 2000s, Melman’s privately held restaurant company, Lettuce Entertain You Enterprises, owned and operated more than seventy restaurants, mostly in Chicago.

“There was no reason for Clark Street to be a barrier,” says Ruttenberg. “It was a psychological barrier. And this is part of what makes the Midwest the Midwest—it is a great place to live but the people are more conservative and risk-averse.” Having gone east for school and then to London, however, Ruttenberg had learned that rules are meant to be challenged. “Some of the most successful people in the world today have broken the rules,” says Ruttenberg. “Bill Gates did not graduate from Harvard and Steve Jobs dropped out of Reed College but for both of them the old rules did not apply to the new game that they were playing.” For Ruttenberg, the lesson was the same: “Here, in Chicago, there are a lot of perceived barriers that really don’t make sense. My dad and Lou Supera succeeded by pushing the geographic envelope where it wanted to go, and I have been doing the same thing ever since.”

Now I Am a Corporate Raider

“Although I went to law school and practiced law while I was working with my father,” says Ruttenberg, “I had always been drawn to entrepreneurial opportunities in real estate and I had a teacher in my dad. We were very fortunate in that we got along well and we found that it was fun to do things together. He had created a base and we had a level of success in the Lincoln Park area and a nice reputation.” Then along came an opportunity that Ruttenberg was able to convert into his first good deal.

In 1970, when he was just twenty-nine, Ruttenberg and his father bought a property called Crilly Court, on Wells Street in Old Town, just a little to the north. It was a $2 million purchase, “which was humongous for us at that point,” and it comprised about 120 residential units and a dozen stores. “We knew nothing about stores, but it was our neighborhood and we knew 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 gave them exclusive rights to show first-run movies in a zone that included the downtown core and all of the north side, which included Webster Place. The only place downtown to see a first-run movie was at a four-screen theater at Water Tower Place, a seventy-four-story, mixed-use tower on Michigan Avenue, but a moviegoer had to brave congestion and expensive parking to get there.

So the Ruttenbergs gambled that bringing in a new theater in a suburban-style mall on the North Side with free and easy parking would increase the market for first-run movies in the city but they had no guarantee that the movie distributors would create a new zone. “At Webster Place, parking was free and you could tell right away from the parking lot whether the movie you wanted to see was showing, rather than paying for parking and then taking the elevator to the seventh floor of Water Tower Place just to find out what was playing or to find out that the movie you wanted to see was sold out.” The theaters at Webster Place opened “with secondary stuff,” says Ruttenberg, “but all 1,600 seats were full within a week and the movie distributors realized that two zones might be a good thing after all, since they would ensure more seats and more revenue for first-run movies.

“Business deals are about ‘what is best for me,’” says Ruttenberg, “and what was best for the movie distributors was the creation of a new zone. It was a perceived barrier but to me it was obvious.” Webster Place went on to become a big hit. “And with the success of Webster Place, our expertise—without any long-term plan—continued to grow, and as it grew, we gained more access to capital.”

Value, Value, Value

Since the 1990s, Ruttenberg has done nothing but for-sale housing in the city. “We needed to learn, develop our expertise, and scale up slowly, so we started out doing small townhomes, then small midrises, and then we went bigger.” Since 2000, Ruttenberg has developed three condominium towers on Chicago’s lakefront, one at 530 Lake Shore Drive and two more across the street at 600 Lake Shore Drive, all adjacent to Navy Pier, Chicago’s big waterfront entertainment center. But once again, says Ruttenberg, “Following the business model that I have already described—cautious risk taking—we didn’t build condos the way other developers did at the peak.”

The property at 600 Lake Shore Drive was about one acre and was the last piece of vacant land on Chicago’s lakefront. In the 1980s there had been plans for a ninety-story building but they fell apart when the stock market crashed in 1987. In the 1990s another developer made plans for a massive single tower but it never got off the ground either. As he was finishing 530 Lake Shore Drive, Ruttenberg approached the owner of the property across the street and said, “Your zoning is going to run out soon and the mode in the city these days is downzoning, so if your FAR [floor area ratio, which is the ratio of buildable floor area to site area] gets reduced from 16 to 12, you will lose 25 percent of your value, but if you work with me maybe we can do something.” Ruttenberg had a plan that comprised two towers that were perpendicular to the lakefront rather than one big tower that was parallel to it. This scheme offered a number of important benefits.

First, while his competitors developed buildings designed to maximize their buildable area based on zoning, Ruttenberg took a more modest tack. “Instead of building the tallest building with the biggest floor plates, we built the shortest buildings possible based on our land costs, to minimize the risk of having too much product to absorb.” Shorter is also better, says Ruttenberg, because “while many people believe that it does not cost more money to go higher, in fact every time a building gets taller it gets more complicated and more expensive.” Tall buildings are like sails, and the as they get taller, more must be spent on design and construction to offset the effects of “wind-loading.” As a building becomes taller its columns and foundations must become larger to resist the building’s tendency to tip, while exterior window and wall systems must be stronger if they are to resist both positive and negative wind pressure. “But, more important, the taller the building, the longer it takes to complete and the longer it takes to deliver the last units and this is only made worse by having small floor plates at the top.” Further, the longer it takes to get to the top the more the market can change in terms of tastes and the more time your competitors have to supply more product and saturate the market.

Figure 9. Buzz Ruttenberg’s two-tower design for 600 Lake Shore Drive, Chicago. Courtesy of Pappageorge Haymes Partners.

Second, Ruttenberg’s conception for two towers rather than one allowed for smaller floor plates and more exterior perimeter for the same amount of area, which meant more windows in the units. But more important, by placing two towers perpendicular to the lakefront, Ruttenberg’s floor plan allowed him to arrange his units so that they all had lake views, whereas a single tower parallel to the Lakefront would have had many units on the back side, facing west, with no lake views. In Ruttenberg’s plan, the two-bedroom units were on the southwest and northwest corners, with oblique lake views; the one-bedroom units were in the centers of the long sides of the towers with lake views to the southeast and northeast; and the largest—the three-bedroom units—were on the northeast and southeast corners, where they had panoramic lake views.

Third, Ruttenberg also charged a higher dollar-per-square-foot price for the larger units and a lower price for the smaller units, which is the opposite of typical practice. More often, units are priced so that smaller units cost more per square foot while larger units cost a little less and the difference between the unit prices is not as great. But at 600 Lake Shore, a 1,000-square-foot, one-bedroom unit sold for as little as $400 per square foot, or $400,000, and a 2,500-square-foot, three-bedroom unit sold for $700 per square foot or $1.7 million. Ruttenberg had looked at suburban retirement home models, where larger, better units are sold for a higher dollar-per-square-foot price. He had also learned from the sellout of his previous project across the street that lake views sell—“what a surprise”—and he was confident that he could charge a significant “view premium” for those three-bedroom corner units facing the lake. “Why pay that premium? Because there is an eighty-mile, no-build zone in front of your unit.”

Fourth, building two separate towers also meant that Ruttenberg could manage his risk by building in two phases, giving him more control over construction and market timing. This also allowed him to “prove up” the concept with the smaller first tower, which represented only 40 percent of the project’s size. He could then make adjustments to the second tower to best satisfy the market at the time. So the two-tower scheme made sense both economically and in terms of managing risk.

Figure 10. A typical floor plan for 600 Lake Shore Drive. There are six units per floor in each of the two towers, and all units have views of the lake to the east (right, in this plan). Courtesy of Pappageorge Haymes Partners.

Fifth, Ruttenberg managed his risk by designing reasonably sized units, paying attention to the total sale price of the unit rather than the dollar-per-square-foot price, providing value, and building with an eye toward what inevitably happens—a downturn in the market. At the peak of the condo boom, many developers were “blowing air” into their floor plans to create larger units that they could sell for higher prices based on dollar-per-square-foot pricing. This has the effect of making larger units look good on paper, but it can lead to difficulty when the market takes a turn for the worse because while home buyers may compare projects based on dollar-per-square-foot prices they buy based on what they can finance—the total price. “So if you provide the same unit as your competitor,” says Ruttenberg, “but you blow a little less air into the floor plans and you make them slimmer and a little more efficient, then you are hedging against the day when the market slows down. And if that means as a buyer you are paying $1.7 million to live in a three-bedroom, three-bath unit on the lake but others are paying $2.5 million to $5 million, then that feels pretty good to you.”

Figure 11. The unobstructed view east, over Lake Michigan, from 600 Lake Shore Drive, with Navy Pier to the right. Courtesy of 600 Lake Shore Drive LLC, a Sandz/Belgravia Group Ltd. Development.

Ruttenberg concludes that “much has been made of the ‘three L’s—location, location, location’—but something that is equally as important that gets talked about less is ‘value, value, value.’ You can have the best location but if it is overpriced then you have to hit the market just right or else you are out of luck. You always have to assume that it is going to go bad,” says Ruttenberg, “and so the question becomes, how do I differentiate myself for when that happens? Once again, ‘cautious risk taking.’ That is how we managed the risk on this project—by designing a product that we could complete and get to market faster and that would be a value even after the market turned down.” And when Ruttenberg talks about “we,” he is including his main partner on the project, Michael Supera. “Michael is the son of Louis Supera so 600 Lake Shore Drive was like a fifty-year reunion of the Ruttenbergs and Superas working together.”

Buzz Ruttenberg’s story illustrates how upbringing and background influence a developer’s career. His ideas about rule breaking and cautious risk taking offer one view of opportunity, risk, and how “psychological barriers” can cause people to value things differently—and create a good deal for the observant entrepreneur. And with 600 Lake Shore Drive, Ruttenberg explains how he was able to hedge against a downturn in the market by using a more efficient design to differentiate his project from that of his competition. Finally, despite the common misconception of entrepreneurs as crazy risk takers, throughout this story Ruttenberg explains how most developers really think about their business and the products they produce. For those who are successful over time, development is not about taking huge risks on bold, creative, but unproven ideas. Rather, it is about minimizing exposure to risk through a careful process of incremental improvement to traditional product types over time.

“The best Shakespeare plays are based on Greek mythology,” says Ruttenberg, “so the question becomes what adaptations can you make and how can you make it better, more interesting, and more current. It is the same for development: You don’t want to reinvent the wheel—once they cut the corners off, it rolls.” Still, to succeed, a developer must always be improving the product at the margins, so in the next chapter we will look more closely at real estate development as a product-development process and how product types evolve over time.