Family-Owned Real Estate Portfolio Transitions Into Company

Problem: Over several decades, a Bay Area family amassed a real estate portfolio of multi-family residential units, commercial and light industrial properties. This wasn’t the result of any constructed plan, but just the product of a hardworking, successful, entrepreneurial Bay Area family over the years.

Thanks to appreciation in the real estate market, these holdings are now valued at $75 million. The family matriarch had always managed daily operations with the help of just a bookkeeper. Succession planning is now required, but the family is unprepared due to internal family dynamics, and a lack of strategic planning or a legal structure for a business of this size and complexity.

Solution: Our first task was to work with the family to understand their post-transition goals in detail. Was there a member of the next generation who wished to manage what’s now a significant, and significantly complex, business? How should they be compensated? How about other family members? Would simply selling the properties make more sense? How much risk was acceptable? What was the time horizon? Were there ways to minimize estate taxes at the matriarch’s death? While some of these questions were obvious next steps, other required some deeper thinking about what mattered to the family, and why.

Once the family articulated their goals, we then created a legal and operational structure to achieve them. This included negotiating an agreement with a management company to handle day-to-day operation of the properties and creating an entity ownership structure that provided a framework for governance as well as tax efficiency and liability protection.

On a less formal, but perhaps more important level, we also helped the family define their priorities and identities. It’s one thing to be working in the family business and doing well. It’s quite another to be the owner, investor and strategist of a real estate portfolio in addition to that, with many complex, consequential decisions to make. Along with providing professional expertise, we also had to earn their trust and help them understand the new world in which they were operating, its challenges and its opportunities and many of both were encountered in the process.

In the course of this planning, we worked closely with the family’s new financial advisor and accountant and brought in additional resources from within Farella and our professional networks in specialty areas including insurance, tax, business law, employment, and finance. As always, our goal at Farella is to add value and knowledge wherever we can, point out pitfalls and opportunities that our clients might overlook or discount, and ensure that a family’s succeeding generations benefit as much as possible from the work and success of their predecessors.