Passing the Torch – Plan Now or Pay Later

By Jay Maddox, Principal, Avison Young

Over the past 50 years, many successful real estate entrepreneurs have amassed substantial wealth, and now count themselves among the uber-rich. While they typically have estate plans in place, they often don’t have a future business succession plan. Without a strategy in place, there is significant risk that the wealth created over a lifetime will be dissipated, family and/or business relationships may be irreparably damaged, or both.

Creating an effective business succession plan starts with the individual’s legacy vision and  involves a careful, and challenging balancing act between financial, business, personal and family interests. The plan should provide a clear roadmap for a smooth transition that will minimize conflicts, establish a path for management succession, meet family members’ current and future needs, accomplish charitable giving objectives, and preserve wealth for future generations.

Wealthy real estate entrepreneurs approaching their twilight years often tell me that they want to “simplify their life.” Their needs are changing, and many are thinking about their legacy vision and how they wish to live out their remaining years. Typically they want to reduce their involvement in day-to-day operations, but still have a role. Over the decades, the founder may have collected many different investor partners and other financial relationships that are now a headache to manage. The structure of existing agreements may be significantly outdated, lacking adequate buy-out or other provisions designed to address the risk of conflicts or of a partner becoming incapacitated. Fortunately, there are many approaches to address financial issues such as re-balancing the portfolio and/or creating liquidity via tax-neutral financing or exchange transactions.

Another concern is the turnover of leadership. Many heirs do not have the aptitude or willingness to take over the responsibility for managing assets, and/or they will be looking to cash out in order to meet their own financial needs. Unless the portfolio is to be liquidated and distributed to the heirs and/or charitable organizations, there must be a management succession plan in place. The founder may be confronted with difficult choices involving which family members will be involved in the business, and who will not participate. It may be necessary to recruit managers from outside the family, hire a third party asset-management company, or combine with another real estate operating company.

The consequences of failing to have a succession plan in place are too high and, as time passes options narrow, so it pays to have a plan now even if it needs to be modified later. To be sure, the process can be daunting when a large portfolio and many different stakeholders are involved. Given the difficulty there is a natural inclination to leave this project on the back burner. In such cases, it may be best to engage an independent, objective, experienced business advisor who can quarterback this process and work closely with the founder to develop and implement a viable plan that has the full support of family members and third-party constituents.