As family offices consider including sophisticated real estate investment strategies in their holdings, they are looking for qualified professionals who can not only be diligent and close these complex transactions, but, just as importantly, provide the personalized service that they are used to. Family offices have unique characteristics that set them apart from other investors, and working effectively with them requires a personalized approach.
The number of U.S.-based family offices skyrocketed after a landmark 2017 ruling in a lawsuit filed against the Internal Revenue Service by the Lender’s Bagels family that paved the way for favorable tax treatment for family offices . This trend is expected to continue for years to come, especially as the wealth of the super-rich continues to skyrocket and lucrative investment opportunities continue to emerge in today’s vibrant real estate market. Consider: Despite the COVID-19 pandemic, an estimated 86% of family offices grew in 2021, with a 58% increase in assets under management and average returns of nearly 20%, according to the Campden Family report Office 2021. Clearly, this massive market growth has created attractive new opportunities for a wide range of professionals serving these family offices, including lawyers, bankers and other lenders, accountants, property developers and managers. of heritage.
In my own practice, I have recently assisted family office clients with their first forays into marinas, hospitality, single family build-to-let communities, mezzanine and preferred stock origination, as well as investments based on blockchain and NFT. I also represent banks and other financial players on the reverse side of these same investments who, although very experienced, are dealing with family offices for the first time.
Based on my experience working with a range of family offices over the past 25 years, here are some general tips for advisors looking to support them:
- First, understand their point of view. Many family offices are considering unique and sophisticated products that are not as easy to understand as traditional investments, and since many do not have dedicated CFOs or other such experts on staff, they need lawyers and other outside consultants who can properly assess and explain these things to them. Although family office members can easily understand what it means to invest in an apartment building, for example, they may need advice on more technical aspects of real estate investing, such as distribution cascades, promotion structures and exit strategies in a limited partnership structure, or the intricacies of issuing or buying debt.
- Understand their dynamics. Family offices, as their name suggests, are made up of family members. These people have varied backgrounds and areas of expertise that are often unrelated to the investment activities of the family office. For many, there is a learning curve – not only in terms of the subject matter, but also in navigating the uncharted territories of working with family members, building consensus, collaborating and resolution of conflicts and disagreements, etc.
- Understand their tax concerns. In addition to the tax considerations that all investors face, family offices are particularly concerned with estate and generational tax planning to ensure that they can minimize tax liability and maximize wealth preservation. They need legal counsel who can ensure they miss no opportunity to maximize results and protect their best interests.
- Understand their needs for control and transferability. Family offices are often concerned with the possibility of transferring control from one generation to another, or between family members in certain circumstances. Lenders and other investment partners should anticipate these needs and build appropriate flexibility into the documentation.
- Understand their customer service expectations. High net worth individuals and families are accustomed to the highest quality service. It is important to anticipate their concerns when their investment is one of many in a large, highly structured transaction. Rather than being the big fish as they are used to, they could find themselves surrounded by institutional investors and REITs with larger positions and influence, with whom lenders and other the transaction may have long-standing and highly valued relationships. Additionally, it is important to remind family offices that banks have strict compliance and reporting requirements that they will need to adhere to. Lenders should keep in mind that family offices have different levels of expectation and will need more flexibility and explanation when using debt to acquire assets.
Although working with family offices and meeting their high expectations can be demanding, in my experience it has been very rewarding and one of the most enjoyable parts of my practice. My experience has shown that family offices, when trusting a professional, tend to be very loyal and are an excellent source of referrals over the years.
Undoubtedly, family offices are a unique client category, and professionals seeking to meet the growing need for high quality advice must understand how to operate within their particular dynamics to meet their particular needs. Those who succeed can position themselves as trusted advisors and perform highly rewarding work on behalf of valued clients.
Jonathan Kurry, a Miami-based partner in financial industry group of the global law firm Reed Smith, can be contacted at [email protected]