Like REITs, CRE Families Now Focus on Succession

NEW YORK CITY-A recent spate of C-suite turnover has put the spotlight on how capably CRE firms are managing these departures and arrivals, in particular the question of succession planning. As Real Estate Forum reported in its June issue, REITs and other publicly traded entities are giving the matter much closer scrutiny than in years past.

Yet commercial real estate in many instances is still a family affair, and leadership can pass—sometimes smoothly, sometimes less so—from generation to generation. How prepared are family-owned and operated companies to make these transitions? More so than they may have been at one time, says Tracey Daniels, a partner with locally based Hartman & Craven LLP who works frequently with family firms.

“They seem to fall into two camps,” Daniels tells GlobeSt.com. “There's the camp of people who don't want to do anything about it and barely even have an operating agreement, and then there are the people who are much more conscious of it. They've started to amend their operating agreements for succession management.”

Loan documents frequently have been a catalyst for these changes. “Refinancings have been so hot lately, with interest rates being what they are, and a major focus of the clients is on the transferability section in the documents,” says Daniels. Real estate families have become “very focused on drafting them in a way that allows for estate planning” or, when a manager is “on the older side,” to ensure that transferring the management role to a younger manager won't trigger a default under the loan documents.

More generally, Daniels says family-owned companies “need to focus on who they're comfortable with” managing the firm, especially as the list of candidates grows along with the generations. “Sometimes you start out with a company that's two brothers, but it ends up becoming two brothers and their sons and daughters—it gets bigger and bigger,” she says. “They don't necessarily focus on that when it's just the two of them.”

When a family-owned firm grows in size and holdings, the members might step back from day-to-day management, leaving that to someone outside the family. In those instances, “you need to focus on what decisions that outside manager can and can't make” without the family members' involvement, Daniels says. While family members might want to take a back seat on the nuts and bolts of running the company—“not everybody's business-savvy, not everybody's involved in real estate, not everybody wants to be bothered with all of it”—there can be limits they want to place on the manager's authority “if it's not their dad or their brother or sister that's managing the company.”         

As a rule, families that have been in the real estate game longer are more cognizant of these matters. “You're required to do an operating agreement if you're a New York company, but when we have younger clients come in, sometimes it takes some convincing to get them to put 'what happens if…' into the agreement,” Daniels says. “It could be an age thing: you may have twenty-something-year-olds who aren't thinking about 'what happens if.' Whereas families that have held property for generations have seen what can happen.” Since some of the twenty-somethings don't necessarily envision themselves as older managers—until 40 or 50 years later, there they are—“it's part of my job to make sure they do pay attention to it, because it's much harder to fix later.”