Do Real Estate families have special challenges?

Business Leader Post, June 11, 2014

Thomas D. Davidow, Ed.D.

Yes they do.  Real Estate models have two specific components: ownership and management.  While all family businesses have these two components, they are more frequently blended together until estate planning activates; and even then, the concept of owner/management fosters the idea of keeping the ownership and the management in the same hands.

In the world of real estate, however, partnerships are the rule.  Consequently, each time an entity is purchased or a new development project is undertaken, the owner and the management of that entity are bifurcated.  Frequently, that bifurcation is an example of estate planning at its best:  The asset is never put in the estate of the senior generation so it accumulates outside of the parents' estate while the senior generation keeps control of it through the structure of the partnership.

The management company is an additional source of income. Usually, there are one or two--not all--the members of the next generation in the business. The succession of the ownership has occurred through the structures of the real estate deals. However, the succession plan for the management/control issue is geometrically more complicated. There are partnerships everywhere with multiple owners/stakeholders that are, by definition of the structures, left without a legal voice.  

Any time family members of the same generation have an unequal amount of control, the chances for conflict increase dramatically.  Limited partners may have a limited voice in a business context. It is only a matter of time before family members who are limited partners respond to that business limitation. They will let you know in no uncertain terms the discomfort of being partners while their wealth is being managed by siblings in whom they may or may not have confidence.

It can be a nightmare.  Addressing those complicated family business issues without damaging the wealth and the family relationships is a daunting task. It requires both the expertise of a professional skilled in family dynamics and a professional skilled in understanding the complexity of real estate. Legal authority and responsibility can be passed down. Family authority cannot.