The panel consisted of Daniel L. Daniels, partner at Wiggin and Dana's Private Client Services Department, Preston Tsao, sole management member at Metcircle Networking LLC, Alex Hurst, founder of Palatine Capital Partners, Paul Comstock, chairman of Paul Comstock Partners and Angelo J. Robles, founder & CEO of Family Office Association.
Moderator Daniel L. Daniels kicked off the Family Office panel by noting that the current gift and transfer tax environment represents a historic opportunity that should not be missed, because it may never happen again. The current $5 million gift and transfer tax exemptions, as well as the absurdly low 35% tax rate are not going to last much longer and will likely revert to the far less attractive levels of $1 million and 55%, respectively, come 2013.
The overarching theme of the panel was that the term “alternate investment” can be misleading when applied to commercial real estate. It implies that these investments should be considered as supplemental to a family office’s more traditional investment methods and, as such, be somewhat of a planning afterthought. This is not the case. To maximize return, real estate investments must be considered as an equal part of the family office’s portfolio and should be conducted according to a strict and well laid out asset allocation plan.
The panel agreed that one of the most difficult jobs an advisor has is convincing the family office to simply hold the course. Asset allocation plans are easy to put into place, but extremely difficult to maintain. As the market inevitably experiences peaks and valleys, clients will be tempted to break from the plan.
Interestingly, real estate investments can work to counteract this feeling, as they, by nature, tend to be longer term and less liquid. As such, clients experience the emotional swings inherent in investing less acutely with their real estate holdings, as they are rarely tempted to panic sell in a down market and are basically forced to ride out market fluctuations. Liquidity is great for cash flow, but it can be highly destructive to an investment plan, as it becomes too easy to audible. Furthermore, real estate holdings offer more continuity of cash distribution, which makes it easier for a family office to plan out its future cash flows. This predictability, while lacking in the home run excitement that other types of investments can provide, leads to less panic in the face of a down market and breeds long-term stability. These factors also combine to make the real estate arm of a family office a great place for younger, up and coming family members to be engaged and gain valuable experience.
The panel then brought up trusts as a useful tool for managing commercial real estate investments, but cautioned that certain steps need to be taken to ensure they work properly. Placing holdings in trust and, thereby, under the control of a trustee, who is bound by the family’s asset allocation plan, is an excellent way to ensure continuity throughout the various members of the family office and can prevent fringe relatives from breaking ranks. However, it’s important to note that the trustee will also be bound by fiduciary duty and the prudent investor standard which, if not addressed in drafting the trust itself, can cause issues. The nature of commercial real estate investments lends itself toward concentrated positions, which the prudent investor standard seeks to avoid, causing a conflict of interest for the trustee.
Finally, the panel discussed opportunity funds and their future as the market recovers. It was agreed that when it comes to opportunity funds, both present and future, bigger is better. There are certain billion dollar plus transactions that only very few funds will have the means to bid on, which naturally means the bigger the fund and the bigger the transaction, the less competition there will be. The largest fund will remain viable even when the market fully recovers, because these massive transactions will always require an outlet that only they provide. However, the panel stressed that investment in opportunity funds must be viewed in the very long term and family offices must be willing to wait 10 to 15 years before they even start to see a return. They suggest thinking of these types of investments as almost the real estate version of an IRA.