When Real Estate is a Family Affair (and sometimes even a family feud)
Wow, the recent news surrounding the Libfeld v. Libfeld dispute is getting a lot of attention! This raises the attention of Intergenerational Real Estate to a new level, as internal matters do not often make their way to a public audience. Long story short, this multibillion-dollar portfolio, built from scratch in the Toronto suburbs by a holocaust survivor, has been ordered sold because Teddy Libfeld’s four wealthy sons cannot work together.
This didn’t need to happen!
The writer contends that Libfeld v. Libfeld could have had a different outcome if good governance was in place – if not by the founder, then by the next generation when they were still communicating and on good terms.
Yes, I know, hindsight is 20/20 and I may be over-simplifying, but there’s insight and lessons here that can be of value to others in similar situations. I work with many intergenerational real estate families, and I believe that my experiences in helping them have resulted in learning some key principles:
- Governance matters most.
- Deal with challenges while you are still in control and address fissures early before they become chasms that cannot be bridged – keep it out of court.
- Independently retained external professionals work within silos of expertise, don’t expect them to solve the entire challenge – keep them in their lane.
- Utilize a quarterback, who looks at the big picture, brings the necessary resources and experience to the team, creates alignment in terms of strategy and focus, and executes a process to prevent meeting on the courthouse steps.
Intergenerational Family disputes can happen over something as simple as the family cottage, or as complex as a multibillion-dollar real estate portfolio. After 35 years of working with families, I’ve noticed that there are common characteristics of real estate ownership as it moves between generations. Most real estate empires began simple and small, typically with a developer in the 50s, 60s, or 70s. They’re usually not born with privilege and often come from difficult circumstances, as chronicled in the recent Canadian feature film Shelter.
These entrepreneurs run their business with an entrepreneurial mindset, even though they’ve become large corporations – sometimes the size of a public company. As the company moves from 1st, 2nd to 3rdgeneration, the individual goals and desires change as the family naturally gets larger. Unfortunately, in some cases, the founder has not left governance in place to account for the varying family members’ needs, wants, and desires.
Many of my clients have a similar story and it has been our quarterback strategy and execution that has yielded successful resolution to their challenges. In contrast, this recent Libfeld v. Libfeld dispute documents how they enlisted professionals in areas of expertise, yet no agreements could be reached – they were missing the quarterback!
We have filled this quarterback, or trusted advisor, role for many years here’s some of the working practices that we’ve learned:
- It’s going to take time to execute the final resolution and be patient.
- Focus on what people can agree upon first (ex. “we can’t let our children inherit this situation”).
- Pay for good professional advice (but keep them in their lane).
- The solution often falls out of the real estate assets (asset class, geography, ownership structure, sentiment…).
- Have a quarterback who understands real estate and people and can coordinate the efforts of external professionals while exploring all the options for solving disputes.
- Arriving at a resolution involves everyone giving a bit in order to get to an out-of-court solution – once it’s in the court’s hands, control is lost.
Coincidentally, earlier this year we released a white paper Control & Ownership for Multigenerational Family Real Estate. You can request access to it here and download an introductory resource.
So, what makes Multigenerational Family Real Estate so difficult? Why are there challenges and issues? Quite simply put, these family companies are complex in three ways:
- Portfolios are not easily divisible (fungible) and valuation is complex.
- Separation of the real estate.
- Diverse people dynamics.
Complexity #1 – Portfolios are not Easily Divisible (Fungible) and Valuation is Complex
This is the easiest of the three. The real estate can be figured out with traditional skills and expertise available in the marketplace (building condition reports, appraisal reports, financiers…). Family members can get this information independently or together, but all members need to understand the assets. Yes, it will take a bit of time and the numbers don’t lie.
Complexity #2 – Separation of the Real Estate
As one of my clients said to me, “It would have been much easier if my father had sold the $100 million portfolio, bought Royal Bank shares, and had given each of us four kids $25 million. If he had done that, I’d probably still be talking to my siblings.” In that case, the father had left several real estate assets that were not easily divisible.
The real estate can be divisible using the practices mentioned above, coupled with a thorough process. We’ve helped divide real estate assets, several times, into pools where you take into consideration traditional valuations, minority ownership discounts, cash rebalancing, and with a reasonable degree of sanity (while taking into consideration family members’ financial and emotional needs), you can get to a fair and equitable division. This allows each family member to continue with their desired interest, perhaps managing the family portfolio together, managing it independently, or liquidating their proportionate share.
Complexity #3 – Diverse People Dynamics
Most professionals within the real estate fraternity have their specific skills, and they operate in silos of expertise. They are needed for the execution of many required elements such as discovery, valuation, legal procedures, agreements, taxation, brokerage, etc.
Handling people dynamics is an art, as much as it is a skill, and clearly, this is not brokerage. But for the quarterback, it is essential! The quarterback can’t give everybody what they want but they can give everybody what they need while creating a permanent solution that won’t spill over into the next generation. As I alluded to earlier, even when families aren’t getting along, they can all agree that the situation needs to be solved before it goes to the next generation. One thing for sure, in a court-ordered resolution, everybody loses!
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Bringing this all together, I hope that you have gained some insight as to why I stated earlier “this didn’t need to happen…” There is a process that can help avoid the ultimate scenario of having someone else decide for you – as we’re seeing now with Libfeld v. Libfeld, and that is my message.
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Check out the RENX article on this topic we’re featured in as well!
👉Request access to the white paper here and download an introductory resource👈
Additional Multigenerational Family Real Estate resources: John Davis: https://johndavis.com/