Senior Wealth Planner
Wealth Planner
Senior Commercial Mortgage Underwriter

In this Wealth Planning Update:

  • Many high-net-worth families wish to leave their real estate holdings to the next generation of family members.
  • As part of a multi-generational wealth plan, these families should pay particular attention to how they will transition their real estate holdings from one generation to the next.
  • They should work with their team of advisors to prepare both the real estate business and their families for the transition.

A statistical survey of high-net-worth families in the U.S. and Canada carried out by Tiger 21, a high-net-worth group of individual investors in the first quarter of 2015, determined that the average high-net-worth family invests as much as one-third of their overall investment portfolio in real estate holdings—the highest allocation percentage of any investment class.

Many of the families surveyed intend on retaining their real estate holdings with the desire to pass them on to the next generation. To help ensure a smooth transition, we recommend that families with real estate holdings establish a transition plan for their real estate portfolio. A successful plan involves preparing both the business (i.e., the real estate portfolio) and the family for the change of ownership and change of control.

Preparing the Business (Real Estate Portfolio)

Assessment of holdings: As families prepare their real estate businesses for transition, in our view it is advisable for them to work with an advisory team to conduct a top-to-bottom review of the real estate portfolio. This review should address how to potentially maximize the profitability, leverage, risk exposure and mitigation, and taxes and financial planning for each asset in the real estate portfolio. For example, to mitigate the risk of increasing interest rates, it may be advisable to utilize a mix of fixed and floating rate borrowing strategies and/or to utilize hedging alternatives.

Assessment of holdings. Maximizing profitability. Effective uses of leverage. Risk exposure and mitigation. Taxes and financial planning. Strategic plan. Contact your Relationship Manager for more information.

Cash management and liquidity: The family should also consider positioning their real estate business to help them to meet regular and extraordinary cash flow needs. This includes taking into consideration everything from maintenance costs and physical replacements to unexpected up-fit costs associated with tenant turnover. The family also should plan for future estate taxes if the real estate portfolio is to be preserved following the owners’ deaths.

Streamlining and/or consolidating holdings: As they plan for the eventual transition of the real estate portfolio, the family also may benefit from determining whether or not it is advisable to streamline and/or consolidate their real estate holdings. For example, if a family wishes to exchange an apartment building for a less management-intensive asset, they could purchase a commercial property with a triple net lease. A triple net lease shifts many of the responsibilities and expenses to the tenant (including real estate taxes, insurance, and maintenance of the property). It may be significantly easier to transition a portfolio of real estate consisting of triple net properties than a portfolio of residential rental properties. Of course, triple net properties require careful reviews of the creditworthiness of tenants, remaining lease terms, and market rental rates.

Organizational Structure: Another important step in preparing the real estate business for transition is to consider alternative organizational structures. This involves reviewing the current entity selection (LLCs, LPs, Corporations, etc.) and determining if there are more advantageous structures available. For example, many families choose to consolidate their real estate holdings into a single Family Investment LLC. If these companies are structured and maintained correctly, they may provide the family with a number of potential benefits, including:

  • Added liability protection,
  • Reduction in estate and income taxes,
  • Consolidation of family assets to simplify management duties and reporting,
  • Enhanced management succession, and
  • Increased access to complex financial products and qualified advisors.

Additionally, clients should have their organizational documents, contracts, and leases reviewed to identify whether it is advisable to seek amendments for more favorable terms.

Preparing the Family

Imparting the vision: Real estate entrepreneurs are often independent decision makers, guided by a clear vision for their business. Less involved family members, however, may not be aware of this vision, which can lead to misunderstandings, disagreements, and even resentment when things seem to be going in a direction they do not understand. This is why communicating the vision is a vital part of any transition plan.

It is often advisable for this vision to take the form of a written plan that outlines the future goals of the business. This process should also take into consideration the needs and desires of the successor generation. Four initial questions that should be considered in developing the vision are:

  1. What is the long-term strategy? (e.g., keep, divest, exchange, etc.)
  2. How should the assets impact the family? (e.g., available for lifestyle needs or only certain reasons)
  3. How involved should the family be? (e.g., day-to-day management, strategic oversight, etc.)
  4. Should external management by involved? (e.g., trustees, property managers, etc.)

Education and family governance plans: In addition to developing a shared vision, successful transitions of real estate portfolios are often supported by comprehensive and actionable plans to help prepare the next generation family members. These plans should help the family to:

Establish or clarify family values and policies. Cultivate collaboration among family members with different skills. Define authority and responsibility of each family member. Provide younger generation with the necessary experience. Foster self-confidence. Contact your Relationship Manager for more information.

Source: Wells Fargo Wealth Planning Center, 5/1/2016

Creating a board of advisors is one example of establishing a formal education and governance plan. The structure of such board, selection of its members, and their respective roles vary based upon the complexity of the real estate holdings and family dynamics. The board could be comprised of family members, external parties or a combination of both. Common purposes of such boards include:

  • Overseeing management: The board selects the primary manager(s) of the day-to-day operations for the real estate business. They also evaluate the manager’s performance. The board members are responsible for directing the manager on big picture issues, such as vision, strategy, and growth plans.
  • Protecting decisiveness: Due to the family's desire to avoid conflict and/or protect traditions, they often avoid addressing sensitive issues or making difficult decisions. The board must insist that decisions be made expeditiously and with care, in order to help ensure the successful management of the real estate portfolio.
  • Balancing the needs of the family: The board also needs to understand the family’s goals, relationship issues, and politics. They need to balance helping the family accomplish their goals with ensuring the business accomplishes its goals. For example, the board can address whether or not large distributions to the family are advisable or may weaken the business. The board can also help to promote other shareholder goals like family employment or family leadership.


It is clear that preparing both the real estate business and the family can be exceedingly important to the success of any transition. Due to the complex challenges and opportunities that accompany transitions of real estate portfolios from one generation to the next, it may be advisable for families to consider working with the Wells Fargo Regional Wealth Planning team and their Wells Fargo relationship manager to begin putting their plans in place. As your plans progress, our Wells Fargo Real Estate Asset Management team can assist with real estate asset and portfolio management; acquisitions and exchanges, and building real estate cash flow.