Family Office Elite Spring_16

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One way to address still-existing shortcomings in the alignment of interests is to implement what we will call here an enhanced alignment model. The goal of such a model is “defensive”: to ensure that the real estate Partner or GP and its managers deliver on the agreed-upon investment objectives, undiluted by other interests. The financial structure associated with partnerships varies greatly; however, a typical investment might provide for leverage or debt of 75% on the property (of which should be non-recourse to the family office), with the limited partner(s) providing 80%–90% of the equity and the general partner investing 10%– 20%. All equity will receive a pari passu return to an agreed-upon level or preferred return, after which the general partner receives a disproportionate share of the returns, referred to as a “promote.” Promotes are negotiated so that the partner, based on leveraged internal rates of returns (IRRs) at the time of refinancing or sale, could earn an additional 25%–50% above a certain equity return. As the operator of the asset, the GP is generally able to earn market rate fees for its services, such as development and property management fees. Some family offices prefer a simple structure of a “50/50” split with minimal fees going to pay the basic expenses of the transaction. Sometimes, general partners will want to charge fees that may be more than what the true costs are for the property. Although it is fine for the general partner to charge fees, you still need to have a good understanding of what they are to ensure a proper alignment of interests rather than a structure that benefits the partner regardless of the investment outcome. The end purpose of fees is to compensate the general partner for the expenses that it occurs, rather than to serve as a profit center. Conclusion Forming a partnership with a real estate operator or real estate family office is an exciting way for family offices to gain exposure to real estate as a direct investment, which, is an important addition to any investment portfolio. Such partnerships free the family office from the tedious and time-consuming task of looking at and evaluating enough deals to make a good decision, and to operate the property from purchase to sale. Many families have created their wealth in a variety of ways. From chemicals and food businesses to hedge funds, each family’s wealth is created from expertise in its respective industry. Knowing that, one of the best ways to gain exposure to real estate is to find another family office that created its wealth through real estate. After all, by combining a partner’s history, track record, and awareness and understanding of the real estate industry with your capital, one family office can benefit from another real estate family office’s experience and, ultimately, from this important asset class. 69 FAMILY OFFICE ELITE MAGAZINE
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REAL ESTATE FAMILY OFFICE PORTFOLIO
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Family Office Elite Spring_16

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