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What Family Offices Want From Real Estate

Tom Burroughes

5 June 2018

While it might be an obvious asset class in many ways, it is surprising that real estate is not always understood as thoroughly as it should be by investors. Even family offices - natural owners of brick-and-mortar assets - have their lacunae when it comes to understanding. Therefore, figures who are able to set investors straight and provide value over the medium term are going to be popular.

A figure with a background in the North American family office and real estate investing field is DJ Van Keuren, who works for the Hayman Family Office, a single family office looking after a prominent Beverly Hills family responsible for creating Giorgio Perfume. DJ is vice president and has been working on the launch of a boutique office brand called VIBE. The brand initially is being developed on the West Coast before going national.

Van Keuren is also publisher of the Family Office Real Estate Magazine, launched more than two years ago. Education is something of a passion for him; he is also a frequent speaker at industry conferences and other forums. Family Wealth Report recently interviewed him about his work, investment views and strategies for the future.

Please tell us about yourself
I have 25 years of experience in finance, real estate, investment banking and fund management. In the 1990s I was an advisor to high net worth individuals and companies. Then, after selling my practice, I moved to Vietnam to co-found what today is the largest coffee company in Vietnam. Returning after three years of being in Asia, I asked myself what I wanted to do with my career and focusing on real estate was where my interest lay.

When I came back I launched what was to be the first single family real estate investment trust. Being about 10 years ahead of the curve, I sold the portfolio right before the downturn after really diving into the market cycles of real estate and understanding where we were in the cycle. After the sale of the portfolio, I then went back to Graduate School at Harvard University and received my master’s in management and finance. The reason for the finance focus was because I had realized that I needed to continue to master the financial aspects of business, and particularly real estate, to be able to structure various complex transactions in the future.

After graduate school I ended up in real estate investment banking and worked for several developers in Texas and NYC where I was structuring equity and debt with various institutions from Carlyle to Apollo.  After living in NYC for seven years I moved to Denver where, after being there for a year and a half, I realized I had yet to meet anyone in the local market. It was then that I met the first patriarch that I would end up working for and this became my first family office. This gentleman had created his wealth in real estate and after wanting to work on his estate planning, we started to ask other families if they wanted to co-invest with us as part of his estate planning. Since then I was recruited to the Hayman Family Office.  Although I fell into the family office industry by mistake like so many others, I will never leave the family office space and helping families with their real estate portfolios.

What or who would you say are your formative influences in how you operate? Are there industry figures, mentors or sources of study you would pinpoint as being particularly significant?
I believe that once I reached age 40 something clicked inside of me that was less about caring what people thought and trusting in myself. In many regards that was very freeing. As for industry figures, mentors or sources of study, I would say that since entering the family office space, I have really started to focus on the patriarchs and their actions and how they act. For example, my first patriarch, Marcel Arsenault is the most analytical real estate person I have ever met. In fact, prior to working for him I often asked why real estate people weren’t so analytical on their analysis as there is much data that can be used to make good solid decisions.

Outside of the analytics I learned that he would have a high return threshold and stick to it. People at his office would often complain that he was asking for $100,000 less on a $40 million deal but if that was what he needed to hit his returns he would stick to it. Also, he was/is a fierce negotiator. However, when the agreement was written up he would stick to what was in writing. I think there is something to be said for that.

Now I am trying to learn from my new patriarch as well as any other very successful patriarchs that I have the fortunate opportunity to meet and interact with, which for me is often. They all have created significant wealth and so I try to listen, learn and watch their actions as much as possible. The two common denominators that I continue to find is that they believe in themselves and that they trust their decisions more than anyone else’s, even the people they ask for advice from. The second denominator is every patriarch I have met, and it is close to 600 now, is they are just amazingly nice people and are very respectful. I believe that may be due to the confidence they have in themselves.

As for me, I am on a quest as to who I want to become, how I want to be perceived and what that will look like. The one thing I do know is that it will be a constant quest for the rest of my life.

You focus very much on US real estate. How, in 'macro' terms, would you describe the state of the residential and commercial markets today and do you have general ideas on where they are headed?
Currently I do focus on US real estate, but I would expect that to become international sometime in the future. One thing that I have learned from my research is that real estate runs in cycles and you can go back about 250 years, not only in the US, but also in the UK and Australia. The typical cycle is an 18-year cycle which, according to our last recession, would mean we should be seeing a downturn in 2019 or 2020, which will last for a bit before going back up at which we should then see another recession around 2029 or 2030.

Now as you mention that is on the 'macro' side, but then you have cycles based upon the asset classes and areas of the country. For example, NYC is back at an all-time high and could see quite a correction soon. Miami I believe is starting to bubble again and there is the making of another market shift about to happen in the future as well. As for asset classes, Class A multifamily is overbuilt, but like history tells us there will be the continual overbuilding, then the Class A will become Class B in terms of rents and concessions will start to increase driving up vacancy and driving down values. It is a cycle that just continues to happen in real estate in general.

On a more 'micro' level, what sectors of real estate do you like/dislike and why? Do you adopt a particular method for selecting investments? Are there metrics you use or rules of thumb?
There are a lot of people that are very bullish on multifamily.  In fact, that is the asset class of choice for family offices. Personally, I think that if you want to 'shoot the gap' in multifamily I would highly suggest investing into senior apartments. Not assisted living but 55 and older active adult apartments. These renters are much stickier since they are there from probably downsizing from a home they lived in for the last 30 or 40 years and, after going through the move, they will not want to move again until they go to the next stage in their life, which would be assisted living. The other asset classes I like are recession-proof assets. This includes medical office, self-storage, workforce, housing/multifamily, senior housing, and assisted living.

For long-term investments I think that due to the automation of self-driving cars, real opportunities that are available would be investing into parking lots or garages in downtowns that can be repurposed in the future for apartments or office buildings.  

This would hold true for gas stations in and around cities as well. Lastly, the other opportunities are in last mile logistic centres due to the internet and the `amazon effect’. You ask about selection methods. Well, the method for selecting investments comes down to complete due diligence which starts with the operator or the sponsor. This includes looking at track records, management, how much of their own money are they putting in or skin in the game, looking to see how they operated during the last downturn and getting referrals. From there when we start looking at the individual deals we look at the market conditions, including how much development is in the pipeline, are people moving to the area, what are the future job opportunities, and what is the demand for the asset class and, of course, the financial models and the variables that we used. We stress-test the opportunity so we know what the downside risk is.

As for metrics and rule of thumb, we add at least five to one basis points to the future cap rate assuming cap rates will go up, and from learning from my old patriarch we hold to a 23-25 per cent internal rate of return potential and if we can’t get that we walk away from a deal.   

In talking to family offices, what sort of returns and qualities are they seeking from real estate and do you see a shift to or from capital growth, income, etc? From an asset allocation point of view, have you noticed any increase or decrease in the share of property in family offices’ portfolios and those of rich families more generally?
The ideal deal for a family office is something like a three to five-year hold, 8 per cent Pref with current pay and a 15-20 per cent IRR over the period of the investment. What has happened over the last year to a year and a half is many families have started to invest either into real estate debt or providing notes against real estate to get yield.

With the limited options available in the US due to the low interest rate environment, family offices are looking for yield. In the US the average percentage allocation to real estate was about 15 per cent in 2017 and in 2018 that number has come down to a little over 10 per cent of their total assets. The reason for this is in line with a survey I did about a year back with some other family offices. The number one thing family offices wanted to know in relation to real estate was “where are we in the cycle”.  

Although they do not understand the real estate cycle to the extent that I understand it, they do know that things have been going well for quite sometime and they believe a downturn will happen sometime soon to cool things off. Because of that they have decreased their allocation to real estate and moved to more income producing opportunities within the sector, whether that be with the notes I mentioned before or more stabilized assets that can kick off a divided. Family office money is patient capital, so if they want to hold and wait things out they can and, conversely, they don’t have to invest if they don’t want to which is totally different from institutions who can’t have money sitting around.

Do you see family offices and others making mistakes in how they invest and sell property and are there specific examples you give of things people should and should not be doing?
This is a very timely question for me as this was the premise of the article that I just had published in Forbes. Due diligence is an example of what many single family offices can do better at. For families whose money was made in steel, fashion or chemicals, for instance, who then exited after years of building a business and then selling it, the due diligence hurdle often is a high one.

If you were to ask a non-real estate family to examine a deal in their own field, they could size up the opportunity in a matter of minutes. But if they were trying to dig into the nuts and bolts of investing in a hedge fund, private equity deal or real estate deal, they would likely have trouble understanding the intricacies of the deal. I’ve experienced this on a number of occasions with other family offices. Working for a single-family office myself over the last four years and knowing close to 600 family offices directly, I get calls often from other family office leaders and family members who seek my opinion on various real estate transactions.

So, if being able to do proper due diligence is an issue, then why are these families doing direct deals without carefully exploring the financial implications?
I can actually give an example of this. The story goes like this: I was provided an investment opportunity for a multifamily property in the Denver market. The chief investment officer, who is also a family member from the out-of-town family office who shared the deal with me, was seeking to invest between $1 million and $3 million in the deal and wanted to know whether any other families wanted to 'club' together for a bigger investment. I looked at the deal and, within five minutes, was putting the final touches on an email outlining a few points that the family member wasn’t aware of.

Among those points:

• Denver had two years of multifamily inventory coming to market;
• The owner of the multifamily property was planning to take eight months to rehab the property. This would mean this multifamily property would be coming online when other properties would most likely be lowering rents and providing concessions to attract tenants. In turn, this would harm the financial projections for the property;
• The operator was new and had no track record; and
• The operator was putting little skin in the game for this investment.

All of those points made it glaringly obvious that this was not the opportunity that it appeared to be on the surface. Rather than investing in this property, the ideal play would have been to wait a year or two and then start acquiring properties that could be purchased at a discount. That discount would have been available because of the overbuilding - overbuilding that would have tripped up some inexperienced operators who then would be seeking an exit

Are there parts of the US that you spend a lot of time investing in?
Our family has been investing primarily on the west coast. That includes Southern California where they are from, Seattle, Portland, Denver, Salt Lake City, Houston, Dallas and Austin. These have primarily been areas where there has been a lot of growth, primarily due to technology but also due to the cost of living and quality of life.

Personally, I see all the future growth coming out of the South and Southeast. That includes Texas and Florida and then the Atlantic Region. Based upon many economists, that is where the future opportunities will be in the US

Tell us more about your venture into publishing and the education works you do with families about real estate? Do you spend much time talking to younger people about these issues?
As I had mentioned before, my venture into publishing really came out of wanting to provide education for families on real estate so that there is a greater understanding on the subject matter for these families. At first, I wrote a book titled Real Estate Investing for Family Offices, then came the Family Office Real Estate Institute that provided white papers, teasers, suggested books to read on various real estate topics, an understanding of the market cycle, then it expanded into podcasts and videos. The next logical step was a magazine and that is what we are launching June 1st called The Family Office Real Estate Magazine.

For me what is great about this publication is that I am doing this to provide the best information possible specifically for family offices where the focus is on education and not creating a profit. Working for a single family office, understanding what they understand and don’t understand along with my understanding on the topic of real estate, I feel I have a unique perspective that other publishers may not be able to provide.

Because of that we have an invite-only policy for writers and they have three primary aspects that we request. 1) the article must be targeted towards family offices and in a way that it is being directly towards them, 2) it must be on real estate, and 3) no selling is allowed in any article. My objective is to have every article highlighted by readers because it is information that can be used. This information will then be brought over to the Institute's website and the cycle will continue.

Although 99 per cent of my time is speaking with first generation members of the family, it is the younger generation and especially the millennials that will be the future for many family offices. This generation cares more about impact investing, doing good for the world but also wanting to invest into more high return potential investments.   

Besides family offices, do you work with other stakeholders in the wealth management space such as RIAs, private banks, trust firms, etc?
Besides other family offices and professionals from those offices, I work with attorneys, accountants, private banks to some extent, and I plan on working more with trust firms in the future. As for RIAs, not so much because the typical RIA is managing wealth that is more than that of those that manage assets at the retail shops or broker dealers but less than the family offices. I have friends who are RIAs and I understand that market from my past, but the complexity of family offices is much greater to some extent. That not only excites me but it leaves me little time to venture outside the family office space and the professionals who service that space.

Inevitably, tax is a big issue with certain forms of real estate investing and so on. Are there particular issues you need clients to be aware of?
You are 100 per cent correct that tax is a big issue, especially for family offices and the amount of wealth that they have not to include the generational transfer issues and planning that is needed. In the US the tax laws were changed and fortunately that didn’t have a big impact on the real estate investments by families. For those that own real estate they do need to make sure they are taking advantage of such planning strategies as cost segregation and the use of the 1031 exchange. In fact, for the past two years I have been working on a structure especially for family offices that I have trademarked called the Master Tenancy structure. This allows for a continual tax deferral of a portfolio of real estate assets, managed by best in class operators, in an evergreen format that, based upon today’s tax laws, would not only defer taxes indefinitely but would be tax free at the death of the owner for the next for the next generation.

Are you aware of others doing similar things to you in this space? Is it an area with more potential for growth or is it getting crowded?
Yes and no. There are so many people that want to work for family offices and most people 'fall into it'. This happens because someone sells a business, has a big exit and then doesn’t know what to do, so they ask their banker of 30 years or accountant for example to help them because they trust them. That is fine but then you have a generalist who is learning the business, the investment side and the tax and planning side all at once. What is happening, however, is that some family offices are starting to hire outside specialists in a certain field to help build a certain part of their portfolio. This may include recruiting someone from a hedge fund or private equity firm or real estate firm, so they can piggy back on their experience and expertise. I don’t necessarily believe that the family office space is getting too crowded because, based upon projections, the industry is expected to grow quite considerably. Where I do think there is an issue is an awful lot of people in the US and the UK say they are a family office but are not really a family office. This creates a lot of skepticism among the real family office professionals and seems to drag down the industry to some degree.  

If you could own an ideal building or piece of land and money were no object, what would you own, and why?
That’s a very interesting question. The one thing I learned early on in real estate investing was that you never should get emotional about a building. If you think you found the 'perfect' piece of real estate and you end up losing the bid, you will find another one tomorrow as good if not better. I say all of this because of what my answer is. Back in the mid 2000s I sold all of my assets right before the last downturn in Seattle. Of course, now that the secret is out about that City the population has grown significantly as well as the prices and availability of properties. As my wife and I are looking to move back there after my kids are out of school, if money were no object, I would buy a few properties down on Alki in West Seattle to move back to. Why? Quality of life and of course as the saying goes “Happy Wife, Happy Life!”