A practitioner in the field of family office real estate investing, and now a publisher and public speaker, DJ Van Keuren talks to this news service about the asset class and what he's learned from the family offices he has worked with.
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. (Family Offices Need Due Diligence That’s Real.) 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!”