Jaime was 35 years old when she received a text from her mother that she was needed at home in Florida. Her grandmother had passed away and had appointed Jaime the executor of her estate. After getting off the phone and arranging for her flight to Florida, Jaime wondered what an executor was and why she had been chosen.

Untrained and Confused

She quickly Googled to get the definition for the word executor.  Jamie learned that she was supposed to be responsible for submitting all the documentation to the court and deal with operations and liquidation of the estate in addition to preparing the taxes for her grandmother’s estate.

Her flight was a red-eye from Portland, OR to Fort Lauderdale, and then she had to rent a car to drive to Boca Raton. The sun was just coming up as she picked up the rental.

She reached Boca Raton in record time and got to her mom’s house just in time for breakfast. “Hi, mom, I’m here. What do I need to do?” Her mom said “Let’s figure this out after breakfast and you have a chance to shower. We need to see the attorney and see if there is a will or trust and how grandmother was going to allocate her funds”.

But first, I need to tell you a story. Your grandmother Elsa was married three times. Each time she remarried she managed to save a little bit of money and she started buying industrial properties. Most of these properties had multiple tenants in them. Think of them as apartments in industrial buildings. Elsa had five of these when she died, all of them in Florida. Her property manager, George Masterson of Masterson Commercial Property Management, has been taking care of these assets for her.

“She didn’t want to tell you about these investments because she wanted you to keep your feet on the ground so you would grow up into a thoughtful young lady, which is clear that you have. You have your own small business; you understand the value of money. Your job is to figure out what to do with all the properties and how to manage the tax implications that will result from this estate. We estimate her estate to be worth $15 million.”

Jamie about fell out of her chair. Her grandmother had lived in a small single-level house of about 1,400 square feet in Boca Raton and drove a VW Bug but had never seemed to be wealthy or well-to-do. This was a huge shock.

After her shower, Jamie and her mother called Vanessa Smith, the estate attorney, to make an appointment and figure out what to do with this large estate. They assumed there were going to be taxes, and they needed to find money to pay the Federal tax bill. Fortunately, Florida doesn’t have any estate taxes, but the federal government did have death taxes that currently start at estate values over $11,700,000.

Jaime had not worked with attorneys, CPA’s or property managers.  The learning curve was significant, and then her brother Charlie filed a claim that he should have been the executor and should have control of all the assets.  That did not go very far, because the trust was very clear regarding Jaime and how the estate was going to be allocated. Charlie was pushed out. He was an opportunist after all and never once visited his grandmother because she was “too poor” and not worth his time. Jaime had visited with her often and called her every weekend. Her grandmother trusted her. The primary reason Elsa had chosen Jamie and not her daughter is because she lived to 98 years old and her daughter at 70 might not have been able to navigate the estate.

But Jamie struggled. She had no financial training, did not understand basic proforma analysis, commercial leasing, building maintenance, or taxes.  She had no idea whether to renew leases, pay for tenant and/or building improvements. Budgets were foreign to her and this was a lot to take in and take care of her own business as well. She ultimately decided to close her business and move to Boca to be with her mother and the properties so she could understand better and spend full time on these investments.  It was good that George Masterson was a good teacher and very patient. After 12 months, she started seeing daylight. Most importantly, she had a chance to look at all of the properties and meet most of the tenants and could make thoughtful decisions, but it was an uphill climb.

It would have been helpful if Grandmother Elsa had taken the time to train her before she was not available to coach Jamie. Though she did leave behind a letter for Jaime that outlined the past history and a potential future vision for the portfolio. She also detailed how she made some of her decisions, and thankfully all her properties were paid off.

Her friend Anil had an easier time.

Training Pays Off

Anil grew up in Oregon and his parents were physicians.  They owned 300 apartment units at six locations that they purchased early in their medical careers. They also owned five medical buildings (two surgery-centers and three office buildings), that were designed as medical office plazas. Anil was not a physician, but he had an instinct for real estate and interned for two commercial management companies in his twenties. Anil, his brother, and sister each had a role in the family real estate investments. He was the general manager and made all of the major policy and leasing decisions. His sister, Krishna, took care of the accounting and his brother Bashir was responsible for building maintenance.

They all took the same real estate classes, finance, accounting, maintenance, and all worked for two outside companies to get a handle on the state of the art. They made all decisions as a group, and once the youngest was 30 years old, the parents delegated all of the operating decisions for the real estate investments to the children because they were very wrapped up in their medical practices.

This estate was valued at about $60 million dollars and had about $30 million of loans that needed to be serviced from the revenue generated by the tenants. The parents established a long-term trust so that this investment portfolio could last at least two generations.

The parents met with the children three times a year to review the direction of the investments. The cash flow that was generated by the investments was used to pay the children’s salaries and create additional value for the parents so that when they decided to retire, they would have a very comfortable retirement. All major decisions were decided at these three meetings, especially ones having to do with spending significant money, refinancing properties, or purchasing additional properties to build the corpus. The family drafted a nonbinding statement of the key ideas and aspirations that they used to build their estate so that the kids knew what the parents had in mind in the long run. You could say that they were going to end up operating their estate from the grave but that’s not really true, they just wanted to help the kids focus on the future.

Anil obtained a Certified Property Managers certificate (CPM), as well as a Certified Commercial Investment Member (CCIM) designation to maximize his educational background. His sister obtained an accounting degree, and his brother became a contractor. They had big dreams because they all wanted to have children and wanted to be able to pass down this trust to their next generation as well. Fortunately, they were all focused on achieving the same goals.

That is not to say that they didn’t have disagreements or maybe conflicts of vision. But they understood that standing together they would be able to make a lot more money and invest more wisely with less risk than if they split the assets apart. It wasn’t easy to work together.

One thing they did do is create a mechanism to deal with an impasse and decision-making conflicts. They found a way to break a tie vote.  They also agreed that if they did not have a consensus on a direction, they could table the decision for a few years and see if it made sense in the future.

Another thing that became very relevant after ten years was that the first properties their parents had purchased were aging out and needed to be renovated or replaced. Finding the correct kind of financing was difficult given that they were just part of the trust and the parents had all the net worth. It took some very creative work with banks and lending institutions to achieve some of the repositioning that was necessary to grow and readjust the portfolio.

Their parents weren’t young, but they lived another 20 years which gave the siblings time to mature, test out their theories and build the size of the trust by buying more real estate. Because they had so much trust in each other, they were able to develop and redevelop some properties, and learn what worked and what did not.

After the parents passed away and because all of the assets were in Oregon, not only were there state death taxes but there were also federal taxes given the size of the portfolio. This slowed down some of the growth because they needed to set some significant cash aside for future tax planning. They did not want to sell any of the assets if they did not have to pay the taxes. Anil knew they were lucky because everybody was generally on the same page.

Anil had friends whose siblings wanted to split all the assets immediately upon the death of the last parent. He had a friend whose family owned an apartment complex in an excellent location. When the father died, the five siblings could not wait to liquidate the asset because they needed to pay for college for their children or they want to buy a new house or the motorhome they had was not new enough. Only one of the siblings saw the long-range vision and wanted to keep the property, but he was unable to convince the others.

Life is hard even if you are working with real estate assets that your parents have assembled. When Anil started actively managing these properties, they realized that they needed some consulting help, and they hired a property manager to lay the groundwork for them and create the business infrastructure. They decided to keep the property management function in place over the long run because it gave all three of them a neutral third party whose information they could trust as they move forward as co-investors in their parent’s trust. It seems this story has a very happy ending.

Conclusion

It is unusual for a third generation to inherit a business, but it is not usual for a second generation to take over assets that have been developed by the first generation.

The concepts of staying humble and thoughtful and caring not only for the assets but also for the tenants can go a long way as you build the next generation’s assets and follow the footsteps of the parents and family members and allow the assets to make money for you.

Not everybody will like real estate. Many of the decisions are extremely difficult and sometimes we make the wrong decisions because we don’t know any better. Or sometimes we make the wrong decisions because our experience tells us to do it one way when in fact our experience was good five years ago, but things have changed like technology has advanced. A good example is touchless showings for residential properties which nobody would have implemented before the COVID pandemic but now has become extraordinarily popular and has reduced property management overhead because you can have fewer leasing agents.

Anil was lucky that he and his siblings had a lot of training and it was a very, very smooth handoff from his parents’ generation to his. Jamie on the other hand really struggled for some time before she was able to get her arms around the investments and just understand the issues that need to be dealt with, but she was fortunate that she had a strong property manager to lean on. Looking back, had Jamie known that she was going to be the executor and the manager of the family portfolio she probably would have taken the time to take some business and real estate classes in college and maybe been more involved with her grandmother’s investments.

Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company. He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM).  Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM).  Cliff is also the author of Successful Real Estate Investing – a book on how to invest wisely, avoid costly mistakes and make money.