Geller & Company outlines some of the challenges associated with real estate asset management and related projects. Founded in 1984, Geller serves high net worth individuals and families, corporations, non-profits and foundations.

It is no secret that oversight of real estate assets is one of the most important elements of a financial management plan for all levels of wealth.  For the ultra high net worth, it can represent an even greater challenge to manage the financial, operational and emotional aspects of real estate assets effectively. 

Here, Hayden Horowitz, head of the Real Estate Solutions Group at Geller & Company, offers some critical insights into some of the more common challenges and questions.

Real estate is often a family’s largest capital asset class, and one that impacts not only financial and estate planning, but also the daily lives of its owners. Further, properties are frequently a very visible reflection of the values and personal tastes of their owners, whether in a personal, business or investment context.

•    A 2014 Wealth Report survey found that primary and other homes accounted for nearly 30 per cent of wealth for high net worth families.

•    On average, high net worth families own 2.4 properties, and 20 per cent of the survey subjects were considering adding another home.

•    The Wealth Report found that real estate investments accounted for almost 25 per cent of investment portfolios for high net worth families; nearly half of the respondents expected to increase that allocation in 2014.

•    A 2014 Christie’s International Real Estate Luxury Property Market report noted that real estate is a natural way for high net worth families to safely distribute money to their children and to diversify into different countries.

For high net worth families, the accumulation of large, expansive and extremely valuable properties frequently results in substantial upkeep and improvement costs.  These burdens, which potentially drain resources and many times create family stress, should be properly assessed and planned for within an ongoing wealth management framework. 

What are the most significant real estate challenges high net worth families face?

Despite the tendency of high net worth families to accumulate real estate for investment or personal enjoyment, in our experience these families are often not adequately focused on proper management of those properties or requisite improvements. 

In particular, they often begin construction projects without proper representation, planning or oversight.  That situation may leave them at the mercy of contractors or vendors whose interests are not aligned fully with their own, especially with respect to cost and time management.  And, given sizable project costs and complexities, even relatively minor errors in the planning or execution of a construction project may mean millions of dollars in additional expense, delays in project completion, compromises in the final design, legal entanglements, emotional distress or all of these challenges.

Three types of construction pitfalls that occur with some frequency are:

•    Escalating construction costs: Design-scope creep, schedule delays, lack of proper budgeting and poor cost reporting may all lead to higher total costs for a given project.   Ensuring the final cost of a project matches initial expectations requires meticulous attention to detail throughout the project lifecycle.

•    Schedule drift: The most common causes of schedule delays are failures by the owner to: 1) appropriately manage and monitor contractors; and 2) make timely design or construction decisions.   Unfortunately, schedule delays also frequently have outsized financial implications because of the impact on dependent activities, whether direct construction costs such as equipment rentals, or consequential costs such as incremental expense for storage space.  In addition, delays often add to the stress and frustration of an already challenging and time consuming endeavor.

•    Poor risk management: Construction projects by their nature involve significant risks, including the potential hazards of a construction site.  Therefore, instituting proper risk management is essential for owners to protect those working on the project and themselves.  Prudent measures include safety protocols, sufficient insurance coverage and assurance that key contractors are in good financial health.  By not implementing appropriate safeguards, owners put themselves at risk for physical harm, project delays and incremental costs arising from accidents and contractor defaults.

Avoiding the pitfalls

Construction projects require a very detailed knowledge base, careful planning and ongoing management in order to avoid the numerous scenarios that may threaten their success. That said, high net worth families do not necessarily need to learn this subject matter themselves, nor do they need to devote the requisite time to manage a project on a daily basis, as these skills are readily available through outsourcing.

They should, however, make hiring expert representation a priority at the outset of a project, since that is the best opportunity for mitigating or eliminating problems throughout the course of construction. Ideally, this expertise will reside within their multi-family office or come from someone who has a successful track record executing similar projects.

Working with a multi-family office that has real estate and project management experts on staff can provide the client both the expertise for the project itself and the capability to assess how real estate assets fit within a broader wealth plan.