GlobeSt.com: What brings a successful real estate entrepreneur to the realization they need a plan for succession?

Raybin: I would like to say my persuasive arguments motivate a desire for planning and change, but the desire to craft a succession plan usually comes from a combination of two things: an attachment to a real estate portfolio with a desire to see it maintained as a family legacy; and some outside event; a health problem, an economic setback or the death of a spouse or partner.

Von Berg: Most real estate entrepreneurs take care of estate tax issues but don’t really put together a proper succession plan. I agree many owners are very attached to their portfolios and these properties are their babies. So, maintaining the portfolio is the priority.

GlobeSt.com: Why is planned succession so important?

Von Berg: If your legacy is to survive, you need to make sure your portfolio can be run without you. Hopefully, you can see it running well under a new chief when you are around to give advice. If you have brought a son or daughter into the business, you need to work on handing over first the operations and later the deal-making role. This is always hard, but there are ways to ease the transition, including creating a board of directors, bringing in consultants, defining roles, and setting a timeline for shifting duties and decision making to the next generation. If you intend for your children to rely on third-party management, this process is easier. But, remember that asset management is a separate role from property management. Asset management can never be fully contracted out unless you convert your holdings to stock in a well-managed REIT through an up-REIT process.

Raybin: As a successful entrepreneur, you’ll want to leave a real, lasting legacy―not just your assets―to your children and their descendants. To do this, you need to think through your family’s unique issues and the potential consequences of your decisions. You’ll need to be honest with yourself about your family dynamics and your children’s interests, skills and shortcomings. This kind of comprehensive planning will help guide the outcome to what you think will be best for your family. While a succession without planning is possible, it is unlikely to be successful. Instead, it’s critical to take concrete steps, including considering how to provide for different needs among offspring and descendants and avoid strife; strategies for protecting the estate from creditors (including divorce); and whether to continue to focus on real estate or pursue a broader diversification of your wealth.

GlobeSt.com: What changes should someone make their real estate portfolio when planning for succession?

Von Berg: If you are like most successful, self-made real estate investors, your focus has been on building wealth. You have been ready to reinvest if it creates value. I have many clients who made tens of millions but lived frugally for most of their lives. Assume that one or more of your children or their spouses will be more focused on receiving a steady income from the portfolio than seeing that portfolio managed to maximize the creation of wealth.

Raybin: In my experience, I’ve found that the disruption of steady distributions is one of the most common issues for strife in family-run portfolios. At the risk of spouting heresy, I am a proponent of broad diversification. Although you may have created your wealth through real estate and never enjoyed much success with other types of investments, there are significant benefits that come from diversifying your wealth. Diversification reduces your exposure to an unsuccessful succession or the squabbling over the family fortune. Also, it is unrealistic to expect that real estate will continue to outpace other investments. Comparing the returns reported in the NCREIF Property Index with other asset classes bears this out. I have found the key to successful diversification is avoiding investment programs that favor the sponsor at your expense. Fortunately, there is a growing cadre of financial products and advisors who can help you successfully diversify.