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Family offices have locally acquired newly developed multifamily properties such as the Trac 75 apartment complex in Allston.
For the growing ranks of ultra-high net worth families, a more bespoke approach to real estate investing is gaining ground: the family office that invests directly in assets such as office buildings, industrial properties and apartment complexes. Family offices are a growing source of capital for investment sales in Greater Boston and other metros with strong real estate markets.
“We’re adding real estate to clients’ portfolios as part of their overall strategy. A lot of times, that strategy is creating a cash flow component in the midst of other appreciation,” said William Ward, managing director of direct investments at Boston-based TwinFocus Capital, which advises high net worth clients in $6 billion of investments.
Advisors say the family office model can offer personalized investment strategy with lower fees than hedge funds and private equity. Typically, they make sense for families that have at least $100 million to invest, said Shannon Saccocia, chief investment officer at Boston Private.
“We’ve seen a strong commercial real estate market over the last few years, so there has been interest in investments there,” Saccocia said. “And with some changes in the tax code, that has made real estate more attractive.”
Membership Has Its Privileges
There are few limits on family offices’ investment options. The model remains lightly regulated, as the Securities and Exchange Commission in 2011 excluded them from oversight by the Investment Advisers Act. The main requirements to invest: clients must be lineal descendants of a common ancestor over the past 10 generations, or key employees and trustees of the family office.
“It’s very insulated, whereas a hedge fund or private equity fund will take money from other people. This is really meant to manage a family’s assets,” said Jared Ross, a partner and real estate attorney at Day Pitney LLP in Boston.
Family offices can take various structures, either hiring in-house attorneys and accountants, using outside financial advisers, or a combination of the two. They typically offer savings from hedge funds’ and private equities’ management and performance fee structure. And the benefits escalate with the size of the family fortune, Ross said.
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“It may cost a couple of million [dollars] annually to set up, depending upon the number of employees, to pay for the overhead,” Ross said. “If you have $1 billion in liquid assets and you’re paying a percentage, it’s going to be a lot more than the overhead of a family office.”
Stocks still make up a significant portion of family offices’ investments, with equities comprising 28 percent of the typical family office portfolio, according to a September 2018 report by Campden Wealth and UBS. And much of that still flows through private equity investments, which made up 22 percent of the average portfolio, the study said.
But commercial real estate’s role is growing. Direct real estate investments rose to 17 percent of portfolios in 2017, the study said.
Tax Benefits Sweeten the Pot
Tax advantages through 1031 exchanges make real estate a compelling investment, enabling investors to defer capital gains from the sale of real estate or other assets into property purchases. And the new federal Opportunity Zone program sweetens the pot by waiving capital gains taxes on properties in designated census tracts that are bought and held for the next 10 years.
“This is as big an opportunity for the ultra-high net worth family offices as we’ve seen in some time,” Boston Private’s Saccocia said. “Especially for investors comfortable in real estate, this is a great way to invest in an asset class they find compelling with an additional tax benefit.”
But even with tax advantages, commercial real estate investments are not a slam dunk, Saccocia noted.
“There’s been a lot of people rushing to the [Opportunity Zone] space that don’t have as much experience in vetting real estate,” she said. “You really want to make sure you’re looking for a developer or investment partner that has solid real estate experience, particularly in adding value for properties.”
And family offices come with their own unique set of risks. Family squabbles over investment strategies are common, making it important that family office boards include representation from each generation, Day Pitney’s Ross said. Families that have made their fortunes in real estate tend to have heavier allocations in the sector, some ranging as high as 50 percent, he said.
In Greater Boston, family offices have acquired newly developed multifamily properties such as the Trac 75 apartment complex in Allston – a $42.5 million transaction in August – and the former United Nations Information Center in Back Bay, which sold in 2017 for $22.5 million.
Across the U.S., family offices are focused on acquiring multifamily properties with a value-add strategy, said Christopher Sower, a senior vice president at Colliers International in Boston. In Boston and other high-priced metros, new development and properties on the urban fringe offer potentially greater returns than downtown luxury towers.
Rising local demand for direct real estate investments prompted TwinFocus Capital to add a new advisory service in January. The service will help clients find multifamily, industrial and stable retail properties, Twin Focus Capital’s Ward said.
Multifamily and industrial properties offer steady cash flow and potentially lower capital expenses than categories such as office buildings, which can require substantial renovations after the loss of an anchor tenant, he said. The firm is evaluating dozens of potential property acquisitions for clients to acquire in 2019, including those in Opportunity Zones and development sites on the edges of central business districts.
“It’s a natural fit for high net worth individuals who may have gains even from non-real estate sources,” he said.
