6 challenges leaders face when planning succession in real estate
As a real estate leadership challenge, succession planning may feel like a distraction from more pressing concerns. When you’ve got a lender on one line and a key investor beeping through on another, your mind is probably not focused on who could fill your shoes when you retire years from now.
But planning for succession in the real estate business is essential to both your firm’s current stability and future prospects. So Wipfli and the NAIOP Research Foundation asked 22 real estate industry leaders to share some of the thorniest aspects of creating a succession plan, along with succession planning strategies or insights.
Here’s what those owners and executives told us.
Top challenges in real estate succession planning
1. Valuation and financial planning
Real estate businesses are often particularly financially complex. This presents unique challenges compared to other industries.
For example, consider one real estate vice president who was exploring options for selling his family-owned firm. After meeting with sell-side advisors, he discovered that while his business is profitable and has a strong EBIDTA, he and his brother — the co-owners — represent most of the value.
In his words: “We are the company.” So, if the two of them plan to exit after selling, then what exactly is a potential new owner buying?
One solution here is for principals to translate their experience into shared knowledge or best practices that can be distributed throughout their organization. Essentially, you want to turn personal knowledge into institutional understanding that no longer relies on any one irreplaceable person to create value.
Illiquidity is another issue. If your succession plan requires meeting certain financial obligations to inheritors, other owners, or lenders, then ideally, you want to have enough cash or cash equivalents on hand to meet those obligations.
Otherwise, when the time for succession arrives, you may be required to sell real estate assets at less than market value. This problem is especially common in smaller markets with lower demand, as you may not be able to find an ideal buyer.
2. Size, complexity and family dynamics
Commercial real estate firms are often a paradox. A business with fewer than 10 employees and a simple organizational structure may oversee hundreds of properties and serve thousands of investors — with each of those properties potentially representing a distinctly structured partnership governed by a unique operating agreement.
What this means is that selling a business like this necessarily isn’t just a deal involving a small seven-person company. It’s often more akin to selling hundreds of businesses all at once.
You can imagine how messy that could get.
Meanwhile, some real estate firms may be involved in multiple aspects of the business, which makes finding a new leader with the right mix of experience even more challenging. For example, one firm president who was interviewed noted that his business was not just a development company or a property management company but both — as well as one of the larger construction companies in his region.
To fill his shoes, his successor would need to understand how to run all three divisions. Otherwise, a succession plan may need to involve restructuring how the company is managed.
Finally, given that real estate businesses are frequently family-owned, family dynamics are another unavoidable complexity here. Interview respondents shared that when doing succession planning in a family business, navigating a gap between a family member’s emotional involvement in the business and proven capabilities could be especially challenging.
In all cases, the sooner and more transparently you can start developing your succession planning strategy, the better.
3. Relationship continuity
Real estate is a relationship business. So, when one end of a key relationship sells or retires, that can throw a firm’s future into doubt.
What veteran real estate leaders have shared is that transitioning relationships with lenders, partners or investors to a designated successor is delicate. The process takes time and can be emotionally difficult for all involved.
The firm’s deal partners need time to build trust with the successor. The successor needs the right mix of guidance and room to learn. And the current leader may not feel ready to give up the big chair.
Creating confidence is essential here. If you can reduce feelings of uncertainty on the part of your firm’s external partners by first identifying a successor or successors with the right skill sets and temperament and then giving them a long window to build partner relationships, then you’ll have a big leg up on firms that don’t do that.
And don’t be afraid of change here either. New leaders may ultimately prove themselves by developing new outside relationships rather than simply seeking to maintain every existing one.
4. Resource investment
Succession planning takes time, money and energy. And when weighed against seemingly more pressing business concerns, it may feel like a waste of resources.
Several real estate leaders interviewed confessed to feeling this way. Some described succession planning as burdensome.
But all advised not to let any similar feelings you may have stand in the way of beginning your succession planning. One firm president observed that, at 62 years old, he’s “probably been standing on the starting line for too long.”
Consulting outside advisors can make starting your succession planning easier and help deliver a more reliable end result. You don’t have to reinvent the wheel here; just learn how to apply best practices to fit the specific needs of your firm.
5. Rigidity
Uncertainty in life is a given. And when a rigid plan meets a sudden twist of fate, the result is often chaos.
Or as a partner in one firm bluntly put it, “If you have a concrete plan and you’re not willing to be nimble enough to pivot, then that could be a problem.”
That’s why it’s so important that your succession plan isn’t set in stone. Prepare for contingencies and leave room to improvise when needed.
6. Uncomfortable conversations
Finally, succession planning almost inevitably means having some uncomfortable conversations. For a leader preparing to one day step down, it means confronting mortality — and the possibility that it could come sooner than expected.
For many people, that’s hard to talk about.
You should also be prepared for the fact that stakeholders, which may include family members, will likely have strong opinions about who should succeed or when that transition should take place. This can be tough to navigate as well.
Here, starting your succession planning earlier gives you time to ease into these conversations. When there’s less urgency, scary or emotional subjects can be less challenging to talk about.
Where can you learn more about succession planning?
Wipfli and the NAIOP Research Foundation created a report to guide you through your succession planning process. This report pulls together perspectives from 22 different senior real estate leaders who have been involved in succession planning with their own firms.
Wipfli also advises commercial real estate owners or executives directly on succession planning. Work with us to figure out your specific needs, learn best practices and develop a plan that will help deliver a stronger tomorrow for your business. Learn more here.
