The Family Solution to Owning, Operating and Inheriting Commercial Real Estate
In today’s commercial market, one of the problems my clients need help with is a workable and efficient operating structures for family – owned real estate when parents have failed to set up a decision making and succession plan. This was the starting point for two of my clients after they acquired multiple, highly-appreciated prime commercial properties from their elderly parents in Santa Monica and Venice, California. Now in their 70s, the two sisters, and their separate families, were struggling to jointly manage the properties.
Their concerns ranged from the lack of a coherent succession plan for each of their 50% interests to a similar lack of a management plan for the properties once they passed. In the event one of them were to die, it would be difficult to manage the properties and they worried about how successor family spokespersons and decision makers would be selected.
In my experience, disagreements among siblings over management decisions are common, especially when they involve different generations of related families. The disagreements between the sisters included how the properties should be managed, performance of maintenance and deferred repairs, and whether all or a portion of the real estate should be sold.
Additionally, one sister wanted to make current gifts of her 50% interest in the real property to her three adult children, rather than at the time of her death. This raised the issue of how her 50% interest would be managed and how her grown children would interact with their aunt’s 50% interest. Even though each of the properties was held of record in a limited liability company with detailed operating agreements, none of the operating agreements were specifically tailored to deal with the myriad of family issues present.
Coherent and Comprehensive Family Oriented Management Structure
After obtaining copies of the seven limited liability company operating agreements, I was able to create a more coherent and comprehensive family oriented management structure. The new operating agreements I drafted permitted each family to have a say in the operation of each property by permitting each family unit to appoint its own co-manager. It also allowed for the transfer of proportional membership interests to other immediate family members, within each individual “family unit,” without interference from the other family unit, except in the event that any individual family member wanted to transfer to a non-family member. In this case, the partial interest was required to be first offered to the other immediate members of that family unit. If the purchase of that interest was declined, then it was offered to the other family unit. If no member of the other family unit desired to purchase the interest, it could then be sold to third party. In this manner, both families would be assured that the real property always stayed within the family, as was desired by the parents and grandparents.
Because both families recognized this new arrangement to be fair and impartial, it resolved the conflicts that had arisen. Each family could now deal with each of their 50% interest as a separate family unit without adversely affecting the other family’s 50% interest or the real properties as a whole. Through the artful drafting of my “Ozzie and Harriet” Family Oriented Operating Agreement, I was able to create a document that not only kept this family out of court but also helped them coexist as a family and properly manage their family – owned real estate.
Ultimately, a few years later, the new operating agreements allowed both families to successfully negotiate and sell all the real property to a single buyer to the benefit of both families and multiple generations of the original owners.
While many families may believe that ownership of commercial real estate in a living trust and/or LLC or partnership is sufficient, this family unit arrangement required an attorney knowledgeable in real estate, business law and estate planning – due to the many complex issues present in owning, operating, inheriting and selling multifamily and multi-generational real property. With my experience, I was able to recognize the potential problems that could occur and take the steps necessary to ensure the lasting bliss with which Ozzie and Harriet’s family was blessed.