Development Magazine Summer 2017

Development - Ownership

The Future of Family-owned CRE Businesses

Russell Construction Co. served as general contractor for the Black Hawk College Health Sciences Center, a 46,300-square-foot structure housing eight labs, two classrooms, two conference rooms, a lecture hall and faculty offices in Moline, Illinois.
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How can family-owned businesses stay competitive in the commercial real estate industry?

FIVE MEMBERS of NAIOP’s Family-owned Business I and II Forums offer their insights into the future of family-owned CRE businesses as well as some of their strategies to successfully manage and convey the business to the next generation. They also provide their insights on the benefits of the following:

• Creating a generational overlap so that the older generation can pass on its wisdom to the younger one.

• The importance of getting “real world” work experience outside of the family business.

• Making sure that new family members coming into the firm develop skills in at least one area of commercial real estate to add value to the company.

• Allowing only those family members working in the business to manage it.

• Ensuring that family members coming into the business gain the respect of other employees and the industry.

• How to avoid playing favorites when it comes to family.

How is your family-owned business structured?

family owned CRE experts

Stuart Wyllie: From a governance standpoint, we have an 11-member board; all are shareholders. Then we have a five-member executive committee made up of four members of the third generation and one outside member who is our chief financial officer. The Graham Companies is a family-owned business founded in 1932 when Ernest “Cap” Graham acquired 7,000 acres [outside Miami] to start a dairy business called Graham Dairy. Two generations later, we have commercial, residential, hospitality and agricultural divisions in the company. I am president and CEO. I happen to be a son-in-law.

Ralph Heins: My wife and I formed Primera Companies in 1989 when we were living in Minnesota. We made the transition from being a service provider in the Twin Cities with CBRE to being a principal down here in Dallas. We started the business in Dallas with an industrial project we purchased and an office portfolio that we managed for a family from Hamburg, Germany.

Alex Klatskin: Forsgate Industrial Partners is a limited partnership consisting of two families, the Klatskin family and the Seiden family. Our families are not related, but in business we are 50-50 on everything. The first generation in each family started the business together. The structure of our business has not changed in the past decade, and we do not anticipate changes in the next several years. We are now into the second generation of ownership with me — I am 52 years old — and my business partner, Steve Seiden, who is in his 60s. Steve’s son, Sam, joined the firm last October. There is a third generation potentially coming in from the Klatskin family as well, in the next one to three years.

Caitlin Russell: My father, Jim Russell, started Russell Construction Co. in Bettendorf, Iowa, in 1983. Until the early 2000s, he was the sole owner. Over the last 15 years, he has expanded ownership of the company as an employee benefit and engagement tool. Currently, he owns 70 percent; the remaining 30 percent is owned by employees and his children.

Harvey Alter: Alter Asset Management, a division of Alter, is owned by my brother Michael and me. (See “CEO on Leadership: Michael J. Alter,” Development, fall 2014.) We are the only family members involved in the business, although we have other siblings. My father was involved in the business right up to his death in 2008. He knew his health was declining, and we created a seamless transition. Over the next couple of years, we probably won’t see any of our kids taking over the mantle. The oldest member of the next generation is now 26 and they are making their careers elsewhere, although they are enormously proud of the family legacy.

What is the focus of your business? Do you expect it to shift in the future?

Russell: We started as a commercial contractor focusing on medical, institutional, office and industrial construction. Over the years we have diversified our business to also include commercial development. We found that clients were looking for additional services, which led to our providing build-to-suit leasebacks, site selection and sourcing financing. As we look to the future, we plan to continue to mold our offerings to the changing needs of our clients.

Klatskin: The focus of our business is industrial real estate in New Jersey, 100 percent. We do not own anything else. In the past, we had a hotel and an office building in Maryland, but they have been sold.
Alter: Ours is a 62-year-old business. We are in development and asset management. We were NAIOP’s Developer of the Year in 2010. We have six divisions: construction, property management, internal brokerage, health care, investment sales and distressed assets. One of the biggest shifts in our company is the increasing migration toward Class A downtown office development in major gateway markets.

Does your firm work independently or with partners?

Klatskin: We use all of our own equity for projects; we do take debt from third parties, either banks or life insurance companies. The newest project we are doing is with another family business that is also a member of NAIOP. The Forsgate partnership and the other family business each own 50 percent of that project.

Wyllie: It was a family decision back in the early days of the business that we would have a smaller pie, but a pie that we owned 100 percent of as a family. For all of these years, we have done no joint ventures and we have no partners.

Russell: We find that partners are a good way to expand offerings, whether a client needs assistance finding a site or sourcing financing. Each project is unique, so each project’s ownership structure is tailored to meet the needs of that specific project, which is where real estate partners come into play.

One project we are working on is a former hotel site in our hometown. The 30-year-old hotel had fallen into disrepair, but is in a prime location. We acquired the property, demolished the hotel and will redevelop the 8-acre parcel. Local brokers, companies and ownership partners are helping bring new life to the property.
Alter: We work independently and we are self-financed with no debt. We never took any debt to fund the growth of the firm, relying instead on our revenues from investment sales and leasing to fund our growth.

How did you “cut your teeth” in the real estate business?

Klatskin: I am a licensed, registered architect. I worked at an architectural firm in New York for five years and then joined the family business. I got my property-level experience at the family-owned business because we are, first and foremost, developers.

Heins: I joined Coldwell Banker Commercial, the predecessor of CBRE, in the early 1980s. I was in the investment division in Minneapolis. I worked with them for five years and then struck out on my own.

Russell: Growing up in a construction family, I always knew I wanted to get into the business. I earned a construction management degree and began working for a construction company. After spending my first few years managing construction projects, I knew real estate development was the next step in my career path. Knowing I needed to continue to challenge myself professionally, I received an MBA in finance and earned my real estate broker’s license. A lot of my industry knowledge has come from working with clients on construction sites and the natural progression of thinking of the “next deal,” which tends to lead to real estate acquisition and development to make it happen.

Wyllie: I graduated from the University of Florida in 1976 and got a job with General Development, the largest development company in Florida at the time. Eventually, I ran its commercial operation for 15 years. My father-in-law wanted me to work for the family business, The Graham Companies. I said at the time that the last thing I would ever do is come work for my wife’s family company. But my father-in-law convinced me, and I have been with the company for 27 years.

Alter: My dad created a very democratic culture at Alter, and we [family members] were treated like everyone else. I started cleaning vacant space, working on electrical panels, hanging heaters and cutting lawns at our office and industrial parks as a teenager. I was interested in real estate, and I asked my dad if I could come to work with him to learn the business. He said that he would teach me the business, but wanted to give me the freedom to choose my own career. 
I later got a hotel/restaurant degree in college and worked in that industry for several years. When my dad got sick, I realized that, rather than selling the business, we wanted to keep the family name on the front door. My brother Michael joined the business in 1990; I got in in 1991.

What is the age range of family members involved in the business? Have age or generational differences created conflicts or opportunities?

Russell: I am the youngest family member involved, at 30 years old, and my father is the oldest at 56. We each bring our own views to the table, but ultimately always have the same goal of achieving successful, profitable projects and exceeding client expectations.

Klatskin: I was born in 1964, the last year of the baby boomer generation. Sam Seiden is 36, so he is a Gen Xer. We have had no conflicts, but we have discovered opportunities working with a different generation. Those opportunities involve translating the wisdom of the past into the future.

What, if any, efforts is the company making to engage younger family members and prepare them to lead the company in the future?

Klatskin: To prepare the next generation, they need to work for someone else who doesn’t [care] about them. They need to see how the real world works, because not everyone is nice. But there are additional reasons. Real estate is actually made up of five or six fields, including construction, engineering, law, accounting, finance and marketing. We need people of the next generation to come into the business who can add value with expertise in one of these six fields. I think working five to 10 years at other businesses is sufficient. If possible, it is beneficial to have a 10-year overlap of generations to pass on wisdom from the older to the younger generation.

Wyllie: All of the [members of the] first and second generations of the business are gone. We have four members from the third generation, including me, and four members of the fourth generation. We third-generation folks are all in our late 50s and early 60s; the fourth-generation group are in their mid to late 20s and early 30s.

About 15 years ago, we third-generation people came up with a playbook for family members getting into the business. We called it a “family protocol,” which is just a rule book. We spelled out that you need to get an education, and then you need to work somewhere else for a period of time, preferably in a business that has something to do with what we are doing here.

The four fourth-generation people have varying backgrounds, but they have all received advanced degrees and have all worked elsewhere. We frown on people coming here out of college. We say a minimum of a year working for someone else [is good], but more is better. We think these kids should get a perspective, get out there in the real world and get beat up a little. There is a fifth generation coming along, but they are all still running around in diapers.

Russell: My father gifted my sister, brother and me a small amount of stock in the company with the caveat that any of us who are not working at the company by age 30 would need to sell their stock back. My brother and sister are younger and, at this point, are not working in the business, so they may end up selling their stock back in the future. Gifting us stock was a good way for him to teach us about the business. The company culture is very entrepreneurial and has a strong emphasis on continual learning and professional development for both family members and other employees.

What is unique about your family-owned business? What makes you most proud of it?

Russell: What is unique and what I am most proud of is that we grew from a small company in 1983 to [one that is now] one of the largest general contractors [in the region] and have a great reputation in the community. We would not have gotten where we are with just my father. We have a lot of great people in the company who want to continually make it better. While we are one of the largest contractors in the region, we have managed to maintain the small, family-owned feel and culture that go along with that.

Heins: What is unique about our business is that my wife and I were able to come to the United States from Europe, get into the commercial real estate business and build a portfolio that is now self-sustaining. We have about 3 million square feet of office and industrial space in which we own more than 50 percent and, in some cases, 100 percent. We take pride in identifying the land, designing the building, developing it and continuing to manage it.

Alter: We have employees who have been with us for 35 years and an executive team whose tenure is approaching 30 years. That is what I am most proud of; we’ve created a culture that’s as much about high performance and success as it is about family. There are people here who saw me grow up.

Klatskin: What is unique about the business is that I am working for myself and my family, not some pension fund in Boston that couldn’t [care] less about my family. Then there are the nonmonetary benefits: If your child has a baseball game at 3 p.m., go to it! Leave work and attend your child’s game. That goes for all of our employees, not just family members.

What makes me most proud is successfully transitioning from one generation to another and gaining the respect of the industry and employees along the way. When a new generation enters the business, they must gain the respect of the employees, otherwise you are [in deep trouble] because you are going to be their future leader.

Wyllie: My father-in-law used to say that when the family was in the dairy business, they would work 365 days a year, and the only time they made money was when they sold eggnog at Christmas. So everyone in the family has tried to live well below their means and work hard. It is a cultural thing with us. We have always reinvested in the business as well.

What I am most proud of is the development of Miami Lakes, Florida, a 3,000-acre master-planned community that started out as a dairy and now is home to 35,000 people. We did that without ever missing a payment to anyone or tearing up the family. We have an annual board meeting and annual dinner that is like a big family reunion for us.

Why does the firm elect to remain a family-owned company?

Alter: There is so much blood, sweat and tears that my family put into this business in 62 years, I can’t imagine selling it. My father, my brother and I built this business from one small office in a Class B building [and expanded it] to 25 markets all over the country, stretching from Washington, D.C., to California.

Heins: We have a lot of unsolicited offers to buy the business. We have never been tempted to sell. Real estate is now considered the fourth asset class and this is justification for me not to sell. Besides, what would I do with the money? Invest in stocks, bonds or commodities? An existing real estate portfolio provides a reasonable risk/reward investment return and it allows us to shelter income. These are great attributes.

Russell: As the second-generation person in the business, I have asked my father that same question. He is only 56, and a young 56 at that, so selling the business is not something he is even considering at this point. I think there is a general sense that we are just getting started.

Wyllie: We have learned from our two earlier generations that by sticking together as a family and not selling either land or company stock, we can create long-term value that exceeds what any family member could achieve on their own. Even when times get tough, we make money because we have low leverage. Family members feel safe about leaving their equity in the company. It is an efficient way to grow wealth because, in essence, we are not paying taxes on it as it grows. 
We bring in a company from New York once a year to do a stock valuation for gifting purposes and in case someone wants or needs to sell. The stock in the company has compounded an average 7 to 8 percent annually for the past 30 to 40 years. If someone wants or needs to sell, however, they have the right to sell to another member of their family group; there are four family groups. If no one in the family group wants to buy the stock, then the company will buy it.

Klatskin: We resist selling. If we were to sell the company, where would we invest the money? There is no reason to sell the business at this point. We will leave the keys to the business to the next generation to decide what they want to do with it. If they [mess] it up, so be it.”

NAIOP National Forums

NAIOP’s National Forums program brings together successful commercial real estate executives from leading companies across the U.S. and Canada in a noncompetitive environment where they share industry knowledge and help each other solve problems. These focused groups serve the needs of senior-level NAIOP members and provide them with an opportunity for exclusive networking and experience exchange with their peers. National Forum members gain and provide practical advice, creative ideas and industry wisdom.

The program began in 1995 with 100 members in four Forums. Since then, it has grown to 669 members in 44 Forums, including Capital Markets V, Developing Leaders X and E-commerce II.

The first Family-owned Business Forum began in 2004. Seven of the 14 individuals in the group’s current roster are founding members. Increased interest in this Forum resulted in the formation of a second group in 2017. The Family-owned Business II Forum met for the first time in April at the National Forums Symposium in Indian Wells, California. This Forum is interested in expanding its membership and is accepting applications during the program’s current recruitment period, which began in June and runs through September.

To learn more about the Forums program, contact Bennett Gray, vice president, National Forums, at gray@naiop.org or 703-647-1436.

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