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Family offices have a lot of options when it comes to real estate investing, including direct investments, LP investments in a fund, or even co-GP and LP-GP models. But how do they actually invest, according to the data?
DJ Van Keuren, founder of the Van Keuren Family Office Real Estate Institute and co-managing member of Evergreen Property Partners, joins the show to discuss some surprising insights on how family offices are actually investing in real estate, based on research from the Institute.
Watch On YouTube
- Background on the Van Keuren Family Office Real Estate Institute, and its annual research report on family office real estate investing.
- Insights into why family offices have a preference for investments in secondary markets.
- Background on holding periods for family office real estate investments (and why hold periods vary so much from family to family).
- Surprising data on tax efficiency, an area where many family offices have room for improvement.
- The size a family office needs to be to afford an actual CIO.
- Details on the upcoming fall 2022 program at FOREI (and how prospective students can apply).
Featured On This Episode
Today’s Guest: DJ Van Keuren, FOREI
- The Van Keuren Institute for Family Office Real Estate (FOREI) – Official Website
- FOREI on LinkedIn
- DJ Van Keuren.com – Official Website
- DJ Van Keuren on LinkedIn
- Evergreen Property Partners – Official Website
- Evergreen Property Partners on LinkedIn
About The Alternative Investment Podcast
The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.
Andy: Welcome to “The Alternative Investment Podcast.” I’m your host Andy Hagans. And we have a great episode for you today, we’re taking a deep dive into the world of family offices and a whole lot of data and research into how they invest in real estate. And joining me today, I have DJ Van Keuren who is founder of The Van Keuren Family Office Real Estate Institute, as well as a co-managing partner of Evergreen Property Partners.
DJ, welcome to the show.
DJ: Thank you, Andy. Glad to be here.
Andy: You know what? Even before we get into the research, how long have you been working in the family office world, DJ?
DJ: You know, I first started working about seven years ago. And like many people, I actually fell into the space. Because about 95% of the people that work for a family office fell into it. And that’s because the patriarch or matriarch has a major exit and now they have all this money that they come across and they’re like, “Okay, now it needs to be managed. I’ve got to figure out how to planning, I got tax situations, etc.”
And they say, “Who do I know? Well, I trust my accountant, I trust my advisor, I trust my neighbor, I trust, you know, my banker.” So, that’s typically how somebody gets into the family office space. In my situation, I got very fortunate and worked for my first family, billion-dollar family, focused on their real estate portfolio about seven years ago.
Andy: Okay. And so, now you’ve founded The Van Keuren Family Office Real Estate Institute, and I know that you’re on the leading edge of executive education in the family office world. So, the research that we’re going to discuss today is produced by the institute, but before we even get to that, could you tell us more about the institute?
DJ: Yeah, sure. So, after I worked for the first family, I got headhunted by the Hayman family, which is Giorgio perfume, Giorgio of Beverly Hills, came up with a retail brand strategy and stabilized that, did some work with the younger gen that owns one of the Major League baseball teams. And through that period of time, I dove in to really try to understand families, after working for some, and additional families and where that gap was.
And one of the biggest reasons why Family Office Real Estate Institute came about is because 70% of families lose their wealth by the second gen, 90% lose their wealth by the third generation, and real estate, I wholeheartedly believe, and it’s like I’m on a mission, can be used in order to maintain that legacy wealth.
And so, the institute came about after initially providing education, writing articles, speaking at events, etc. Then I was asked by one of the universities to help spearhead this. And it’s there to provide education for families, family offices, industry experts, family office professionals so that they can get a holistic look with real estate, to make sure that they’re investing properly and they’re really utilizing that asset class to maintain that legacy and even create an additional legacy in addition.
Because real estate’s the second largest area of wealth creation after the first area that they created the wealth.
Andy: Got it. And so, when we’re talking about family offices, if I remember correctly from the last episode you recorded, you know, the true family office, meaning like a single-family office, really necessitates around 250 million in investable assets. But I also know that there’s shared family offices, multi-family offices, outsourced family offices, there’s all kinds of different hybrid models or gray area, whatever you want to call it.
So, you know, once we’re talking that amount of wealth, we’re talking ultra high-net-worth, how big is this world? I mean, how many family offices are there in the United States?
DJ: You know, that’s a good question. In the U.S. alone, there’s probably up to 7,500, maybe 8,000, families. On a global basis, about 15,000 as a whole, which is 250 million or more, and actually classified as a family office.
You know, so, it’s quite a large number of people. But what’s interesting is that the amount of wealth that’s going to be created and transferred over the next 10 to 20 years is significant. We’re going to be getting into the largest wealth transfer in history.
It’s starting to happen right now. And, I mean, that is, you know, probably in the realm of $50-$60 trillion that’s going to be transferred. So, it’s a very, very large market. Today, on the real estate side, the average allocation to real estate for a family is about 24.5%. That equates, just in the U.S. alone, to about, you know, $1.5-$2 trillion.
And that’s going to grow, over the next 10 to 20 years, to about $15 trillion that should be allocated into real estate at least. So, it’s a large market, it’s an upcoming market, and it continues to grow.
Andy: And so, what are the growth drivers there? I mean, in terms of the ultra-wealthy and clients who need this sort of service, is it just the increased number of liquidity events with startups and software and just a increasingly global economy or is there just more overall opportunity to create wealth or what’s driving that?
DJ: Yeah, that’s a good question. And by the way too is that, you know, when we say 250 million or more, and you said this a little bit earlier, it’s not even including those that are worth 50 million, 100 million, 150 million, which is really ultra-high-net-worth and it’s surprising to say that.
And those are additional statistics of what that global wealth is, which is pretty significant. And when you look at…a couple years back, somebody told me that just in the Houston area alone, there was 1,500 people that were worth 100 million. So, that number’s pretty significant, you know, it gets up there quite a bit. The reason for the growth is a couple fold, and a lot of people probably hear, well, politicians talking about it and then in the news about all this wealth that’s been created.
And that’s from the sale of businesses, it’s also from investments that have been made. I mean, the one thing I will tell you that, you know, three months into working for my first family, I was out at a meeting with another family in California and I walked out. And they were talking about being first investors into, you know, Twitter and LinkedIn and whatnot.
And I literally walked out and I said, “It’s no wonder why the rich get richer because the reality is they have access to deals that other people don’t see.” Right? Or they’ll invest with families.
If I was sitting on a couple hundred million dollars, personally, I’d want to invest in tech, I’d find a family that made their wealth or created their wealth in tech and say, “Can I invest with you?” Because that’s what they spent the last 40 years on. So, that growth is coming from a variety of sources. And, you know, investments have been good for everybody, it’s just that, when you add zeros, it grows that much more, right?
Andy: Right. No, and you’re absolutely right looking at the real estate market, looking at the stock market, looking at, you know, the wealth that’s been built in the past 20 years in Silicon Valley or shoot, in Texas. You know, that makes sense that there would be this…you know, it’s not that small anymore. I mean, even if you’re talking about 100 million and up, it’s an increasingly larger number.
And so, I think this research is really interesting because we’re talking about how family offices invest, and as you mentioned, they have, like, a 24%-25% allocation to real estate. So, we’re really talking about a tremendous amount of money that’s being invested. And, you know, as I looked through the report and I did read it, you know, it kind of occurred to me, it kind of hit home, family offices really do think about their investments differently.
And some of the trends will align with, you know, trends that you’ll see with very high-net-worth accredited investors or RIAs or whatever but some of them are a little bit different. So, before we get to the headlines in the report, could I ask, you know, how do you produce this report, how do you actually survey family offices to get this data?
DJ: That’s a good question. So, I’ve been fortunate to get to know a lot of families over the last seven years, and that’s primarily from working for a family individually at a time, right? And so, how the report started, and we just finished up our fourth year, we’re going to start our fifth year coming up here, so, now we’ve got real data to pull off of.
Honestly, I picked up the phone and called, you know, hundreds of families in order to gather this information so that I…because I knew if they were actually really a family or not, we ask a lot of questions. And so, by me personally calling them, they’re more apt to fill that out because…
Andy: So, this isn’t a survey that you could, like, hire a survey company to do. You basically, if you want real family offices to give you that information, you need that personal relationship. And, I mean, honestly, that’s a theme in the family office world, is personal relationship is everything.
DJ: That’s right. And the majority of families want to be silent, they don’t want to have…you know, there’s not a sign on the door. Everybody wants access or get to know these wealthy families but that doesn’t mean that they’re publicly out there. So, when I’ve met them through another family or in a private event or something like that, you know, I get to know these people.
And so, I make sure that I ask people that I know are actually family offices. And that name’s really been thrown around over the last number of years, where people say, “Oh, I’m a family office,” and, you know, that’s another conversation per se. But, so, we make sure, yeah, that these are legitimate families that are answering these questions.
Andy: Got it. So, this is, essentially, proprietary data you’ve collected yourself, we can’t get it anywhere else. And just so our listeners and viewers know, I’m going to link to this in our show notes. So, there’s a section on The FORE Institute website where you can go and access these reports. And I actually have it pulled up here on my computer monitor, so, if you see me looking around my screen, it’s because I want to get the data correct.
And right on the second page of the report, there are some trends from 2021. And I understand that you’re releasing the 2022 report soon but 2021 compared to 2020, I mean, there’s some really big trends and big changes here if we think about, you know, all that occurred, you know, over that timeline.
And so, that first trend, I thought this one was very interesting, family offices have a preference for investing into secondary markets. So, 48.61% are investing in secondary markets. DJ, why do families like these secondary markets so much?
DJ: Well, there’s one thing that I want to bring up first and then I’m going to answer that question. I’ve had the ability, in the 90s, I was an advisor, so, working with a lot of retail investors, high-net-worth investors, which, like you said, there might be a lot of people watching, or whatever the case is.
And then you have family offices. And then you also have institutional. So, I’ve done work in the past with Goldman Sachs and Carlyle Group and Blackstone and stuff like that, which are institutional investors. And family offices are more like the retail everyday common investor. And I think that’s important for a couple reasons because, one, what you’re about to go over in the data and any information that anybody that watches a show like this where I’m talking about how family offices are investing, they can do the exact same thing, it’s just at a smaller scale, right?
So, the fundamentals all remain the same, but instead of being invested in a 40-million-dollar deal, maybe you’re invested into a 3-million dollar deal. That’s okay, right?
Andy: Well, and, DJ, sorry, you said that, you know, family offices are different from institutions. I totally agree with that but I guess there’s at least two aspects to that, maybe there’s more than two, but one aspect is just, psychologically, you know, that institutions, you know, a lot of times, they’ll have legal mandates or restrictions and handcuffs on how they can invest, where a family office, it’s basically down to the principal, you know?
But also, even just the tax considerations for a family office are going to be very similar to any other individual because there’s all sorts of tax-advantaged investing, you know, investment products that are not really attractive to institutions, they’re really more attractive to individual investors.
So, I’m just kind of curious, when you say family offices are more similar to that individual investor, did you mean more psychologically or more in terms of, like, their tax-advantaged philosophy?
DJ: That’s a good question. So, on the institutional side, right, they have a box, “This is what we invest into, this is our mandate, this is our returns that we need to go for,” right, and, “This is our time frame.” If they have a fund, then they only have a specific amount of time that they can invest. If it ends at the end of six years, guess what, it doesn’t matter where we are in the cycle, they have to dispose of those assets.
But more importantly, it’s not their money. They’re hired, right, a lot of people that have spent their time in NBAs, you get a lot of people in their early 30s, mid-30s, but at the end of the day, it’s not their money, they’re making decisions based upon the criteria and the box and they have to get money out. So, I actually even have a question if there’s really a proper fiduciary component.
Because, if they’re sitting on a billion dollars, they’ve got to invest. Whereas a family, right, they don’t have to invest. And there’s three rules that you get when you work for a family. Don’t lose money, don’t lose money, and don’t lose money, right? And so, they don’t have to be in just for six years, they can let that go forever, right?
They don’t have to pull the trigger and write a check, if they want to hold off, they can hold off, right? But this is a personal decision, an investment decision, because they want to make sure that that money is there for future generations, just like a retail investor. They are making a decision and say, “I only have X amount of money and I need to make good decisions. And if I lose this money, I may never get it back.”
It’s the same thing for family offices but maybe even more so because their checks are bigger and they’re not going to have another exit of hundreds of millions of dollars, or billions of dollars, in their lifetime.
Andy: That’s a good point, DJ, because, you know, if you’re a surgeon and, you know, you’re earning 750,000 a year, essentially, if you lose your investments in any given year, it doesn’t really matter, you have that earning power. Whereas if you started a software company or a widget company and you have that one-time liquidity event, I think the psychology of that is a little bit different.
Because most people, you know, if you’re not Steve Jobs, you know, even most very successful entrepreneurs, you’re going to look back and there’s going to be, like, one really big liquidity event, right?
DJ: That’s right. And then, when you get that money, you’re like, “Okay, I got to make good decisions,” right? It’s not like, “I know I’ve got fund two and fund three coming behind because we’re just going to go to all these endowments or foundations, right, to invest.” But what’s also different is because institutions have to put out a lot of money, they’ll go into the primary markets, they’ll go into the coastal cities, the New Yorks, the San Franciscos, right, the Miamis of the world.
And they will occasionally look in the secondary markets, the problem is a lot of them cannot go below a 20-million-dollar check. Now, you do have big families like the Perot family or Michael Dells or Bloombergs, right, where they also have to get money out because, you know, they’re so wealthy themselves. But the sweet spot, which is underneath the institutional radar and above what we call country-club money, are deals that are anywhere between $10 million to $40 million in size.
Those checks are between 5 million to $12 million equity checks. If you wrote it yourself or if it got syndicated out, maybe they invest 100,000 or 500,000 or whatever the case is. And these are markets that are up and coming, your Denvers, your Austins, right, your Nashvilles.
Andy: Are those even secondary markets anymore? I feel like…
DJ: Well, they technically are but they’re moving into being, you know, primary markets. But that’s where your greatest increases are, you’re not competing with the institutional dollar, right? And so, they’re very comfortable. And don’t forget, a lot of these families were entrepreneurs, so, they’re able to sort of take that additional step.
And that’s where the real monies are, these secondary markets, the smaller property types. And, you know, you’re going to get more bang for your buck, you’re going to get higher returns. And you have so many fundamentals that are happening, growth due to people migrating to those areas, jobs are there, quality of life.
And so, families are very open to these secondary markets.
Andy: So, there’s, basically, a premium there because these large institutional investors need to deploy so much capital at one time that they’re, essentially, forced to invest in these primary markets in your LAs and so on?
DJ: And so, that’s why the only way that…like, we were working on, you know, through our consortium, a team of families, we were looking at industrial small bay, for example. Some of those properties are $2 million. Some are 10, 15.
You might hit 20 occasionally. That’s total price, that’s with debt. Well, there is no institution that’s going to come in. However, if you accumulate a portfolio of $100 million, $150 million, $200 million, now the institutions are like, “Well, I can buy that $100 million portfolio and write a check for $40 million or $50 million.”
Andy: That’s so interesting. Yeah, I had The Spartan Investor Group on the show a couple episodes back. And, I mean, they’re a fund but it’s, essentially, that same strategy, you go into secondary markets, acquire assets, roll them up, and then it’s, essentially, multiple arbitrage. Because once it hits a certain scale, then you have a different buyer who, essentially, will pay that higher multiple.
DJ: And more buyers too, right? You have more buyers because now the institutional checkbooks can come out, they’re looking to deploy capital.
Andy: That’s so strange to me, DJ, that there’s more buyers at, you know, 300 million than there are at 30 million. You know, I guess it’s strange but true.
DJ: It’s very true. And I’ll tell you one thing too that was really interesting, so, I’m in the office of American Realty Advisors, this was before I started working with families, right, and there was a big industrial deal. And they’re like, “Well, we want off market.” Well, for the size of deals that institutions will do because they have to write big checks, these are $150 million, $200 million, $250 million transactions.
There is no off-market deals, right? And so, what happened, which really was surprising to me, is that…so, a broker got a deal for $200 million, right, so, she secured it. She did an email blast to all the institutions, all the insurance company, all the big players. She did not pick it up, she just blasted it out.
And there’s all these people, all these institutions and stuff that were interested because it was a big deal so they could put money out. And that just really baffled me because, usually, you know, people that raise money, they’re on the phones, they’re talking to people, you know, a lot of the time, but there’s such a demand at that level.
And that’s why these roll-ups are important, right, as well.
Andy: That’s fascinating, that is fascinating. Okay, let’s move on to the second trend from the research. So, holding period. So, the typical hold time for families, according to this research, is between 5 to 19 years. And 20% of participants preferred 5 to 7 years hold time, with an equal percentage of about 20% wanting to hold 7 to 10 years.
I mean, that checks out to me, that’s a typical life cycle of, like, a private placement offering. DJ, is there any trend of holding times getting longer? Because I feel like I hear the message more of like, “When you buy a good asset, why sell it?” Then you’re in the problem of, “Now I need to deploy cash, you know, to buy another asset.”
So, I hear that but then when I look at the market, I see people cashing in, you know? So, maybe those two things counteract each other.
DJ: All right, so, this really depends on what kind of real estate investor you are with the family office. There’s five different types of real estate investors in the family office space. The first kind is the family that created their wealth in real estate. This might be a Silverstein, right, it could be a Trump, it could be…that’s where they created their wealth, was real estate.
So, that’s the first one. And typically, they’re going to buy their own properties because they have all the infrastructure in place for the property managers and everything else, right? The second type of family office real estate investor is a Michael Dell, right, a Ross Perot, a Bloomberg. These are families that are worth billions of dollars, and they’ll actually hire those institutional people, similar to these private equity firms, right, to come and run that platform.
And once again, they might buy some themselves but they’re also going to be investing in other deals. But it’s ran on an institutional perspective. The third type of family office real estate investor is like the one family that I worked for out of LA where they’ll build their own platform.
So, what that means is they’ll hire their internal property manager, or asset manager, to oversee the properties and they own them all themselves. So, creating…
Andy: I mean, that has to be a great model for returns. I mean, if you can figure out how to vertically integrate, it seems like there’s a lot of juice to squeeze there.
DJ: Well, there is a lot of juice but, you know, those families are going to be more, “We’re going to just buy and hold. I don’t have to sell, I can hold them forever,” right?
Andy: And they might give the second and third generation a job to do as well, right? I mean…
DJ: They could. They could, right?
Andy: Okay, so, what’s our fourth and fifth type? Sorry, I interrupted there.
DJ: No, that’s okay. So, the fourth is the family office that says, “I’m going to invest with a sponsor,” right, or an operator. And, on average, which you can see in the report, it’s consistent, they might have four to six different sponsors that they consistently invest with. Now, 70% of families want to invest directly into real estate. And that doesn’t mean owning the property themselves because they have the day-to-day headache but really investing with a partner that’s going to be handling the day-to-day and everything else.
Now, those types of investments, although they are direct, they’re usually a period of time, right? They usually end after five years or seven years. They couldn’t hold it forever because they’re part of a syndicate, right? So, they’re a limited partner in that investment. So, that’s the fourth kind. The fifth kind is the family that just doesn’t have an infrastructure in place.
They don’t have the ability to do all the research and everything else. So, they’ll invest into funds and they’ll invest in everything from private funds, to REITs, you know, as a whole.
Andy: Sure, yeah. And, I mean, you know, just doing the math, if setting up the infrastructure, let’s say, costs a million a year, then even at the 100 million in assets level, I mean, that’s a 1% drag, right, that’s going to be a lot more efficient at the 250-million or 500-million level, the economics of that will be a lot better. Okay, so those holding periods, to some extent, it sounds a little bit like the institutions, or whatever, is that, just due to the nature of the beast, some of these family offices, the way they invest, whether into funds or with a partner, they, essentially, need to life cycle out, they need to exit those investments at year five or year seven.
DJ: That’s right, unless they hold it themselves and they’re like, “We’re just going to hold this for future gens,” or they’re with another family that’s like, “We just want to hold, we just want cash flow.” And it just varies just like different retail clients, when you’re an advisor, have different investment objectives, right, based upon their risk tolerance, based upon, you know, when they retire or the lifestyle they want afterward is going to determine the kind of investments they go into.
It’s the same thing with families, right, if they’re like, “We just want to hold,” that’s it. Or, “No, let’s try to get some additional higher returns. And to do that, it’s by increase in value and sell once it’s stabilized,” right?
Andy: Absolutely, absolutely. Okay, so let’s talk about sectors next, so, this was the third headline in the research. And I’m really only on page two, although I did dig into these sections for more data, but I love when the research report, you know, you don’t hide the lead, you know, you kind of come right out with it.
Talking about sectors here, the most popular sector for family office was multi-family. I don’t think anyone watching or listening is surprised by that. And then also that, in 2020, office was the second most popular sector. In 2021, industrial was the second most popular sector. Again, I don’t think that’s surprising but, DJ, do you see any, you know, differences overall in the sectors that families are interested in versus the sectors that institutions are interested in or maybe individual investors?
DJ: Yeah, so, for this report that’s coming out as well, once again, the main one was multi-family and then it was followed by industrial, right, there was just some information that came out through one of the institutional real estate news wires where institutions are really going after multi-family and industrial.
So, in this situation, it’s the same. You know, I think it goes back to there’s much more of a planning, right, I say the box, the planning box that institutions have than families.
I mean, it’s amazing because a lot of families don’t have a thesis or investment parameters or allocations or anything like that. Which amazes me because it’s one of the most important things, right, that needs to be done about how we’re going to do that. Now, some of that has to do purely from education, which is, once again, why the institute came about and why it’s so important.
And it makes sense because, if you spend 40 years in chemicals or tires or technology, and all of a sudden, you have all this money, you don’t understand hedge funds and real estate and venture capital, right, and private equity. And, in fact, there’s people that spend their whole life in not only venture capital but healthcare venture capital and then certain sizes, right?
So, some of that is just based upon, “We don’t really know how to do the planning because we don’t really understand these allocations, but what is it that I’m comfortable with?” So, once again, it goes to that personal emotion. Well, multi-family, you have a diverse base of people paying rents. I get it, I understand, people have to have a place to live, right? And so, that’s one of the driving factors.
“Oh, wait a minute, I’m not going into retail locations that much, so, I’m not very keen on that office.” “Oh, there’s a big trend that’s happening with…you know, because of COVID, people aren’t going back into the office.” So, they look at it more like…I’m trying to think, he was an old real estate fund manager who had the number one fidelity fund, I think it was, and he made his decisions based upon what you’re seeing out there, right?
“Go into a mall. Where are people going to?”
Andy: Was that Peter Lynch or somebody?
DJ: Yes, Peter Lynch. Yes, Peter Lynch. So, Peter Lynch’s was more like, you know, his wife came back one time and she had all these bags. He’s like, “Where were you?” She’s like, “I was at the Gap.” So, he goes and checks out the Gap and he invests in the Gap, right, rather than, “Let’s go over a portfolio allocation and let’s make sure that we’ve got, you know, certain betas and all this other stuff.”
So, that’s where really a difference comes, they’re more, like, “Emotionally, this is what I’m seeing.”
Andy: Yeah, no, I get it. I mean, if you look through my portfolio, you’ll see a lot of investments in chocolate bars and red wine…no, I’m kidding. But, you know, it’s one of those things, it’s like, some of the most sophisticated and smartest investors, when you look at what they’re investing in, it’s like, “Well, duh.”
It’s common-sense fundamental macro trends. And it’s like when you look at these trends over a long enough period of time, of course, you want to align your money, you know, in alignment with big macro trends and with the fundamentals rather than trying to “outsmart” any local market.
DJ: It’s what you know. And think about it, anybody can, where they live, right, they know of an area that’s booming. It could be a small little area, actually, where there’s a lot of people moving to or houses are being renovated or something, right? Well, that may never come up on my radar or your radar, definitely not an institutional radar, but because you see what’s happening, what’s going on, you have an understanding about it, you’re like, “That’s a good deal, that’s a good place to invest because it’s intrinsic,” you know, and you don’t necessarily need that supporting data.
Of course, the more data you have, the better off, right? Data can mitigate a lot of risk. But it’s the same kind of thing, you know? And, you know, that’s a huge component. That’s what’s great about real estate, is that it’s actually tangible, right? And that’s why I think it’s important that…like I said, if I had 200 million, I’d find a family that created their wealth in an area, same thing when you’re investing with others.
In real estate, if somebody’s been out there doing it a long time, they’ve had success at it, right, probably a good person to invest with.
Andy: Absolutely. Okay, one other big headline I want to hit on. And I’m going to read this verbatim because I want to get it right. So, although most family offices felt that tax efficiency was either important, and that was 31.5%, or very important, and that was 34.7%, only about 32% believe that their tax efficiency is “very good” and about 48% felt their tax efficiency was “merely good.”
And then I added them up, we have a total of 15% who felt their tax efficiency was somewhat between either fair or poor or very poor. So, it’s like these families, or the family offices rather, they’re aware that tax efficiency is important, yet at the same time, they’re acknowledging that, you know, at least a lot of them are acknowledging that they’re not really addressing it or executing well in that area.
And I got to say, I guess I give those families…I give them an A for honesty, right, at least acknowledging that we need to do better here.
DJ: Well, it goes back to, one, education and understanding, right, which is what The Family Office Real Estate Institute is all about. When I started working with my first family, I sat across the table, three months in, from an industry professional that’s been doing it for a long time. And so, I’m trying to learn as much as I can.
So, I asked her, I said, “So, what have you been doing?” She goes, “Well, we had 60 families in Israel, we did an event.” And I said to her, “What were you working on?” Or, “What did you guys talk about?” And she looked at me and she said, “You know, hedge funds 101.” And I just shook my head, I’m like, “Yeah, yeah, yeah.” I’m like, “Okay, she doesn’t know what she’s talking about. These people are wealthy, these people are smart, they’re successful. What’s she talking about?”
Well, like I said before, if they’ve spent their whole life in one specific area where they created their wealth but they don’t know all these other things, and taxes are one of those as well. In fact, you know, to give you a couple examples…and, once again, this year, about 80% of families don’t use a 1031 exchange. Which is baffling to me why they ask because you can continue to defer taxes, it’s one of the greatest way to…
Andy: It seems like if there was ever a program that was, like, made for a family office, it would seem to be a 1031 exchange. That’s all about preserving generational wealth, right?
DJ: Well, the other shoe is just opportunity zone, right? And when you look at how many…and everybody thought these wealthy-wealthy families were going to be investing in these opportunity zone, the reality is is, initially, it was like 18% and then it went up to about 26%, 28%. And the majority of the people that are taking advantage of the opportunity zones are the high-net-worth.
Well, the reason for this is, one, they didn’t understand what the rule guidelines were coming out because they took like a year to come out with, you know…and I’m sure you and Jimmy can talk more about this better than me, but they took a long time to get the rulings out. Right?
DJ: And then, when the rulings came out, the majority of families still don’t understand them. They don’t understand really what that involves and how that can play a role and what to look for and all this other stuff. And all they see are returns and they don’t really understand how the program lasts. I also did an email a couple years ago about cost segregation for real estate, and that was the most time I ever had…my phone rang off the hook from families I knew to say, “What is this? I don’t understand this. Who can I talk to?”
And all this other stuff. And so, I think there’s an assumption that families really understand the tax components. And a lot of professionals don’t either.
Andy: Well, I was going to ask, DJ, is this more an issue of the issue not being top of mind for, you know, the principle, for the matriarch or patriarch, or is it more a gap with the professionals who are working in the offices?
DJ: Okay, so, I think it’s a couple fold. If you remember when I said, at the beginning, that 95% fall into the space, right, and that’s because the patriarch or matriarch trusts that person. Well, let’s say it’s your banker that comes in or your accountant.
They don’t understand all the different types of investments either. They don’t understand, you know, private equity and what to look for and all this other stuff, just like the patriarch or matriarch. So, now you’ve just exacerbated the problem. And do they really know who they’re looking for, professional-wise, in order to help them that really has that understanding or do they really understand, you know, what are the issues that you’re really having to deal with?
You know, a great show is succession. And it just shows you how families can be so dysfunctional, you know? And it is advisors. There is advisors that don’t understand 1031 exchanges, they don’t understand the implementation, they’re just carrying out whatever they’re doing on a daily basis. And so, I think it’s a combination of not talking to the right professionals that had that expertise and then, internally, whether that’s with your internal professional or the family, having an idea of really what to ask themselves.
Andy: Yeah, that’s a good point, DJ. And, you know, it occurs to me that a matriarch or patriarch, you know, a principal at a family office, you know, I wouldn’t say that they’re wrong to play such an emphasis on trust and long-term relationship with an advisor that they work with, I mean, I think that makes sense on a lot of different levels.
But, at the same time, you might want to, you know, keep your long-term advisor in place but, you know, that advisor may need to educate themselves or may need to pursue, you know, different types of education or networking with other folks who can assist them, right?
Because a professional in the family office world, you’re kind of a generalist by nature, right? Like, you’re not likely to be able to be a true expert in any one area, it’s more about managing lots of different things that work together, I would think.
DJ: Yeah, well, you know, and this is where… you know, the number you had mentioned, 250, to have somebody, it’s really about 750 to a billion until you have your own internal CIO. Right? Which is a lot, right? So, that’s where an outsourced CIO, where they work with multiple families, can be extremely beneficial, right?
You don’t have to have the 250, or whatever, or a multi-family office. Now, a real multi-family office, and I was talking about it this morning with somebody, they have, what I call, the hard side and the soft side of their business. The hard side is the tangible side, that’s the investments. That’s where to invest, how to construct a portfolio, the different types of alternative investments, right, and how to deal with all that.
The soft side is, “Okay, do we have to do a bill pay because they have so much? Are we dealing with jets? Are we dealing with make sure that the planning’s in the state, the estate, the taxes?” All of those issues…
Andy: So, is this, you know, paying the housekeeper at four different houses around the world, I mean, that type of stuff?
DJ: It could be if they’re worth that much money. But a lot of times, you know…that’s why, if you can use a multi-family office and you’re worth 20 million or 50 million, you can still have access to this through a real multi-family office because there’s a lot of issues you have to deal with. Sometimes you have to deal with…I’ll ask, you know, “Is there a psychiatrist on board?” Because everybody has family issues but it gets exacerbated when you have all this money, right?
DJ: Now, people that say they’re a family office, and this is really important, that don’t deal with that soft side, all those issues that I said, the tax components and the planning and future generations dealing with all that other stuff, and they only deal with the investment side, they’re probably just an RIA saying they’re a multi-family office.
So, you know, and then there’s different ways that, you know, you can have these services for multi-family offices and you can pay for it. And so, I think that, if you can utilize that as your wealth is growing and these real multi-family offices…because there are some now that are focusing between 10 and 100 million, right, or 50 million and 150 million, and they can do that because they have 10 clients, they have 10 families, 12 families.
And so, now they’re helping multiple families, they have that experience, and then that smaller family can still get the same type of support as if they had their own.
Andy: Understood. Yeah, and that’s really interesting, you know, that hard side and that soft side. I’m sure it depends family to family, sort of which side requires, you know, more time to manage or, you know, more time to service.
DJ: The more money that you have, you really need both. You really do. I mean, look at Anne Heche. I mean, she didn’t even have a will, and I’m sure she had a few dollars. I mean, and there’s a number of stories about that, you know?
Andy: Sure, absolutely.
DJ: And that’s just a basic thing. But as you get more money, and if you truly want to pass and not be one of those families that lose 70% by the second gen and 90% by the third gen and truly have that go on for future generations, you do need to make sure that you’ve got that soft side taken care of, it’s just a matter of to what extent.
Andy: Absolutely. And, you know, one thing I appreciate about the FORE Institute is, you know, the fact that the programming addresses both that soft side and the hard side, the investment side, you know, and the people’s side.
And I understand that you have an upcoming fall program coming up at the FORE Institute. So, could you tell us more about that program?
DJ: Yeah. So, we have virtual where you can go to the program virtually. You can also go on campus, which is held at the University of Denver. And, you know, we bring in the very best professionals and industry experts. So, we have professors from Harvard and Wharton and University of Chicago and University of Denver, we have some of the top family office people.
And like you said, we will, you know, focus on real estate but we’ll also talk about things like governance or how to structure various aspects of what I said, the soft side, right? So, there are those aspects. And then there’s other people that you can get a chance to speak with other families, other people that have been through the same situation.
And that’s probably one of the best things about the institute, is the collaboration, right, and talking to other people. I mean, it’s not uncommon that we won’t have a couple billion dollar families or a billion dollar family in there and they’re super, super, super nice but what you can learn from them is pretty incredible, regardless of how big you are, right? And our education is just like any other that you get at Harvard, at Wharton, obviously, with the professors that we have and the quality.
And that’s coming up October 26th, 27th, and 28th. You can get more information at fore.institute. Not .com but fore.institute. And, you know, you can also gather additional information where we’ve got the quarterly magazine, “Family Office Real Estate Magazine,” up there.
“The Mueller Market Monitor,” which tells us where we are in the real estate cycle, based on property type and location, that comes out quarterly. We’ve got the studies that you’re bringing up and talking about. We’ve also got podcasts. We have videos. We have online individual courses. So, we’ve got a lot of great resources there as well.
And like I said, it’s relevant for anybody, it’s just whether you add a couple zeros or not.
Andy: Absolutely. And, DJ, I love that, you know, that program is primarily on campus. I know you have the online option as well but, you know, you get together in-person with people, like-minded people, you know, in community, in-person. It’s just easier to share things, you know, share things privately.
And talking with you before, you’ve mentioned that The Family Office Community is very collaborative, not necessarily competitive. So, I think this is a really cool program for anyone who’s working in a family office, who’s managing the family office. So, I’m going to make sure to link to the fall 2022 program at the FORE Institute in our show notes here.
And I know limited space is available, I think this episode, DJ, is going to publish this week around September 14th or so. So, there still should be at least, hopefully, a couple weeks left where listeners could register or apply to that program.
But in general, where can our viewers and listeners go to learn more about the institute, as well as your investment platform, Evergreen Property Partners?
DJ: Yeah, so, there’s three different areas. One is, as I mentioned, the fore.institute, F-O-R-E, for Family Office Real Estate, .institute, not .com. That’s for the institute, where they can learn more. And they’ve got up to the middle of next month in order to apply. And we do take applications for that, for the institute.
For The Family Office Real Estate Consortium, which is investing together with families, they can go to evergreenpropertypartners.com. And if they want to learn more, a little bit about me and my background, they can go to djvankeuren.com.
Andy: Yeah, DJ, you are a very busy guy, I understand, you’re speaking at the upcoming Family Office Conference in Miami, is that right?
DJ: Yeah, I’m keynoting the family office local conference. And we’re going to be going over a lot of the data from the current report and the past reports. Because, like you said, we can start seeing trends and, you know, hopefully, you know, really get the message across that real estate, in my mind and this is personal but I really believe it’s the best way to maintain a legacy and create additional wealth.
Andy: Absolutely. And Jimmy and I, we just booked our hotels there, so we’ll be there as well, DJ. AltsDb is an official media partner at that event. So, any viewers or listeners who want to, you know, come introduce yourselves to myself or to DJ, please don’t be a stranger.
We’d love to talk to you at the upcoming IMN Family Office Conference. And as a reminder for our listeners, if you want links to all the things that we mentioned in today’s show, you can always access our show notes at altsdb.com/podcast, that is. I’m pretty good about linking to everything that we discuss. And please, don’t forget to subscribe to our show on YouTube and on your favorite podcast listening platform so that you will receive our new episodes as we release them.
DJ, thanks again for coming on the show today.
DJ: Yeah, and I just want to say one last thing in closing. For anybody that’s listening to this for the first time or maybe the second time, you really need to utilize the resources, education, and information that AltsDb has and OpportunityDb. I mean, you guys put on some fantastic content and it would really behoove people listening, if they haven’t, to really dig in to what you guys are doing, because you’ve got some great stuff.
Andy: I appreciate that, DJ. Thanks for the kind words.