Canadian real estate stands to gain by embracing succession planning early

Empower your legacy through EY’s three-phased approach to succession planning.

In brief

• Across the real estate industry, a perfect storm of factors is making it increasingly important for privately held and family-owned businesses to proactively address succession planning.
  
• Particularly among second- and third generation-owned businesses: embracing the planning process early can help secure a harmonious outcome.
  
• Whether you’re looking to divest or pass real estate assets to the next generation, putting the process in place ahead of time enables you to generate better results and return on investment.  

In Canada, generations of entrepreneurs have built and scaled the real estate industry in earnest for more than 75 years. From immigrants who arrived following World War II looking to create a tangible footprint in Canada to business owners hoping to expand their businesses: the industry reflects a wide range of innovative ideas and entrepreneurial drive.

That said, while privately held and family-owned real estate businesses have defined Canadian cities over the years, many of these organizations were forged in an era before formal documentation and paper trails were paramount to long-term success. Partnerships were created on the basis of goodwill and agreements were sealed with a handshake. 

As these organizations evolve and new generations join the leadership ranks, this reality can create uncertainty around how ownership transitions. It’s essential that the next generation of business leaders seeks to put robust, 21st century governance models in place. What’s more, they should think beyond management succession alone to address big-picture issues. Why? If not confronted in advance, issues such as assets held in an estate or trust, competing interests among beneficiaries, incomplete or missing records, illiquid investments or business interests and complex tax structures can all create additional complexity.

Building out a fulsome, connected and flexible succession plan can help you mitigate these risks while creating new possibilities and potential. For example, a second- or third-generation real estate company that proactively puts proper governance procedures in place — especially when these generations comprise numerous stakeholders of varying ages and experience levels — will hopefully be able to avoid disputes around partnerships, asset dispositions, valuation and other potential areas of disagreement.

Second- and third-generation organizations improve their overall success rates by addressing these issues head on so they can avoid a situation in which dynamics devolve and stakeholders find themselves in costly legal battles. These proactive organizations also understand that real estate can be a relatively illiquid asset that experiences market cycles and fluctuations in value.

Proper structuring can provide a means to liquidity when needed and protect the organization from forced dispositions during an ownership transition. Smart planning can provide both a means for transitioning ownership and control, as well as a path for liquidity for those who seek it.

At EY, we recommend a phased approach to succession planning. By methodically moving through the process, you can increase value at every stage and dial down risks along the way. Think about the process as a whole and then strategically address each phase:

Phase 1: Assess the valuation of your assets and explore ownership structures

You can’t know where you’re headed without understanding where you are today.

When we initiate succession planning with a privately held or family-owned real estate business, we start with an in-depth discovery phase. Through market research and site visits, we compile, analyze and benchmark detailed property reports and offer insight on potential improvements, optimization opportunities and market values of both the individual assets and the assets as part of a portfolio.

Then we develop a consultation process that helps enable information gathering and proper data sharing across family groups.

Last, we carry out detailed tax analysis to help you understand the impact of decisions and structures. This research phase is critical. It allows you to anchor decisions in facts and updated information. It also helps in creating  a spirit of transparency that helps establish family members’ goals, priorities, risk tolerances and preferences for specific assets. This lays the groundwork for ultimately achieving a partnership that all stakeholders can agree on. 

Phase 2: Develop the strategy

With initial assessments complete, we channel intel gleaned into an overall strategy. There is no room for one-off or ad-hoc decisions in effective succession planning. You want to make sure that every decision is made with intention, to serve the family’s overarching goals and objectives. At EY, we approach this process by highlighting all the strengths of each individual asset and the portfolio as a whole to help mitigate any weaknesses. We meet with different family stakeholder groups to hear about their future goals and objectives for the assets.

All of this helps us comprehend the risk appetite and universe of acceptable strategies. For example: do shareholders tolerate development risk and timeline? Would they consider assuming development risk directly, or prefer to explore the benefits of development through a more passive and lower-risk strategy  — think joint partners? Is the asset mix appropriate for shareholder objectives? What are the short- and longer-term liquidity needs, and how does that correlate with the asset base and portfolio construct? Does the portfolio base need to change to meet the next generation’s needs and goals? What’s the best way to accomplish that? And in some cases, are shareholder needs and interests so divergent that a separation of interests is the best path forward?

Answering these kinds of questions and developing the strategy in this way allows you to understand the value proposition associated with every asset and connect it up to a big-picture financial evaluation that demonstrates the impact of potential returns on investment, as well as cap rate.

Phase 3: Execute the strategy

Every business — and every family — is moving towards a unique destination. Grounding succession planning in the first two phases will inform the third phase: execution. Depending on what you’re trying to achieve, execution will look different from one group to the next.

For example, if a butterfly transaction — one that seeks to separate the portfolio of assets in a tax-efficient basis — is the best option, we’ll help you achieve the separation in a fair and equitable fashion, along with proper tax planning.

If property dispositions are required, we will develop a sales strategy that seeks to enhance the value of the assets. This process could include consultations with family members, sales strategies and plans for individual assets, criteria for selecting successful bidders and other factors. At this phase of the process, you’ll likely work with a wide range of external professionals and contractors, whether environmental, physical, zoning experts, urban planners or legal and tax professionals.

At EY, we coordinate this process so it feels seamless and deliberate. We also help manage data rooms for each transaction so that due diligence is carried out and provided effectively, and liaise with your board to they’re up to speed.

However you approach succession planning, you’ll want to dedicate resources to owning the execution phase of the process to manage stakeholders and achieve consistent progress and clarity.