It’s time for advisers to add direct real estate ownership to client portfolios
- November 1, 2021: Vol. 8, Number 10

It’s time for advisers to add direct real estate ownership to client portfolios

by Babak Ziai

It’s time to put to rest the myth that direct investment in real estate is only for large institutional investors. Investing in commercial real estate can bring additional challenges and risks, but they are not insurmountable. The benefits can far outweigh the risk and effort to overcome those challenges — as any multi-generational commercial property owner will tell you.

The fact that direct real estate investment is a key factor in wealth-building is well known among an emerging class of private high-net-worth investors and their fiduciary advisers. This collective group seeks to emulate the direct, long-term ownership model employed by the wealthiest and longest-running family offices. However, because many of these advisers and their principals do not possess investment and asset management capabilities of direct ownership experience, they are stopped in their tracks and unable to execute direct strategies.


The compounding of bond-like annual yields, capital appreciation and beneficial tax treatments over a very long-term investment horizon, often spanning multiple generations, is considered the holy grail for private investors. Direct real estate ownership offers more tax benefits than real estate ETFs/REITs through depreciation and mortgage interest write-offs. If structured correctly, periodic step-ups in commercial and apartment leases can also help protect against inflation in a rising-interest rate environment.

In addition, direct ownership provides principal investors with control and discretion over major investment, sale and financing decisions in comparison to investing in private equity funds and syndications controlled by third-party managers. This is particularly attractive when obtaining mortgage refinancing on an appreciated asset value, where the owner can receive tax-free “cash-out” proceeds to pay down the equity balance. Through thoughtful execution of value-creation plans, these cash-out events can occur multiple times over long investment horizons to substantially repay the investor’s equity and continue the compounding of cash flow returns.

Alongside institutionally advised pension funds, successful family offices and endowments have been accessing these benefits for decades. In a 2021 survey of 150 global family offices conducted by Goldman Sachs, 45 percent of their portfolios are allocated to alternatives, of which 25 percent (or 11 percent of the total) is allocated to real estate. Within this, more than 60 percent of family offices invest directly as opposed to going through managers.


Principal investors and their fiduciary advisers face several challenges in executing direct commercial real estate investment strategies on their own in the face of increased competition, rapidly evolving markets and higher valuations. Adding noise is a flurry of new private investment syndication opportunities offered through online marketplaces promising strong returns on paper.

Because commercial real estate investment requires managing multiple disciplines (financing, market repositioning, leasing, management, construction, design, etc.) and is both operationally and capital intensive, principal investors and their fiduciary advisers (estate attorneys, trustees and CPA tax advisers) do not typically have the in-house expertise to effectively evaluate, execute and manage direct investment opportunities.

For RIAs specifically, illiquid structures prevent advisers from charging fees — so these investments cannot be directly monetized as a percentage of AUM — and fiduciary regulations make it difficult to recommend private investments, even if they are in the client’s best interest. This inability to meet client demand for direct real estate comes as RIAs are going through an industry consolidation, with full-service agencies losing clients and income to more automated and hands-on service providers, and thus unable to add additional services.


These challenges can be solved by outsourcing all or portions of direct investment and asset management functions. Success lies in implementing systems-based processes to assess and mitigate risk, drive cash flow, and unlock value at the asset level. Depending on the size and scale of the asset portfolio, these systems can be customized and tailored to extend the capabilities of the principal investor’s in-house team or be aligned and added to an adviser’s service offering to add value for multiple clients.

In the case of RIAs, outsourcing presents a transformational business expansion opportunity to (i) become stickier and grow with clients, (ii) monetize in a moral and ethical way to meet custodial requirements, and (iii) avoid re-creating the wheel in a very costly and risky trial-and-error way.

Trustees, estate attorneys and CPAs can also benefit from strategically aligning with asset management firms, as most commercial real estate solutions (i.e., lease, purchase, sale, refinance) require higher-level legal, tax and consulting work.

This is similar to outsourcing other highly specialized functions, such as cybersecurity and human resources. It allows advisers to quickly and economically offer additional direct investment services to their sophisticated and high-net-worth clients, while reserving their own resources for the things they do best.


But firms and principals still need to find the right firm to align with. The private investment market is underserved when it comes to direct alternative investment, and firms looking for outsourced services need to make sure the firm they align with is truly competent in this market segment. Here are four crucial areas to look at when you begin your due diligence:

  • Investment evaluation capability and process: The ability to establish work flows to first filter and then screen opportunities to warrant “deep dive” evaluation of financial, operational and qualitative feasibility, while also evaluating whether the property’s risk-return profile meets the client’s portfolio objectives.
  • Property business plans: The ability to develop and execute a business plan that addresses the operational, financial and market positioning aspects of the property. These plans will provide the necessary strategic planning and analysis to support financial decisions in ever-changing market conditions.
  • Quarterbacking: The ability to oversee multiple specialties that work in concert to execute the plan to drive all value decision-making activities, including overseeing property management operations and third-party service providers, monitoring key performance and market indicators, and uncovering and managing both risks and returns.
  • Owner’s approach and experience: Whether engaged by the fiduciary adviser or its principal, commercial real estate asset managers should have experience as a direct owner and operator of commercial real estate.


A significant share of emerging family offices and high-net-worth investors want to add direct commercial real estate to their portfolios to emulate the generational family office model. Although the challenges are real for this institutionally underserved yet growing investor class, the solutions lie in outsourcing investment and asset management functions and implementing customized systems and processes to meet client objectives.

Through direct investment, investors and RIAs can access an asset class that provides solid annual income, appreciation that typically keeps up with or exceeds inflation, and tax shelters that enable wealth building that spans generations. This means it is time for RIAs and other fiduciaries to add direct commercial real estate investment advisory and asset management capabilities to their stable of offerings — setting them apart from competitors and enabling them to meet the needs of high-net-worth investors. RIAs and fiduciaries who align with commercial real estate asset managers to offer direct investment advisory will benefit from this focus, as will principals who are building wealth for generations to come.


Babak Ziai is founder and managing principal of BrandView Asset Management, which provides direct investment advisory and asset management services to fiduciary advisers and asset owners.


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