The Institutional Real Estate Inc Sponsorship brochure, Connected-Investor Focused, We connect people, data and insights, sponsorship, events, IREI Products
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NAREIM DIALOGUES SPRING 2017 27 Let's paint the picture. There are still a ton of real estate companies where you walk in the Board Room and the senior executive team is largely a room of older white guys, most of whom have worked together for years. This is a caricature, but still too often true. Exceptions are often a matter of degree. There are multiple issues here and hard work to the path forward. Let's explore. First issue. Long tenure and stability on a team is very much a blessing, but also a curse. The blessings are obvious. Stability. Longevity. Knowledge and experience. Success at working together. All good. But the curse is the potential of rigidity of organization and perspective. Some level of ongoing change at the senior levels can bring different perspectives on the market, customers, competition, best practices and etc. No one is perfect and long standing teams have usually learned to cope with the natural strengths, weaknesses and sometimes dysfunctional or overly dominant team members. I often use the metaphor of cross country skiing where you ski only in those well worn tracks, ie, ruts, versus the flexibility of free style. Occasional change trains an organization to flex and helps create resiliency. Everything is a balance. Constant change is a clear weakness. But too much stability is a weakness, too. Second issue. Diversity. This is not a political correctness issue. It is much deeper than what-you- should do. Google the statistics on the benefits of diversity in leadership and in the boardroom. They are compelling. You know that this Board Room, in 5, 10, 15 years will look different. It will have diversity of age, gender, orientation, and the faces will be more rainbow colored. That is absolutely the face of our upcoming generation of real estate leaders and it is clearly the face of your customers, capital sources, business partners, and collaborators. Companies that have not yet much dealt with that will experience a wholesale versus a gradual shift. Again, think resilience. Third issue, age and age politics. This used to be straightforward back when the societal norm was retirement in the early to mid 60's. But we baby boomers have a changed attitude towards work, where retirement, at least for people in successful and satisfying positions, is not the prize, but the booby prize. So, members of the senior team want to keep working into their mid and late sixties or further. This is cool. Truly. But it comes at the risk of that overly tenured team and it also comes at the expense of everyone down the food chain in the different functional areas getting blocked up. The next generation(s) are looking to make their mark and their fortunes and will not stick around without meaningful growth opportunities. People moving around is a natural part of business. But an organization where too many people are blocked out is a true risk. There are other related, equally sticky wickets. Let's group them around capital, both intellectual capital and the dough. First, intellectual capital. Companies in our industry are often founded and built around a charismatic and often brilliant individual real estate investor. Often, we know them from their first names – Sam and Barry, of course, come to mind. Capital is drawn to these brilliant, iconic investors. But if it is to be a business for the long run, succession planning demands that their brilliance must be distributed within an organization and then built into its DNA. If not, the company will not last much beyond the active lifespan of that leader. This is a challenging and long term transition and applies equally to the small and midsized real estate investment and development companies as it does to the Sam and Barry iconic firms. Balance sheet is the last key topic. There are two, related issues. First, how does succession enable a liquidity event for the outgoing leaders? Second, in doing this, and assuming that the business has decent cash flow for ongoing operations, how does the transition create or maintain enough of a balance sheet for the next generation to have the capital for coinvestment, pursuit cost, and/ or guarantee funds? Balance sheet transition is probably the do-or-die issue that will define the rest of these issues and whether the company can find a succession capital source to position the company into its next generation or will need to pursue a merger or sale of assets. Eventually all companies have to come to grips with these matters. These are all interrelated topics. Planning for the future requires all to move forward together or the long term prospects of an ongoing concern are weakened. Punting suggests a company for which a sale, merger or liquidation is a very likely outcome which, by the way, is nothing to be ashamed of. Growing up in the business, many have deemed the definition of success more as a happy capital event for the leaders than passing the baton for an ongoing concern. But if a company is looking to build an institutional platform, which means ongoing capital and ongoing business, then it must deal with all of these issues – call them succession issues – discussed herein. One size does not fit all and, in most companies, this can be a messy, awkward process and one that requires strong leadership and vision at the top. It is not easy. Continual planning and change creates resiliency and a company that has a good chance to continue into its next generation – at which point, of course, these matters get to be addressed anew. Matt founded Terra Search Partners in 2006 to provide a highly consultative and both a client and candidate centric approach to real estate search. Prior to forming Terra Search, Matt was a Partner with several executive search firms, including Heidrick & Struggles and Ferguson Partners. Mary McCarthy is Managing Director at Terra Search partners. She brings 30 years of real estate capital markets experience and a deep understanding of real estate private equity to executive search. 1. 2. 3. ©iStock.com/FatCamera