Figuring out who’s next in line

Oct.October 31, 2007 01:40 PM

Real estate mogul Nathan Brodsky, the head of the Brodsky Organization, died at age 79 at the end of the July.

He founded a property empire that now includes 50 Manhattan buildings and 7,000 apartments. He started small, opening a West Village brokerage after World War II, then buying and renovating small buildings. Starting in 1981, he and his son, Daniel Brodsky, working as the Brodsky Organization, built 12 apartment towers in Manhattan, according to an obituary in the New York Times.

Nathan Brodsky is gone, but the business stayed in the family. The company Web site notes that Daniel Brodsky is a 36-year veteran of the business, and, today, a third generation, represented by Dean Amro and Alexander Brodsky, is firmly entrenched at the top of the organization.

While succession issues appear relatively clear cut in the Brodsky case, succession planning, whether it concerns management or ownership, is a major concern for real estate companies, which are often owned by families.

Some leaders are intent on retiring, but many entrepreneurs want to remain indefinitely at the helm of the companies they created.

Believing in mortality

“When you have organizations like this you have limitations on who it can be run by — and people don’t believe they’re going to die,” said accountant Robert DeMeola, partner in charge at the New York Office of J.H. Cohn LLP.

Debilitating illness can also take its toll on a real estate empire, he said. The headlines are rife with examples of why a succession plan is good for families and businesses.

Harry Helmsley’s prolonged bout with dementia in the 1980s provided plenty of tabloid fodder as the hotel mogul was declared mentally incompetent to stand trial on tax evasion charges. His wife Leona was convicted and went to prison in 1991. The family tried to maintain that he was vital, but that didn’t appear to be the case.

The disarray led to lawsuits from partners and infighting among employees. In 1997, the New York Times quoted an unidentified real estate partner of Helmsley as saying “They’d made provisions for Harry’s death, but there was nothing in writing about how to handle his incompetence. No one was in charge, and the whole company fell apart.”

Even a 2001 obituary of Seymour Milstein, who with his brother Paul built a portfolio of assets that included holdings such as Bank of America Plaza, Emigrant Savings Bank and several residential buildings, mentioned family court fights over control of the company with his nephew Howard.

“You can end up with a situation where the state is going to step in and make objective decisions rather than your own subjective decisions,” said William L. Abrams, an attorney at Abrams Garfinkel Margolis Bergson who handles estate planning issues.

The key to avoiding difficult situations is making succession plans as early as possible, revisiting them on a regular basis, and dealing with ownership and management issues separately, experts say.

Deciding the sooner, the better

Family fights can be rough, and family business squabbles even worse. When things are going well, it’s wise to lay out who will run the company once the current leader retires, dies or is unable to run the operation.

“In a family business you have the challenge of deciding between family members,” said Mark Rubin, partner in charge of the multigenerational family tax group at the Schonbraun McCann Group. “It’s virtually impossible for a parent to choose between siblings.”

But, at some point, these decisions must be made. Rubin gets clients to write down the name of the best person to take the reins, then asks his clients to lock the paper away without showing him.

He then works with potential successors on development plans. “An entire succession process takes years, and the sooner you start the better,” Rubin said.

At a company run by siblings, it’s even more difficult. As a family spreads, some members of the next generation may not be interested, or there may be lots of competition. If family members can’t agree, an outside manager may be needed.

Establishing a “family office” that handles these issues — and the family fortune — and that represents minor heirs works well in may cases, said DeMeola. They can act as a board of directors to which the person managing the organization reports.

Children should be consulted regularly to gauge their interest in the organization. While it might be tempting to give a young relative an important role early on, other employees are usually more accepting if the child works his way up through the company, DeMeola said. It’s still fraught with potential trouble, though. “One bad holiday dinner can change everything,” he said.

Keeping it in the family

Unlike management succession, “Ownership succession is fairly straightforward,” Rubin said. “You need to deal with ownership succession separately.”

Spelling out why the company exists is a vital first step. At first, a real estate management or development firm exists to make money. Over time, however, its profits can give a family a lot of social capital, allowing it to pursue philanthropic efforts on a large scale.

“You fuel social capital from financial capital,” Rubin said of a family foundation.

For other families, the firm may be a way to provide for future generations, or a route for cashing out through a merger or sale. One challenge for real estate concerns is that the assets being passed down are often bricks-and-mortar properties, which are illiquid and sometimes hard to reorganize. Setting up a real estate investment trust (or REIT) to securitize buildings and turn them into financial instruments is a sound remedy, said Rubin.

Tax issues are also a major consideration, though political developments may soon change the terms of that equation.

Republican politicians have been trying to push a new estate tax bill, but the outcome is still uncertain. Currently, the estate tax is due to be phased out by 2010, but would be reinstated in 2011, with a tax rate of 55 percent on estates larger than $1 million.

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