Client: William Poorvu
Project/product: The Real Estate Game

The project
Bill Poorvu -- an entrepreneur, Harvard Business School professor, and leading authority in the development and management of commercial real estate -- asked us for help in developing a book based on his popular HBS real estate course.

Together, we worked through Bill's conceptual scheme. We also created a series of case histories -- some disguised, some undisguised -- that recur throughout the book, illustrating Bill's belief that the real estate game is fundamentally about people. The resulting manuscript was accepted for publication by The Free Press.

We are currently working with Bill on yet another book: an in-depth look at the family dynasties that have shaped the real estate game in the U.S. and around the world in the last century.

Excerpt:
Harvesting, the business, and the family . . . . Another approach [to capital-asset management] involves mixing a gift with a "good." I've talked about my friend Ava Bergman in previous chapters. (Bergman moved from Philadelphia to New York after buying a co-op from a prominent society figure who was moving to California.) At the time Bergman moved into her co-op, she gave a major interest in it to her children, with the stipulation that she would be able to live there for a certain number of years and pay all expenses related to the co-op. This is known as a "qualified personal residence trust," also called a "grantor retained income trust" (GRIT).

If Bergman dies before the specified time period elapses, then the co-op becomes part of her estate. But if she lives beyond that time, the entire property is technically owned by the children (or by a trust that she may have set up for them). The advantage is that the government considers only part of this transfer a "gift." Assume it's a $1 million co-op. The IRS might rule that only $400,000 of the transfer was a gift, whereas the other $600,000 was a "good" -- that is, the value of living in the residence for that certain number of years.

In Bergman's case, she was able to use the purchase price of the unit as the appraised value. In the absence of a recent sale, a fair appraisal would be necessary. This, too, can be managed to good effect. A parent or other family member looking to make this kind of gift would naturally be advised to make the transfer and obtain the appraisal at a time when the market is in a down cycle, thereby establishing a relatively low value on the property.

Even family businesses that aren't real estate businesses can use real estate to solve knotty problems. Take the classic case in which the daughter goes into the family business, and the son doesn't. How do the parents divide up their estate in a way that is fair to all? One way I've run across is to give the real estate "under" the business to the nonparticipating sibling, and to leave the operating business to the sibling who is actually operating it. This way, the business pays rent to the nonoperating son -- providing a dependable cash flow -- while giving full operating control to the daughter who's actually running the business. This also works when you give the business to the siblings, while allocating the rental cash flow to the aging parents.

We have one more character from earlier chapters to bring back on the stage. That character is Charlie Leonard, who -- with limited capital, and as a new entrant to the real estate game -- bought a small apartment building on Boston's Beacon Hill. Leonard and his wife fixed up one apartment and moved into it; then, over the course of a year, they gradually transformed the whole building, serving more or less as their own contractors.

The property progressed more or less according to plan, but unfortunately, the Leonards' young marriage couldn't stand up under the collective strain of tight money, missed deadlines, and a 24-hour-a-day commitment to (hard) work. Shortly after the building was completed, the Leonards' divorce was finalized. Because they had almost no assets beyond the building, they agreed to sell it to allow them to separate their finances. This, again, was a harvest precipitated by an outside force -- and one which no one would have predicted even a year earlier.

From a personal standpoint, this was a very unhappy outcome. (I won't argue that couples or siblings shouldn't work together, but I will argue that couples should make sure to take time away from work together, and that siblings should take some time apart!) There was a small silver lining to this cloud, however. As a results of (1) the Leonards' added value, and (2) a sharp increase in the value of rental properties in the Boston area, both Charlie Leonard and his former wife wound up with a good nest egg with which to start their individual lives over again.

Novelists often report that their characters get away from them -- that they refuse to stay within the roles set out for them in the plot outline. I confess that Charlie Leonard got away from me. I didn't expect that we'd have a divorce at the end of our harvesting chapter. But the Leonards seemed determined to make the point that despite hard work and the best of plans, things rarely turn out as they're supposed to -- and so I let them make that point. I'm reminded of a play I saw recently, in which one of the characters asks the others what makes the gods laugh.

"People who make plans," came the response.

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