Family office investing trends - EY - United States

1 At Ernst & Young Capital Advisors, LLC (EYCA), we regularly meet with single Family offices to discuss their wealth management approach, investment focus and opportunities in the marketplace. In these conversations, we see an array of real estate allocation strategies, asset classes and investment structures because real estate is a bedrock asset in the wealth preservation and wealth creation strategy for ultra-high net worth individuals and Family offices. While allocations to the real estate asset class have been increasing, little is known about the nature of Family office holdings and the collaborative investment clubs that are being privately formed. To provide some insight in this area and the offer to connect interested families, we want to share a few thoughts on Family offices investing in US real office investing trendsEY provides an extensive range of tax, audit, consulting and other financial services to single Family offices as a part of its Family office advisory services practiceTypes of Family office investorsGenerally, we see two different types of Family offices that invest in real estate.

2 The first type is the Family that has generated the majority of its wealth in real estate and is an active investor. These Family offices continue to invest at the general partner (GP) level and sometimes seek outside equity partners. The second type is the Family that has created significant wealth outside of real estate and allocates capital to the space as a passive investor. Typically, this type of investor will invest either in funds, real estate investment trusts (REITs) or directly in an asset as a limited partner (LP) via a joint venture structure. When investing as an LP, the Family office relies on the GP s expertise to generate a return. In both cases, families are looking more and more into club transactions with other do Family offices invest together as a club?

3 According to Jonathan Carroll, Executive Director, Ernst & Young LLP's Family office Advisory practice, stable and value-add real estate can be a safe haven for families concerned about volatility in the marketplace. He suggests that families are focused on risk management as well as wealth preservation and creation and that investment in US real estate is a natural part of a diversified office investing trends A publication by Ernst & Young Capital Advisors, LLCF amily offices invest together in US real estateErnst & Young LLP provides an extensive range of tax, audit, consulting and other financial services to single Family offices as a part of its Family office Advisory office investing trends Purchase of REIT units/shares (both traded and non-traded, public and private )Direct Join t ventures The most common way we see Family offices direct invest is through a joint venture with an operating partner.

4 This structure is a partnership between two or more parties: 1) limited partners groups that have capital they wish to deploy in real estate, but they need assistance identifying and acquiring it and 2) general partners operators that possess experience in acquiring and operating real estate and seek capital to execute their strategy. Deals that are capitalized with this structure involve the LP putting up the majority of the equity, typically 90%, with the GP putting up the remaining 10%. Equity percentages, economic terms and governance vary by deal. 100% fee simple ownership Another way that a Family office can direct invest is by purchasing 100% fee simple ownership of a real estate asset. These transactions tend to be trophy or stabilized assets that have a core return profile.

5 However, we do see the full range of return requirements from core to opportunistic, including build-to-core strategies. Some Family offices will manage the property themselves or may outsource to a third party. Asset management can be done in-house by an investment management estate terms: core through opportunistic?Real estate investors typically use different terms to categorize investments that range from core to opportunistic as a function of risk and return:Core: Generally stabilized, low-leverage trophy properties located in strong, primary locations of major metropolitan areas with returns of roughly 6% to 10% to : Generally a relatively stable asset with either rollover risk or risk from leasing some vacant space for instance. Returns can vary, but are generally around 10% to 13%.

6 Value-added: Investments can be found in primary, secondary or tertiary real estate markets where the sponsor is seeking to add value by making some kind of change to the property, such as changing a largely vacant building to a higher occupancy or making significant repairs and improvements. Returns are roughly between 13% and 16%. Many of my Family office clients are looking for other Family offices to partner with on investments. What is most important to them is connecting with others who share their values and approach to investing . The enhanced due diligence, exposure to new ideas and research, and the shared vision approach are key benefits that families gain from investing with other families. Family offices will club with other Family offices to leverage the experience of other families in the club, especially when their own experience with the asset class is limited.

7 According to Karen Ward, US Head of Real Estate Investment Banking for EYCA: Sometimes Family offices prefer to write a smaller check and club with other Family offices to limit concentration and de-risk the investment, whether filling the LP equity need or co- investing with the GP. Throughout EY, we work with families that are solving for investment needs, particularly created via liquidity events. They club resources so they don t have to bet the farm on a single investment. For example, the Real Estate Investment Banking team of EYCA advised a West Coast Family that sold its business and invested a portion of the proceeds into a value-add office fund focused on major technology tenants. This Family chose to invest in a fund format to gain real estate knowledge and stay out of the day-to-day decision-making.

8 In another case, a large Midwest Family office chose to take a hybrid GP/LP position with a large private apartment owner, where it is investing alongside this proven operator, shoulder-to-shoulder in the GP and selectively clubbing on the larger LP positions in order to allocate funds for a long-term hold and at the same time capture current yield. We truly value our relationship with EY. What started as a relationship built around tax services has blossomed into a multi-tiered strategic approach to our investment business. Our platform has been introduced to multiple real estate owner/operators as well as other Family offices that could develop into future deal partners West Coast-based Family office The how There are two primary ways Family offices invest as a club or on their own in real estate.

9 Direct Joint ventures with an operating partner 100% fee simple ownership Purchase of a real estate platform or company that owns and operates real estateIndirect Investment in private equity fundsRiskReturnValue-addOpportunisticCor eCore-plusUS Real Estate Investment Banking teamKaren Ward | Managing Director Head of US Real Estate Investment BankingErnst & Young Capital Advisors, LLC+1 704 292 4029 Eric Entringer | Vice PresidentErnst & Young Capital Advisors, LLCB rian Miller | Vice PresidentErnst & Young Capital Advisors, LLC Josh Wilkes | PresidentErnst & Young Capital Advisors, LLCA dditional contributions from Ernst & Young LLPJ onathan Carroll | Director private Client Services Family office Advisory practice+1 561 955 8240 Opportunistic: These are the most speculative of investments, including highly distressed properties, new development projects or properties in emerging markets.

10 In many cases, opportunistic investments are generating little to no current cash flow, with much of the return generated on the back end, in the form of future rental income or the sale or refinancing of the asset. Overall returns are generally 16% or of platform or companyThe last method of direct investment is the purchase of a real estate platform or operating company. These investments can occur via minority, control or 100% positions. For instance, EYCA is currently advising an international Family office that has substantial real estate investing experience and offers the following statement: We are seeking minority positions in US real estate operating companies that develop and acquire asset classes that are outside of our existing investment focus. We can leverage our UK capital to fund companies in sectors like student housing or industrial sectors that we think are prime for growth in the US.