For many family office clients, direct investment(s) in real estate investment is nearly always a part of the portfolio. In fact, the FINTRX Private Wealth Data Report, published in May, identified real estate as a favored asset class among the 150 new family offices added to their database. Their report found that nearly 70% of family offices preferred real estate investment.

While real estate is an attractive asset class to own, such holdings may bring additional risk to the family– from a physical property / tangible perspective, as well as potential liability or the intangible. This brings additional risk management considerations for the family, and planning opportunities for their advisors.

The world has seen unprecedented extreme weather and climate disasters globally. Last year, the United States experienced seventeen separate $1 billion dollar plus weather events. Extreme weather, combined with higher inflation and other global factors, has created a catastrophe for the property and casualty insurance industry. Arguably, the industry is in its hardest market in a generation. In times of a hard market cycle, insurance companies generally raise prices on consumers, restrict what is deemed insurable risk, and tighten contractual terms and conditions.

This means that some direct real estate will now require creative thinking and different solutions to insure and protect the investment. As a first step, clients may increase their retention of the risk to offset the costs of insurance. For those clients with higher risk tolerance and adequate liquidity, consider self-insuring entirely against specific causes of loss such as flood or wind. For the advisor, zooming out beyond the traditional parameters of insurance is critical for protecting the family’s assets more holistically. This means looking at the entire real estate portfolio and crafting strategies to protect the portfolio, versus procuring insurance asset by asset.


Increasingly, there is a widening gap between a client’s liability limit procured versus the ultimate settlement amount.

For real estate investors nationally, this trend of holding less liability insurance is continuing to decline. At the same time, the trend of larger verdicts (in excess of $10MM) increases due to a number of factors, including trial advertising, third parties funding litigation as well as social inflation.

In addition to purchasing liability insurance to transfer the risk to an insurer, better risk management on the front end of real estate investors is critical.

Consider contractual risk transfer. For many Family Office clients, it is not uncommon for paid contractors to be working on their real estate assets, on a daily or weekly basis. One of the inherent challenges with managing multiple contractors on a property is the inconsistent contracts the client signs when hiring different vendors.

When contractual language is inconsistent between contractors, and generally written in favor of the contractor, the family is at greater risk of liability or loss should a negative event arise. To mitigate this risk, when possible, the client’s legal advisors should review all contracts, and ideally, draft one uniform contract for all paid contractors who perform work on the property. As an added level of protection, the family office may consider a separate LLC to hire and pay these contractors, to further shield the family from direct exposure.

Clients are also investing in development projects, by contributing capital but not managing the process. This adds a potential layer of exposure when the insurance program is managed elsewhere and implemented by a limited partner.

Delayed completion dates for development opportunities are not uncommon, but beyond the headache and additional costs of said delays, additional risk to the family may arise if the insurance is not properly structured to account for extended timelines.

As mentioned previously, it is important to examine the contractual language before the family invests in the project. The industry standard AIA contract is often considered the norm. However, it is generally written heavily in favor of all those who work on the project such as architects, contractors, and engineers. This could be an area of exposure for the family office as investor in the project and may leave the developer open to exposure.

Planning and coordination of contractual risk transfer alongside insurance solutions is critical for clients to safeguard their investment and insurability.

An additional risk to consider with family offices in investing in real estate is the rise in cyber-attacks and thus, the need for digital security. Not surprisingly, family offices make for extremely attractive targets for the magnitude of wealth being managed, and for the interconnected nature of the family’s personal dealings with the office operations. Cyber insurance exists as a backstop to digital security risk, but it is crucial for family offices to have sound risk management measures in place from the outset.

When investing in real estate, proper design on the properties to limit network access, prevent sensitive information from being downloaded externally, are paramount. Simple strategies such as the need for ultra secure passcodes can be very effective.

Implementing and maintaining a digital security strategy will minimize risk and potential disruption to the family, property, or operations.

Investments in real estate will remain attractive, and even more so with proper planning for the present and emerging risks of this asset class.


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