Decades of gains, one big decision: Next steps for legacy CRE owners - Harrison Klein

A significant portion of real estate in the Greater Boston area hasn’t sold since the 1990s. These owners often purchased at low prices coming out of the Savings and Loan Crisis. They rode a thirty plus year bull market for real estate as our city transformed. Apartments that rented for $300 in 1992 now rent for $3,000! The result: a $100,000 down payment in 1991 delivered a $10 million equity position in 2026. What is the next step for these folks who’ve spent a lifetime owning and operating these buildings? This is the exact question we help Baby Boomer owners answer every day.

The great wealth transfer between Boomers and Millennials is underway. In this article, I’ll explore some common misconceptions legacy owners have and best practices.

“I’m going to leave it to my kids and they’ll run it.” I hear this all the time from owners. Unfortunately, when I talk to their adult children, they often have no interest in chasing tenants. The building that is the right fit for you may not be the right fit for your children. Fortunately, a 1031 exchange can provide an option to convert into real estate your children may appreciate and continue owning after you pass. Perhaps they’d love a vacation rental or a four-tenant retail plaza, as opposed to a fifty-tenant office building. 1031s and refinancing strategies can also help you set your children up now instead of later in their lives. With housing out of reach for most millennials, helping your children buy a home now may be more useful than them inheriting millions in their 50s or 60s.

“My kids can sell it when I’m dead.” On its face, this is good tax planning. Your children will receive a step-up in basis, reducing the tax liability. Unfortunately, elderly owners often lose the ability to effectively operate a building years before they pass away. Good property management can be a solution to this situation. We’ve had success installing professional property management, where the relationship transitions to your children or other heirs as you age. If going this route, it’s important to do so while the building is still running strong and ownership is in a position to make sound decisions.

“This is the building I know how to run. I’ve owned it for thirty years. Look how well it’s treated me.” I’m responsible for finding the right buyer for every building we list. Sometimes, I notice the opposite: ownership that is no longer a fit for something they already own. A single-tenant building with a short-term lease may represent an opportunity for a young, sophisticated investor who has the resources to re-lease the building. Unfortunately, it’s often an unreasonable risk for a 70-year-old retiree who is living off that income. If the tenant vacates, they may be forced to sell the building. The same holds true for a difficult-to-run, older building when the owner decides to spend six months in Florida.

The building that made sense for the past thirty years may not make sense anymore. Fortunately, a 1031 exchange allows you to move your equity into the right building without paying capital gains taxes.

The critical part is making sure you understand the risk/return profile of each property and buy an appropriate investment. Single-tenant triple-net leased (STNL) properties are an ideal fit for those looking for cash flow with zero responsibility and minimal risk. Others buy vacation rentals or multi-tenant buildings in Florida for tax advantages. A terrible investment is worse than paying the taxes, but understanding that your goals are different at 70 than they were at 40 is key. Often, the goal is to minimize risk, simplify management, and generate 5–6% cash flow.

Real estate has turned many ordinary people into multi-millionaires. Your children could owe hundreds of thousands in Massachusetts estate taxes when they inherit your building. Currently, there is an exemption on the first $2 million in an estate, with a sliding scale above that from 7.2% to 16%. This represents a significant cost, especially if most of the estate consists of illiquid real estate that you intend for your heirs to keep. A good estate planning attorney will charge around $10,000 to properly structure your will, trusts, and estate plans. If you have significant assets, then the basic will you drafted twenty years ago isn’t enough.

The growth New England has seen over the past thirty years has created tremendous wealth for real estate owners. Preserving that wealth for generations to come requires a different mindset than the one that created it. Proactive planning will ensure the assets that took care of you in the past continue to work for you in the future.

Harrison Klein is managing director, investments at The Klein Group of Marcus & Millichap, Boston, Mass.