Change is the only real constant in life – Part 2

By Prof. Enrique Soriano

Despite the tumultuous political landscape in the country in the 1980’s, Jack (not his real name) went on to construct a small 2-story apartment building in a 200 sqm property that he inherited from his parents. After successfully renting the rooms, he bought a bigger property that was just a stone’s throw away from a well-known university. He went on to complete a 5-story dorm type building and in just a little over 2 months after completing construction, the 100-bed project was leased out. Jack saw the potential windfall, abandoned some of his other businesses, “most of them were losing money anyway” as he puts it and decided to concentrate in real estate on a full-time basis. He was certain that putting up buildings was his calling and was determined to expand toward bigger projects.

Little did he know that real estate development would form the foundation for his highly successful and lucrative group of companies two decades later.

With a string of successful pocket developments and a healthy cash flow, Jack was ready to venture into big ticket projects. In 1993, he ventured into his first major real estate development: a 12-storey residential and commercial development in Manila. After a string of successes save for the 1997 Asian financial crisis, where he unloaded some of his assets to pay off some debts, Jack navigated his way through many successful projects by prudently managing his cash flow. For someone who never completed college, he was able to grow his wealth with a mixed portfolio of residential, commercial and office buildings and a food franchise business that were conveniently housed in his developments. His finance manager estimates his net worth at more than P10 billion (US$200Million).

The Fateful Event: Heart Attack

Fast forward 30 years later, a day after inaugurating a sales office in one of his high-rise developments, he suffered a heart attack. Jack recounted the day he suddenly clutched his chest after he felt tightness that radiated to the base of his neck, jaw and his left arm. He recalled that fateful day, “If not for the quick action by my staff in bringing me to the hospital, I would have died.” The doctors were quick to conclude that Jack was a “walking time bomb”, that unless he makes a 180-degree changed in his lifestyle, he will not live to enjoy his grandchildren. The health scare triggered a lot of changes and Jack realized that he had to do something to live longer, enjoy the fruits of his hard-earned labor and ensure the continuity of the family business.

With the advice of his personal accountant and lawyer, he was asked if he was ready to place all his real estate assets in a holding corporation and initiate the distribution of the shares to his wife and five children. Most of his assets are under his name but in several corporations, Jack held the majority interest. In these land companies, his stake went even as high as 80% to 90% and some of the corporations were created when the children were still minors so the other incorporators were relatives and close friends.

Typical Founder Behaviour: Reluctant and Unprepared  

To formalize the documentation process of distributing shares to the family members, Jack was asked by his lawyer the distribution percentages. He would always respond that all he ever wanted was for his children to have equal shares and his wife down to a minimal interest but when it came to the details (how much equity will he and his wife retain, the actual shares that he intends to pass on to his children, what to do with the other incorporators, etc.), he would always defer his decision. For Jack, his simple wish and aspiration is for his children to work together, respect each other, be united and maintain their future ownership in a real estate company exclusively owned by the family. Beyond that mindset, he was clueless on how to proceed with the distribution.

It was obvious that Jack was procrastinating but it was also clear that he was unprepared to hand over power, unsure of how much to distribute to the family members, unclear where the ownership is headed but cognizant of the dangers of “doing nothing”.