Turn your family office into a family bank
Strategically borrowing through your family office can help your family meet distinct goals in flexible, discreet ways.
A family in Texas recently found itself in a financial dilemma. The patriarch wanted to support a new business proposal his granddaughter had brought to him. The idea: To buy a group of local coffee franchises and rebrand them as a regional mini-chain. She had done her homework and composed a compelling pitchbook and a smart marketing plan for the investment — one that reminded the grandfather of some of his own youthful ventures.
However, the family’s extensive holdings included private equity, hedge funds and other long-term investments. And, at the same time, the granddaughter was not the only one interested in buying the coffee shops; swift and definitive offers were needed to outbid the other prospective buyers. For someone with little business experience, the time and paperwork involved in seeking a traditional loan was likely to be enormous. What’s more, convincing a bank of the business’s viability was not a certainty. The result might well have been a lost opportunity.
Luckily, the patriarch was ready for a situation like this. He had already spoken with the CFO of his family office and his private client advisor to prepare in case a family member had a financing need. Together, with a structured credit executive, they had crafted a solution in the form of a Private Client Line to a family office entity that would be on standby for the day it was needed. By doing this advance planning, the patriarch, through the family office vehicle, was able to quickly fund a loan under the Private Client Line which could be lent to the granddaughter — at terms beneficial to both.
Credit at your convenience
“Accessing sophisticated credit and banking solutions can provide you with a solid footing to nimbly achieve your goals,” says Elizabeth Thiessen, managing director and head of Family Office Solutions at Bank of America Private Bank. “That’s the case whether you have an immediate need, are looking to have a solution in your back pocket or want to use credit to achieve a long-term goal.”
When you arrange a Private Client Line backed by the assets of your family office, you benefit not only from the flexibility it offers, but also from a greater level of discretion. In addition, along with smoothing out cash flow or helping with large purchases, it can satisfy funding needs – including unexpected ones.
What is a Private Client Line?
A Private Client Line is an uncommitted line of credit offered through the Bank of America Private Bank that is secured by marketable securities held at the Bank or its affiliates. The Private Client Line has no set maturity date and is payable on demand by the Bank. The Private Client Line’s application process and pricing is designed to be competitive.
Introducing the next generation to investing
In one family, the parents wanted each of their four young adult children to have funds to invest so that they could pursue their personal interests and passions. They were considering $3 million for each child but didn’t want to set aside that much cash when the investments might not be made for years — or to leave themselves open to a tax bill triggered by a generational money transfer.
Their private client advisor suggested a Private Client Line to a family office entity secured by marketable securities of the family office. Opening a $20 million credit line, they earmarked $12 million for intra-family loans. One of the children wanted to invest in a limited partnership focused on sustainability initiatives, which would entail a multimillion-dollar, multi-year commitment. The decision makers within the family office counseled the young investor, vetting the offering memorandum and investment manager, before setting the terms of the funds’ dispersal, drawing on the Private Client Line to on-lend the funds to the next generation.
Funding for yachts, jets, and much more
Take the example of a prominent family in San Francisco who sought to construct a new yacht for the family to enjoy time together. Because the outlay was too large to handle with cash reserves, the matriarch was considering selling long-held equity in several Silicon Valley businesses. But they weren’t assets she was eager to sell. What’s more, the sale would have led to additional complications and — because of capital gains — an even larger tax burden.
She and the head of her family office discussed the scenario with her private client advisor, who introduced them to a credit executive at Bank of America with deep experience financing yachts, aircrafts, recreational real estate, and fine art. Together, they structured a multi-year yacht loan with drawdowns to match the payment milestone requirements under the yacht construction contract. “Credit is a convenience but also a strategic tool, which when used thoughtfully, can help advance the family’s goals,” notes Thiessen.
Managing family finances like a corporation
“Think of the credit options available to your family office as ways to bring large-company scale and efficiency together to address your family's needs,” says Howard Weiss, family office consultant with Family Office Solutions at Bank of America Private Bank. “You can manage your financial life using the same structures that companies use to their benefit.”
For instance, to help pay and track the expenses of the operations of the pied-a-terre in the city, the house on the cape, and the main residence where the kids grew up and the Boston-area clan gathers, a family office CFO established a commercial credit card with Bank of America. That allowed each home’s manager, its chef and select members of the staff to pay for incidentals and other expenses for the house. In turn, the spending could be tracked and categorized appropriately. Additional cards were provided to the matriarch’s driver, house manager and personal assistant. The family office could track the funds, as well as the lines of credit, through backend data aggregation from Bank of America Private Bank.
Getting ahead of family needs
When you plan ahead, you can be ready the moment a need arrives. For instance, in conjunction with their private client advisor and family office consultant, a family held the annual meeting with its constituents to learn about any expected needs in the upcoming year. So, when the time arrived, a credit facility backed by the assets of the family office was ready to fund the projects.
Weighing the benefits against the risks
When considering borrowing, it is important to factor in financing costs, the possibility of collateral calls during bouts of market volatility, as well as other covenants and restrictions on the collateral. Plus, if you plan to lend funds to family members, it is important to seek independent advice on tax and other issues, as well as establishing clear protocols on interest and repayment.
“Together, with your advisors, we can help you think through how credit, used strategically, might help your family office achieve its short- or long-term objectives,” says Thiessen.
For more insights on best practices around strategically borrowing through your family office, talk to your family office solutions consultant at Bank of America.
The Private Client Line is offered by Bank of America Private Bank and not by or through Merrill Lynch, Pierce, Fenner & Smith Incorporated. A decrease in the market value of the pledged securities and other investments may require the deposit of additional funds or the liquidation of some or all of the pledged securities and assets. The Private Client Line is uncommitted, and a complete description of the loan terms can be found within your loan agreement.
Please note the following risks associated with securities-based loans:
- Securities-based loans and using stock as collateral involve a high degree of risk. The investor should read the loan agreement carefully so he or she understands his or her obligations.
- Market conditions can magnify any potential loss. If the market turns against the investor, he or she may be required to deposit additional securities and/or cash in the account.
- The securities in the account may be sold in the event that the collateral is deemed insufficient for the level of borrowing, and the bank can sell investors’ securities without contacting them.
- Some or all of the securities pledged as collateral may be sold at prices higher than what it initially cost the investor to acquire the securities. If that happens, the investor may suffer adverse tax consequences. The investor should consult a tax advisor in order to fully understand the tax implications associated with pledging securities as loan collateral.
Credit facilities are provided by Bank of America, N.A., Member FDIC, its subsidiaries or other bank subsidiaries of Bank of America Corporation, each an Equal Opportunity Lender. All loans and securities collateral are subject to credit approval. Securities-based financing involves special risks and is not for everyone. When considering a securities-based loan, consideration should be given to individual requirements, portfolio composition and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. The securities or other assets in any collateral account may be sold to meet a collateral call as provided in the definitive loan documents and the client is not entitled to choose which securities or other assets will be sold. The client can lose more funds than deposited in such collateral account. A complete description of the loan terms will be found in the individual credit facility documentation and agreements. Clients should consult their own independent tax and legal advisors. Certain securities-based loan facilities may require a brokerage account at Merrill Lynch, Pierce, Fenner & Smith Incorporated.
This product may not be appropriate for all clients. Bank of America Private Bank offers a wide variety of credit products to help meet client needs. Neither Bank of America Private Bank nor any of its affiliates or advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Credit and collateral are subject to approval. Terms and conditions apply. Programs, rates, terms and conditions are subject to change without notice. Equal Housing Lender.
Banking products are provided by Bank of America, N.A., Member FDIC. Investment products:
Are Not FDIC Insured
Are Not Bank Guaranteed
May Lose Value