Unique hidden money in distressed hospitality

May 09, 2023
 

Episode 7

Mike Pine: [00:00:00] Welcome to this episode of The Hidden Money Podcast, where Kevin and I are super excited to have our good friend, awesome client, Josh McCallen from Accountable Equity, join us. I think he's got incredible experience. He started off in the hospitality industry at 14 years old washing dishes, and he learned that industry incredibly well and is very successful.

He's been married for 24 years. He has 10 kids. So I don't know how you find hidden money with 10 children, but we're looking forward to see how it goes. Josh, thank you so much for joining us. We really appreciate you being here.

Josh McCallen: absolute pleasure to be part of the pioneering show you guys are doing. Kevin, great to meet you again. And Mike, thanks for all this wonderful time together. We get to have.

Kevin Schneider: Yeah, and I think the hidden money is in the tax credits for those kids. It's just those tax credits aren't gonna pay the bills that they put on you. But it's something, it's not a good tax strategy. You just get kids. But Josh, we're, yeah, we're excited to have you and I'm just really excited to hear about [00:01:00] your backstory.

As Mike said, you started in the hospitality business at the age of 14 washing dishes, and here you are running some hospitality ventures yourself. So give us a little bit of your backstory and what led you to where you are.

Josh McCallen: original story is one of. I think it's a story that a lot of people resonate with where you up with a scrappy kind of attitude. Grew up without a father at home, and just a lot of work. A lot. I enjoyed work, was good at work and started young, 12 years old as a paper boy, which I don't even know if concept even works anymore unless you're like over 40 or 50.

People don't even have any idea what it was like to be a paperboy back then. It was like, it was pure entrepreneurialism back then. Man, they didn't even give you a paycheck. You had to go get it from the neighbors. It was the best. But, are right. I Dish washing at 14 and I do like fast paced work and hard work.

Fast forward went down a different path though. I thought I was gonna be, I always loved business, always worked. But I had a a conversion and I really wanted to go into ministry actually in college. [00:02:00] So I studied how to teach because I thought you be a teacher in ministry capacity.

Teach, taught high school, taught civics and economics, and even theology. after a year of that, I realized different personalities, different strokes, different folks. It might not have been my calling, though I love to teach the structured environment of trying to negotiate adolescent people's attitudes and all that.

I guess I thought I could teach them with motivation, but that was not how young people wanna be taught. They, different model. Like a teaching adults like we get to do today, which is super awesome. Forward that then what happened, and I don't share this much on shows.

This is

the hidden money. We had this strategy to find hidden money, even back then, and some of the hidden money back then is you work for a university to get your master's degree, right? That's free money because they paid me every day I got a house, meaning I've rented a house or bought a house and then I got a free education.

So I ended up getting my master's in business that way and [00:03:00] during that time I got this cool opportunity to live in Europe because the campuses. I got all these promotions and then eventually they said, do you wanna live in Europe? So I lived in Europe for four years and Melanie and I changed a lot during those four years.

It was the early two thousands right after 11 attacks. But spent so many years without really being an American culture four years. That us to really have say it changed our perspective on life. We in beautiful country of Austria and for us Americans.

It's not Australia, it's Austria. It's where the Von Trapps used to live, and that hills are always singing and they're fully alive with the sound of music. So we lived in one of those villages. You would've thought Maria von Trapp sang in the backyard. It was so beautiful. And it was Village Life guys. It was like you walked to, some food groceries.

You, you to do events, you can go to three bars and restaurants. It was awesome. And we had a few children there. got back to America. We had this dream to get into real estate, and the way we did it was through lending. So [00:04:00] similar, again, trying to find hidden money. Even in the strategies we came up with, we said I don't have money.

I'm not wealthy. You get into real estate development, which was a dream since I was a boy. And got into lending and through lending met developers because we were intentional and eventually partnered with a family office. And boom, that, that changed my trajectory. Ended up building luxury homes on the water during the boom of 0 8, 0 6, 0 7, and ended in the crash were building speculative houses, if you know what that means.

So fix and flips. Buyer. And we're building them at five to 10 million out sales. So crazy nice homes in the early two thousands on the water and no buyer. So totally risky. But would sell 'em. We'd an entrepreneur 

and ended up rejoining that same family office a few years later and took over their hospitality defunct assets. And so I've never known hospitality to be easy. It's always been distressed asset [00:05:00] mega cash flow. And so that's my, life in a nutshell.

Mike Pine: Hospitality and real estate in general, there's been a lot of pressure with the debt market. We're seeing a lot of people who bought on bridges that are now really toughen it out and they're having to either do capital calls or rework stuff.

And a lot of people are wondering, especially in the syndication world and real estate world how does this make sense? How do we continue to go forward on here? What are some ideas that you've found and developed in this area, in this time and age? 

Josh McCallen: Could not be happier. You're asking the best question right off the bat. Break your question into two parts and the listeners can enjoy this. This is a deep dive into how a lot of commercial real estate works.

Changes I'm gonna go deep, if you don't mind for one 

second. There are different food groups in commercial real estate, friends and family who are listening. And the, I think it's the three or four main food groups of commercial real estate, which would be office. Then there's residential, multi-family, then there's industrial and I [00:06:00] believe there's also retail.

Those are the four main food groups. Everything else you and I know, self storage, hospitality types of real estate, use, other things. Those do not fall in the main four food groups. And so do actually have a different lenders. There's less lenders in this world there is in the core four.

Actually something that most people didn't know and I didn't know until the debt market's changed, and this actually is part of our new thesis as we grow the company. Over the next few years, we have always thrived in distressed hospitality. It's basically the only thing I've ever known is to buy things that are either about to go bankrupt, did go bankrupt, struggling and failing physically in disrepair and have a failed business plan. That's what I like to buy. So boy, am I hungry for more in the next few years? I think we're going to find a ton to buy over the next few years, but it is gonna be related to the [00:07:00] debt.

You're absolutely right, Mike. Because when the normal hotel hospitality world, which is Holiday Inn, Hilton's, Marriott's, At the highest end, they're doing fine. It's those middle tier older buildings that are struggling because required by their brand. Now, I don't, we don't build branded hotels.

We get to have a little freedom to do better than branded hotels. Branded hotels are the holiday ends of Hiltons whatever. require the owner by contract to reinvest millions of dollars every five to seven years. It's called a property improvement 

plan, and there's not really been a major problem with that strategy for a long time until the pandemic.

So since the pandemic travel got destroyed, especially those mid-market, low end hotels got destroyed during the pandemic and they were. The lenders, there's less of 'em. I always joke, I do not have the true statistic, but it feels like this. For every [00:08:00] hundred lenders, there were pre pandemic that wanted to talk to us.

It feels like there's 30 now, 40. There's a lot less than half as many lenders, so that means you have to be a dang good business. For the fewer lenders to want to continue to lend to you. And when you're the average holiday in express, on the side of the highway and you're not doing great, there's less and less lenders that are willing to lend to you, and that's gonna have a ripple effect.

And we hope to be beneficiaries as a investment group to buy, not necessarily hot in expresses, but damage, the collateral damage that will happen to a lot of different properties. I went a little too deep there, so I'm gonna take a deep breath and pause and let you guys grill me.

Kevin Schneider: No, that's good. No I think that's really good. And I think what stuck out to me when you're explaining your business plan and business models, finding those distressed properties. So are you, walk me through on our listeners, through the strategy behind finding something broken [00:09:00] and repairing it into something profitable.

Is that kind of your passion or is that financially driven because A lot of our listeners may not be going to buy hotels and maybe they can implement this strategy in any way, shape or form, finding a foreclosed single family home or something like that. Is there more hidden money in finding those distressed properties versus something already tried true operating and running and you gotta probably buy it at a premium, there's not a lot of headache or work on that end.

Josh McCallen: Yep right. And we're all built for struggles and different opportunities. I always say I can't wait until we executing on easier business plans. Ours are the major wealth building strategies, which means they're harder to do, but you do have to have a calling.

So there's two parts of your answer. There's this deeply hospitality focused calling, and there's just great business metrics. And so I'm gonna start with the business metrics. 

The answer to your question is, If you were to look at 10 distressed hotels or hospitality assets tomorrow, The thing I would look at now, this would translate this to your [00:10:00] industry, but going to stay in the world I'm in.

We have a deep expertise in turning around resort quality properties. Now our super sweet spot. Also have deep expertise in construction, several hundred million in managed construction. So in the future, we're gonna open up another wing of company, and we're gonna buy more and more distressed motels and hotels and turn 'em into apartments. New venture going out over the next year and a half. But our core everyday operational skill is we for one thing, I actually wrote a small book about this. You can find it on our website. Resort rehab, which is the 10 steps, is we do want to find a natural reason to reinvest in that property.

So it can't just be cheap. It has to have a natural, compelling reason why we can build a business plan around. So for example, I'll give you one that many listeners who listen to your show have maybe heard me talk about. It's legendary property called Reno Winery. It's outside of it's New Jersey outside of Manhattan, [00:11:00] and it was bankrupt, but we bought it because it had 240 acres, a beautiful golf course hotel that needed love.

A winery that needed love, but a historic brand that had never its door since 1864. So I thought, wow. There's a lot of natural goodness there. And you're like, it actually though it's bankrupt today. It kept open all those years. There's something right about it, so when we ended up realizing the fastest way to pay our investors capital back was through weddings.

So we took this natural asset, this asset that had natural physical nature, like a lot of real estate, a few amenities we thought were hard to rebuild. We brought it at 20% of what it would cost to rebuild it. So we knew we were in at a good basis. And then we said all of those nice things Josh said are just flowery words.

How are we gonna pay the investors back? And how are we gonna pay the families that work with us at salary? And that was weddings. [00:12:00] And so over the years, we had become pretty good at weddings at our other resorts, and I realized the explosive opportunity we were buying, if we could deliver a gorgeous property and service based in love, those two dimensions.

Overlaid with a culture of sales. Can transform these resorts that we buy, and those are the things we look for. Does this resort have an immediate way to turn it around using the skill of selling and our deep expertise in selling weddings? Now we sell corporate events. We sell outings like the best in the country.

Now we're selling the jebe out of things. But at first it was weddings. So our business strategy. Sure it's cheap, but if it's cheap and you can't make any money, it's worthless. If you can find a natural reason that everybody's gonna come back to this property, it's worth your love and sweat and tears.

Mike Pine: That's awesome. You said when you were talking about how you in Reno, how you actually decided, it seemed like it was almost a [00:13:00] gut feeling where you knew that it had this incredible. Brand and untapped brand, how much is it when you're picking and trying to find hidden money, distressed assets, how much of that is gut versus how much is it on paper or underwriting?

Josh McCallen: Sure, great question. It's probably 50 50, but there was a little more than 50% knowledge And so one cool thing, part of our underwriting was. Please show me all the inquiries for events in the last year. And I had just finished my partnership in the family office, so we had become a nationally ranked regional, but regional.

We had been in Wall Street Journal and USA Today for running really great resorts in the area. The same area that I bought these properties originally. And dabbled in weddings. From doing, $0 in weddings and within two and a half years we were doing 5 million annual revenue, brand new revenue, just because we did weddings.

And I was like, wow, weddings are powerful. You know what I mean? It was like, that's a big revenue change. So that was my memory. Then I get to this [00:14:00] property, so my due diligence starts with the question about wedding leads. How many wedding leads are you getting? And now let's do the contrast. I had just finished a partnership where we were doing pretty good on weddings, and the most we could get in the year was 500 inquiries, 500 to 600 inquiries.

And by the way, I thought that was awesome. Women and to book, but you have to talk 'em into it and, you, end up closing a hundred maybe. What? We're happening here. Here, there was 795, they were doing zero marketing and they were bankrupt. It said it right on the internet, like it was a bankrupt property owned by a bank.

So I'm like, how the hell did they get, how the heck did they get 795 women to put their name on a list at a bankrupt property? I'm like, oh my gosh. It's the natural. It's the natural compelling nature of a winery. 

The proximity major metropolises. There was natural elements that were drawing them to this property that I didn't have to create. So once we co-created more natural elements, like better buildings, better service, better [00:15:00] sales skills, then we would be juggernaut today. Suffice to say 6,000 women asked to have their wedding here last year. Now that's astronomical, probably one of the highest demands in the country at this one property.

We obviously did not satisfy 6,000 people, and not 6,000 people came on tours, but over a thousand came on tours. That means they walked to the property, met with the salesperson, and we sold 362 for this year. Which you're like, how the heck can you do 362? And scale would re it. Would you gotta visit the website to B to understand the scale?

We are the like we're really designed well for weddings. Like we have a botanical gardens, five wedding venues. We have a whole staff that makes sure that one bride never sees another bride. It's absolutely a juggernaut.

So our whole idea is we're building things that are juggernauts for a long time. We're not building them to flip 'em out. We're building the one with quality so that they do maintain themselves [00:16:00] well over time with a certain perennial look and style, you'll notice our styles actually hold up to test of time.

Some of them are inherited from Europe. When we lived there, you'll, if you look on our website accountableequity.com, you'll see all our portfolio and you'll be like, geez, these things look gorgeous. Because we're using classical architecture that's has already stood the test of time for hundreds of years.

I believe that there's other ways they can add levers. The more levers you create that force NOI then create new valuation models for appraisers.

Because appraisers, and this is us going deep, folks, when you look at commercial projects, the appraiser's gonna come out unlike a house where it's valued at next door, neighbor's house value in, estate play, a lot of times it's based on a cash flow model or discounted cash flow model.

So if that self storage person figured out two more things to charge their guest for their. They will, their value will be higher than the neighboring self-storage place because they're throwing off more profit. And so these levers can actually [00:17:00] generate new valuation. So the demonstration of that is I, we've now done six of these major turnarounds in 10 years.

Each of them, we bought at a fraction of their basis. That the lowest forced depreciation was a three to four times within four years. So changed the value that much and magic. We just follow the way the appraiser appraises.

Mike Pine: How do you define or explain what forced appreciation is compared to just normal appreciation?

Josh McCallen: Thank you. Yeah, thank you. So normal appreciation probably flows with inflation or whatever's going on in the market. I've had to define normal appreciation, but I guess that's what happens. Forced appreciations when you change the profitability of the Go Company, award the business or this, in this case, we're heavily real estate driven, the appraisers come in and they value us.

Based on the what the, they do three appraisals, typically three modeling models within that big document called an appraisal. One is there is comps, [00:18:00] like a house, and they put that out there. Then they say real estate and building value, like a replacement value. Then they say cash flow, discounted cash flow valuation, and that one tends to get out.

Weight. Weight, it weighted the most. So the more profit you throw off, the more a bank will loan you, the more the appraisal will try give you, so you, the team that operated Billy, Jenny, Sammy, you can force the appreciation if you focus on the model that they care about the most, which is NOI profit at the bottom.

Mike Pine: So choosing not to be a victim of market forces and inflation, but take advantage of the asset you have and take control of it just like we tried to do with the tax 

Josh McCallen: right.

Kevin Schneider: Being adaptive and we've had an offline conversation about kind of the Burr method, which is always an interesting topic because it is actually if on the surface, if you look at it, it's a very good strategy. And for those who don't know what the Burr method is it's buy, you buy a house, [00:19:00] you rehab the house, you rent the house, you refinance the house, pull your cash back out, and then repeat. And you're able to flow a real estate portfolio using that. Now you're gonna be leveraged, highly leveraged, which is risky. But Josh, I think you have some experience u utilizing this method and have some takes on it.

And with this current market that we're seeing, how have you had to adapt?

Josh McCallen: Gosh, man, Kevin, I'm so glad you asked that because definitely talked about the birth strategy.

I had thought of it as a perfect framework back in 2017 when I was really running the other company's business and using, we were using the birth strategy. We were pulling out as much equity as we could, handing it back to the principal family office owner, and we're still running the business and their business is now paying off the future debt, that new debt, and they had a, hopefully a tax mitigated liquidity event. So fast forward, we're about to get into this business. We attract a bunch of wonderful families, investors, over 360 families are now part of our [00:20:00] community of investors. We love them. They love and they love being part of this community. But at first I thought we're do the same thing. We're gonna burn the heck out of this.

We're gonna raise the appreciation value, but using that strategy I just talked about and changing the profit, and then we're gonna pull out every dollar and can it right back as fast as possible. Two things changed. The pandemic happened. We ended up, everybody was actually, I remember talking to investors.

They thought we were just gonna go belly up during the pandemic. All were high-fiving us, just that we always made our preference payments. I'm like pretty well actually, thank God, because we didn't have a normal model. But now we're out of the pandemic. And I've come to realize if we do the birth strategy, each of our companies growing, each of our assets are growing minimum 25% even over year.

First few grew at over 250% last year, but as they mature, they start to grow at less than hundreds of percent, and they start growing at 25. Growing at quite a sizable clip, and if you use the burst strategy to its best, You are stripping out all the equity now [00:21:00] that is cool whole, we're all about making sure investors have wonderful yield preference payments, having their capital back, eventually having great tax strategies built into the model.

But if we do that, what are we trading off? Are we trading off the next year's 25 to 50% growth? Are we not, away more rooms than we sell each year. We away over five times the number of rooms than we sell because the hotel out all the time. So isn't it better we build a more hotel?

Cause hotels throw off upwards of 45% profit. So what that could do to the EBITDA later as it trickles down, could be powerful and maybe force another 20 million of appreciation over time. Wait second. Is it best we strip all the equity out or is the, is it best that we look at the highest and best use of the property?

So what our investors are talking about a lot, and we've done seminars on it, is we're changing our focus with buying hold strategies instead of just always wanting to do Burr. We're evaluating if that's the right choice. There's something else we're on phraseology, [00:22:00] but it's basically legacy cash flow generating strategies instead of just burr strategies.

Burr is cool, but it does cut off your growth. Now if it's a house and you fixed it all up and you leverage it to the hilt, that might not be that worst choice cuz your growth is done. But for us, we don't even think we're halfway done, even though we've grown a lot. So for us it's a different o opportunity cost. So for us, we're actually, what we're doing now is we're letting investors. Evaluate Pros and cons. If you, to strip it out right now, what's the pros if we were to let it double and grow again, what are the pros and cons? Moving away from the burr into something that I find most of our investors think is more powerful is this idea of perpetual strong cash flows.

The business as safe and solvent as possible no matter what the downturns are.

Kevin Schneider: Hedging against those risks. Highly leveraged assets like that in a volatile economic climate is [00:23:00] gives people peace of mind too. We have had episodes about, yeah, we've had episodes where we talk about smartly utilizing debt, using debt as a dessert. It's good in pieces. It's not good to over-indulge on it, cuz then you're gonna get unhealthy with it.

Josh McCallen: "as dessert". Never. I'm gonna, I'm gonna, can we steal that expression? that should be 

Kevin Schneider: It is yours.

Josh McCallen: Wow. I am definitely using that one. I've never heard that. 

Kevin Schneider: Yeah. So I like that. I, cuz you know, as accountants we're we tend to veer on the conservative side ourselves, but also we're aggressive in the tax code where we are and we're aggressive in ar certain areas, but we, I think I tend to be conservative and I'm like, dead is bad, but, As you start opening the window of let's see, let's look into how do we smartly leverage things and we can grow our portfolio quicker, but we don't want to over-leverage and get to.

To lose sight of the risk because that is a major pain point. And so for anyone listening who's potentially wanting to go down the Burr method, you [00:24:00] always want to have your finger on the pulse of how much risk am I willing to accept? Can I cash flow all my debt? Because you're gonna be highly leveraged and it could work out.

You could have a very strong portfolio, but if you can't sleep at night, it's not worth it.

Mike Pine: Yeah.

Kevin Schneider: Yeah.

Mike Pine: Agree. So Josh, I would not be being myself if I didn't ask this question, but how have you found in your line of business and what you're doing, how have you found hidden money in taxes?

Josh McCallen: Okay. Okay. The reason we are with you and the groups like, like the whole idea of the strategist, for those listening today, the biggest thing we have to all come to grips with is CPAs are not all the same. CPAs are certified public accountants. There are some that are look like in every industry that are paper pushers. They're not actually using all the, God gave them as their gift.

And those that have a perspective on strategy say code is the code. We're law abiding citizens. We're following the code, but how was the [00:25:00] code designed? And so if you follow the IRS tax code, there's a lot of incentives built in which creates hidden money 

Mike Pine: Absolutely. 

Josh McCallen: for us from the beginning, we, you can almost call it like a preacher.

We heard people talk about this and we're like, that's a really compelling argument that the code can be seen, mean the IRS code as a roadmap map to follow the incentives that they gave you. You will pay less taxes. So it's not like you're hiding money. It happens to be hidden in the code. 

One is it's better that we don't have urban blight, so it's better that we put money back into buildings. So what they basically s you know, my understanding of depreciation is that buildings do deteriorate. So they give you paper losses on depreciation you're operating a business in real estate.

So we all have heard of depreciation perhaps on this show that, and what you wanna do there. Is you want to follow the code to its 10th degree. So we, [00:26:00] not only do we use the code legally, but we also use the cost segregation studies with our buildings and our physical plant. And again, following the way they want it.

First of all, of course, as an employer, we have several incentives there, but they also want you to continue buying capital improvement projects and capital assets.

And so one of the things we learned years ago is not every investor is built the same way. So what we did is we designed certain funds meet each investor's needs. Some investors are not eager to have major cashflow. Now why? Cuz they have a 10 year highs horizon. They wanna see an asset that has equity and it's gonna maybe double or triple.

So their long-term hold kind of equity, they believe in real estate as a real asset. Other investors need cap flow right now. And other, so we have debt funds for them and then other investors are sophisticated and they have passive income. And I, I know your show is gonna be a masterful resource on this whole [00:27:00] passive income versus active income.

But suffice it to say passive income has benefits. It can be offset. And if it can be offset by following the I R S tax code, what if we, as an investment group, designed ways for families to buy into our assets to specifically benefit from that? And we did we created a, what is called an efficient income fund where people buy into Pieces of equipment. And then today, I think this year it'll be 80% bonus depreciation, which is still amazing. So the IRS code has laid out a way for us to capitalize our company and we align needs, equipment, structures, dirt real estate with the different places investors are in their life.

I used to think four or five years ago, every investor was like, push in all on red. Try to double my money, actually, you even said it Kevin, that may not have been appealing to you. If I said we're gonna double your money, don't worry.

But if I told you [00:28:00] other ways to invest, you might have.

You might have actually liked it. 

Kevin Schneider: Yeah. 

Josh McCallen: people for different strokes. 

Kevin Schneider: right. And as a listener, you may not be wanting to get your own hotel or wedding venue, but linking up with Josh and potentially investing in his group, you would be considered what's called passive. And Mike and I will go into more detail in this, in our bonus content at hiddenmoney.com/bonus. And in there we're gonna explain how you can have tax advantages as a passive investor in deals like Josh runs, and get these tax free distributions, returns of capital and profit back to you. And I'll pay a dollar in tax. And utilizing what Josh said with cost segregation and just getting creative in how we structure an operating agreement, how do we structure our depreciation?

Just these small details add up to a large tax strategy that can save you th. Thousands of dollars. So please go to hidden money.com/bonus. Mike and I will really break that down into a little bit more detail and show you how that works.[00:29:00] 

Josh, it has been an absolute pleasure to have you, and I wish we had two, three more hours with you, but unfortunately, due to time constraints we gotta let you go. But how do our listeners get in touch with you?

Let's say they're inspired and they just want to know more about your group. Or let's say there's a teenager who wants a summer job. How do they get ahold of you?

Josh McCallen: Amen brother. And the way, you, it's actually fun when you're a retiree too. Come on out and join us. We're looking for great people. So for us, it's a great honor to be on the show. I feel like we're already friends. Thanks guys for listening.

Accountable equity, that's the name of our group. It's also our purpose, right? Is to be accountable with our own equity to it and we encourage our investors to change their focus and become part of a community.

One in invitation to everybody listening here. Is you've never invested in a private deal, you don't have to invest with us either. You're still welcome to fly out and be with us at one of our private events. We always bring a keynote speaker in check out accountable equity.com.

Again, no strings attached. You can just join us [00:30:00] in person at one of the properties. We do 'em a few times a year and it's primarily for our investors, so you get to see it in time. Other than that online and we do a podcast. I'd love for you to be on the show. We'll get you set up on Capital Hacking.

Check it out. It's all about, it's similar to Hidden Money, mindset.

Mike Pine: Very nice. There you have it everyone. Josh McAllen, the one, and only Josh [email protected]. Thank you so much, brother, for being here.

Kevin Schneider: Yeah, thanks Josh.

Josh McCallen: Thank you guys.

 

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