Unique Hidden Money in Distressed Hospitality

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: It's an 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 going to 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 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: Again, an honor to be on this show, and thank you guys for all the great work you do with our investors. Quick story in reverse is- today, yes, we're married, actually, we just crossed over 25 years. Always wanted to hit those milestone numbers, so I'm very happy. My beautiful wife Melanie, and I met in college, and have been married ever since.

So, the original story is one of, I think, it's a story that a lot of people resonate with, where you grow up with a scrappy kind of attitude. Grew up without a father at home, and just a lot of work. I enjoyed work, was good at work, and started young, 12 years old as a paper boy, which I don't even know if that 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, You are right. started dishwashing at 14, and I do like fast-paced work, and hard work.

Fast forward- that 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 free education.

So, I ended up getting my Master's in business that way, and 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 want to 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 2000s, right after the 9/11 attacks. But we spent so many years without really being in American culture, four years, that I would say it changed our perspective on [00:03:00] life. We got back to America. I had this dream to get into real estate, and the way we did it was through lending. So, similar again, trying to find hidden money even in the strategies we came up with, we said, “Well, I don't have money. I'm not wealthy. How do 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 changed my trajectory. Ended up building luxury homes on the water during the boom of ’08, ’06, ’07, and ended in the crash. 

We were building speculative houses, if you know what that means. So, fix and flips, but no buyer. And we're building them at $5-$10 Million dollar out sales. So, crazy nice homes in the early 2000s, on the water, and no buyer. So totally risky. But would sell them. We'd always have celebrity guests buy them, and things like that, 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 into mega cash flow.

Mike Pine: In hospitality and real estate in general, we're recording this in February of 2023, 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 toughing 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: I could not be happier. You're asking the best question, right off the bat. And, whenever you entitle this show, I'm sure hospitality will be in the name, of some sort. And the way we look at this world we get to work in is a little different than maybe what casual listeners are thinking, “Oh, Josh builds Holiday Inn Expresses, and stuff like that.”

And that definitely was a great business plan for a decades, or two decades. Those are called select service hotels. We've never had been in that industry. We've always been in an industry that is a little different. It's called Drive to Leisure. So, we like to put properties in proximity to major economic centers.

Let me state by saying there is a struggle in the world of debt in hospitality. The distinction for our business has always been before the debt markets changed in the last few years. Never thought of debt as a challenge for hospitality because we had turned three properties around for that family office.

I learned what forced depreciation was by doing it. Never even heard the term until we executed it. Debt was easy for us at that time. Now it is hard. So, I want to 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 [00:06:00] works.

It changes. I'm going to 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 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 believe there's all retail. Those are the four main food groups. 

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

That's actually something that most people didn't know, and I didn't know until the debt markets 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 going to be related to the 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 they’re 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. Those require the owner by contract to reinvest many millions of dollars every five to seven years. It's called a property improvement, 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. The lenders, there's less of them. I always joke, I do not have the true statistic, but it feels like this. For every 100 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 Inn 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 going to have a ripple effect. And we hope to be beneficiaries as an investment group to buy, not necessarily Holiday Inn Expresses, but damage, the collateral damage that will happen to a lot of different [00:09:00] properties. 

I went a little too deep there, so I'm going to 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, walk me through on, our listeners through the strategy behind finding something broken 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 got to probably buy it at a premium, there's not a lot of headache or work on that end.

Josh McCallen: Yep that's right. And we're all built for different struggles and different opportunities. I always say I can't wait until we’re 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 going to 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 industry, but to stay in the world I'm in, we have a deep expertise in turning around resort quality properties. Now, that's our super sweet spot. Also have deep expertise in construction, several hundred million in managed construction. So, in the future, we're going to open up another wing of the company, and we're going to buy more and more distressed motels and hotels and turn them into apartments. That's our 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- 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 you 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 New Jersey, outside of Manhattan, and it was bankrupt, but we bought it because it had 240 acres, a beautiful golf course that needed love, a winery that needed love, but a historic brand that had never closed its doors since 1864. 

Mike Pine: Wow! 

Josh McCallen: 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, and 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, [00:12:00] a few amenities we thought were hard to rebuild. We brought it at a 1/20^th of what it would cost to rebuild it. So, we knew we were in at a good basis. And then, we sold all of those nice things Josh said are just flowery words.

How are we going to pay the investors back? And how are we going to pay the families that work with us at salary? And that was weddings. 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? Course 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, that's 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 going to 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 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. We went 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 property, 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 ready to book, but you have to talk them into it, and closing 100 maybe. 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 heck did they get 795 [00:15:00] women to put their name on a list at a bankrupt property? I'm like, “Oh my gosh. It's the natural compelling nature of a winery, the proximity to the 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 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 1,000 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 like, the scale? You got to visit the website, the book to understand the scale.

We are the, like, we're really designed well for weddings. Like we have a botanical garden, five wedding venues. We have a whole staff that makes sure that one bride never sees another bride. It's absolutely a juggernaut. And so, we actually will perform over 360+ weddings this year.

Mike Pine: Incredible. It almost sounds like you have a Disneyland operation with tunnels and stuff to move the bride. We got to come visit.

Kevin Schneider: That's great, I liked how you were going into real estate, but then, you're like, “Oh, this wedding thing could really kick off.” And the wedding industry is really crazy because there's just zero barrier of what I can spend. They're just so costly they don't care. And so, it's one of the greatest industries to be in, but it had that, you had that mindset of, “What else can I do to better improve what I have to bring in more revenue?” And so, sometimes hidden money could just be, “What am I doing as an employee, or as a self-employed individual, and what can I be doing different, and growing a different skillset, or maybe tapping into a different market?” and there's so many options out there, so I just love that little piece.

Josh McCallen: May I comment on that, Kevin?

Kevin Schneider: Absolutely. 

Josh McCallen: Let's comment on what you're saying. To break it down to general business principles that I've come to understand just from watching it happen. I'm like, “Oh, that's what they mean when you go to, like, a seminar on business.” We call them levers. This is my simple definition, and picture those old fashioned 1910. It's like an hex. It's like a bar, and then a bar in the middle, and a gigantic lever that changes the power on-off.

And it's like train. You picture it, your train stops, or something like that- that lever that takes a whole arm to move it up and down. The technique of how to change the value of a business- picture your business as numerous levers, and you can put a new lever on the wall at the train station, if you want to keep with that paraphrase. Each lever can create new cash flows.

Now, you have to run that lever, so it produces NOI at the bottom, but every time you add a [00:18:00] complimentary lever, where you're doing is you're arbitraging the audience you've already created for your business, and you see it in any kind of vertically integrated company. They already got Billy and Jenny, and they're here.

Mine is, sell them a delicious espresso on the way out. We do it. We think in terms of ‘while you're here’. You want a client journey. Every business has a client journey, though. So, for example, the lever’s… a typical, I like to contrast what we do in this mega, we call it now, we call it ‘legacy wealth generating mission’. So, our whole idea is we're building things that are juggernauts for a long time. We're not building them to flip them out. 

We're building to, say for us, it's at six to seven lever business every time, but your Holiday Inn Express, happy to stay there tonight. The only lever they can sell you is a room night. And that's great. Do the best you can. And for some people, they love the simplicity of that business plan, but you really can't force appreciation with that business plan. You can charge whatever the next-door neighbor’s hotel is charging, and add $1 or $5, $10, whereas we are 300 times more costly to sleep here. We are 3X the price of a room night here than we are to our next neighboring hotel. Why? Because you want to be here. Why? Because we have other levers. We've already.. The wedding is here. Guess what? You'll pay us three times because you want to be at the hotel. 

Yeah. That's one lever. But that lever created a lot more grease on the next lever for room rate. Oh, and by the way, we have wonderful entertainment. Oh. Which you happen to be able to buy delicious, expensive cocktails at, and delicious wine. So, that's another level that got greased. And then, add layers. Do it in a cascading way, and very intentional. 

Sorry. Yeah, I get excited about that. But that what happens when you create levers, folks, in any commercial business. So, if you're a self-storage person, these levers, self-storage is going to sell you the room, the building, but they can also sell you, like, other services. I believe that there's other ways they can add levers. The more levers you create that force NOI, you 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 going to 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.

So, if that self-storage person figured out two more things to charge their guest for, their value will be higher than the neighboring self-storage place because they're throwing off more profit. And so these levers can actually generate new valuation. 

So, the demonstration of that is, I, we've done six of these major turnarounds in 10 years. Each of them, we bought at a fraction of their basis. That forced depreciation was a three to four times within four years. So, we changed the value that much, and it's magic. We just follow the way the appraiser appraises.

Mike Pine: How do you define or explain what forced appreciation [00:21:00] is compared to just normal appreciation? 

Josh McCallen: Yeah. Normal appreciation probably flows with inflation or whatever's going on in the market. I've never had to define normal appreciation, but I guess that's what happens. Forced appreciation’s when you change the profitability of the company, or the business, or this, in this case, because we’re real estate driven, the appraisers come in and they value us.

They do three appraisals, typically three modeling models within that big document called an appraisal. One is, there is ‘comps’, 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 outweighed. Weighed, most. 

So, the more profit you throw off, the more a bank will loan you, the more the appraisal will try, 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, EBITDA.

Mike Pine: You’re 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 try to do with the tax code. 

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. The reason with you and the groups like The Whole Strategist, those 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, that’s all that God gave them as their gift.

And those that have a perspective on strategy, say the code is- we're law-abiding citizens. We're following the code, but how was the code designed? And so, if you follow the IRS tax code to the incentives built in which creates hidden money, and 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, I mean the IRS code, as a roadmap to 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. You are not hiding money. 

Anyway, so the code has laid out a couple really good compelling stories. One is, it's better that we don't have urban blight, so it's better that we put money back into buildings. So, my depreciation is that buildings do deteriorate. So, they give you paper losses on depreciation while your business is in real estate. So, we all have heard of depreciation perhaps on this show for that, what you want to do there is you want to follow the code to its 10th degree. 

So, not only do [00:24:00] we use the code legally, but we also use the cost segregation studies with our buildings and our physical plant. And that's the way they want it. There's other things we've learned over the years from just being, is the IRS incentivizes the investment code. And that one thing is to keep working. First of all, of course, they 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 to each investor's needs. Some investors are not eager to have major cashflow. Now why? Because they have a 10 year highs horizon. They want to see an asset that has equity, and it's going to maybe double or triple.

So, they’re long-term hold kind of equity. They believe in real estate as a real asset. Other investors need cash flow right now, so we have debt funds for them, and then other investors have passive income. And I know your show is going to be a masterful resource on this whole 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 IRS 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 income fund where people buy into capital, pieces of equipment. And then, even think this year, it'll be 80% immediate bonus depreciation, which is still amazing. So, the IRS code has laid out a way for us to capitalize our company, and we align our 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. But that's actually, you even said it, Kevin, that may not have been appealing to you if I said, “We're going to double your money, don't worry.” If I told you other ways to invest, you might have actually liked it. Yeah. Different people for different strokes. 

Kevin Schneider: That's 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 going to 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 not 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 thousands of dollars. So, please go to hidden money.com/bonus. Mike and I will really break that [00:27:00] down into a little bit more detail and show you how that works.

Mike Pine: I definitely will. Very nice. There you have it, everyone. Josh McCallen, the one and only Josh McCallen at www.accountableequity.com. Thank you so much, brother, for being here.

Kevin Schneider: Yeah, thanks Josh. 

Josh McCallen: Thank you, guys.