Best Real Estate Structure for Hotels

Best Real Estate Structure for Hotels


– Hi Clint Coons here with
Anderson Business Advisors, and in this video, we’re gonna talk about structuring hotels. (electric guitar) – All right, let’s get started. So, you’re thinkin about
investing in hotels. You’re like, I’ve done
residential real estate, I’ve done commercial real estate. Let’s take it to a whole different level. So you go out there and
you find a property, a hotel. And then you start scratching
your head, goin what is the best way to
structure this property from an asset protection and a tax perspective. Well, surprisingly it’s
not that difficult, but there are some different
way you wanna look at it from an operational standpoint. But I think it really
important that you should focus on if you’re going
to go down this road. So, lets first talk about how
we should acquire the hotel. Well, if you’re getting
involved in hotels, I would assume that you’re
a real estate investor who materially participates. That means you spend at
least 50% of your time 750 hours a year on real
estate related activities because hotels are no easy thing. You just don’t wake up one
morning, you know, you’ve had one maybe you’ve had
double wide rental for the last three and you go you know what? I’m gonna start with hotels now. It doesn’t happen that way. Only in Monopoly. So, you decide now you’re gonna set up, acquire your first hotel. What I would recommend
you do, is you create a limited liability company in the state where you’re
going to acquire this hotel. So now you got this hotel
set up right here in my LLC. Now, from a tax standpoint,
which this is the important part here about the structure. How do you want to set it up? Well what made me want
to create this video is I recently spoke to an
individual who actually has four hotels that he’s acquired. All right? That he’s set up entities for. I’m just gonna put
three on the board here. And you’ll notice I’m
putting LLC’s up there. This individual actually set
them up in C corporations. Now, the problem I have with
that which we discovered we’re havin to do some planning
for, is that by creating them in C corporations and not LLC’s all of his flow through
losses that can come from depreciating, expenses that
go in running the hotels. I mean, even though they make cash, they still throw off losses. It’s all trapped inside
of that corporation. That means it doesn’t flow down to him. So he’s not able to take
advantage of these losses that could be hitting
his 1040 and offsetting his other forms of income. Because his tax practitioner trapped him. Trapped these income in these structures that he created as C corporations. And he said hey with a C corporation the tax practitioner told him
there’s more you can do from an expense side,
how you use your funds. Well, you can still get
that, but you can still get the best of both worlds when you combine the two different structures
as I explained to him. So with hotels, what I
wanna do is create LLC’s, and typically I’m gonna
have these LLC’s set up as partnerships, all right? So we have these partnerships
from a tax standpoint. Or, what you might wanna do,
they could be disregarded. I prefer to do it as a
partnership so then down here I’m gonna have a holding company. I would make this Delware LLC right here. And it’s gonna own each
of these LLC’s like this. This is the one, in
this type of structure, it’ll all flow through here. Now, let me back up. One thing to also consider
is if you intend to sell these properties at any
given point in time, that is if you’re buying
them with the intent to renovate them, stabilize
them, and then sell them, then you may not want to follow
this structure like this. What you’re gonna want to do instead is set these up where they file tax returns. So each of these should be
filing separate tax returns rather than using this holding structure. So what you might want to
do in that case is have two structures set up like this. I would have a one LLC here, I know you’re going, well this is, I have to
create two structures? Yeah I would do two. And I’d have another
Delaware LLC right here. And I would have them
own 50-50 just like this. All right? So I’d break them up, and
then you could be down here owning these two Delaware
LLC’s, or maybe you got your spouse on there as well. But the purpose now, by
structuring this way, is that we put two partners
in each of the LLC’s, so as a result of that, they’re gonna file partnership 1065 tax returns. And the reason why you would
want it to file a tax return is if you’re looking to
sell them in the future, you need to have all that
income on a tax return because it makes it easier
for a buyer to come in and obtain financing because
the lenders for the buyers are gonna wanna see tax
returns filed for whatever property you’re selling. And if you don’t do it that
way, you run it through a holding company that’s
only filing the tax return, then that’s gonna make
it much more difficult for them to segregate out the income. So you have distinct units. I strongly encourage you
on the commercial context and hotels, all of those
LLC’s that have these separate units should
file their own tax return. So anyways. So you got this structure set up. Their set up is partnership,
you have asset protection. Now comes the aspect of
running the hotel itself. So this individual that
I’m now working with, he had employees set up in
each of these corporations. So each of them hired its own employees, and he was pullin salaries,
W2’s out of multiple companies. And I looked at him and I said,
you know, that’s expensive. And it’s cumbersome to do it that way. You need to consolidate that. So from a hotel standpoint what
I would do then, recommend, is I would create a C corp up here, and this is going to be the
hotel management entity. So, it’s going to manage
all of the properties. It’s going to supply
the personnel that will work on all of these hotels. So all your employees are run through this company right here, right up here. This is where you pull
your W2, your salary, out of this company up here. And so, now you’re starting
to simplify your costs. You’re also keeping all
the accounting up here, at this one particular entity. So then you now brought,
rather than running all these three separate business units, you’ve really consolidated through that one management corporation
for handling that. So, what these hotels can
do then, they can collect the income up here, right? And then they pay the
company its management fee to handle all the management activities. So that’s situation number one. An alternative situation
you could do, it’s similar to my AirBnB strategy. Watch the AirBnB video, I go
into this in a lot of depth. You could adopt the AirBnB, or what I call the Four Seasons Approach
to hotel management. That is you don’t, you lease
the properties to the company, so the company corporation
leases the properties from your various LLC’s here. So that keeps passive
income flow down here. And then it runs the hotels. Now I would use this
strategy if you’re intending to build name recognition. So lets say you wanna become the next Marriott chain, or the Hilton out there. So, in that case, you’re gonna operate under one name. You’re wanna brand yourself. It’s really simple to do
that then when you have your corporation that
creates the brand, right, run all those properties. And so the way I would
accomplish that is I would lease the properties to the
corporation and let the corporation then run it under one brand. So now you have consolidation
at the corporate level. The money that comes back
here is all gonna be passive, it’s not active, and you can go about running your business that way. So, however you structure
it, when you’re looking to go into hotels, I would set
up an LLC for the particular hotel property for the
asset protection, and then I would have my management
corporation up here, a C corporation controlling everything. So I want consolidation. It’s gonna drive my cost
down, and it’s gonna make ease of administration that much simpler. My name’s Clint Coons with
Anderson Business Advisors, and in this segment, we
talked about hotel structure. (upbeat music)

3 thoughts on “Best Real Estate Structure for Hotels

  1. hi clint. Why do u perfer a partnership over disregarded? and who are the partners or each LLC? dont u need two people or two companys for it to be considered partner?

  2. Should the land, building, mortgage, and all physical assets be held under one LLC and then have another LLC set-up to be the operational entity. Then have rent paid by operational LLC to asset owning LLC. Does this add a layer of asset protection or is this just unnecessary and redundant?

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