For some closely held restaurants and lodging businesses, the most valuable asset is not the operating business. It is the land and building from which the business operates. The same owner may have purchased the property, built the business, guaranteed the debt, and made every important decision about both. While that owner remains in control, the distinction between the real estate and the business can feel technical.
Across generations, however, that distinction can become one of the most important parts of the succession plan. The family is dealing with two different assets: an operating business that requires active management, working capital, and daily attention, and real estate that may serve as a long-term investment and source of income. Those assets may not belong in the same hands or be best governed by the same rules.
If the structure is not addressed before a transition, the next generation may inherit conflict rather than a functioning business. One family member may want to continue operating the restaurant or inn. Others may want rental income, a sale, or access to the value of the property. Questions about rent, renovations, financing, and control can quickly become personal. A thoughtful structure can reduce that uncertainty and give the operating business a more stable platform.
Recognize That the Property and the Business Present Different Succession Questions
The operating business and the real estate respond differently to risk. Restaurant and lodging operations are labor intensive and exposed to changing customer demand, food and payroll costs, seasonality, competition, and reputational risk. The real estate may appreciate over time and produce relatively predictable income, but it also carries debt, taxes, insurance, maintenance obligations, and the need for major capital improvements.
Those differences become especially significant when one child works in the business and other children do not. An equal division of every asset may appear fair, but it can produce an arrangement in which the active child is responsible for the success of the business while depending on siblings for continued use of the property. At the same time, the siblings who own the property may feel that below-market rent is subsidizing the active child, while the operator may view higher rent or required distributions as a threat to payroll, renovations, or working capital. Planning cannot guarantee agreement, but it can establish a workable framework before those differences place the business at risk.
Separate the Real Estate from the Operating Business When Appropriate
One commonly used structure is to hold the land and building in a separate real estate entity and have that entity lease the property to the operating company. This can allow an active family member to own or control the operating company while the real estate remains owned more broadly by the family, by a trust, or by a separate group of family members. It may also allow the family to retain the property if the operating business is later sold, or to transfer the operating business without forcing an immediate decision about the real estate.
Separation can also clarify financial performance. The operating company pays rent and its assigned expenses, while the real estate entity receives rent and services the property debt. Separate accounts, records, contracts, and insurance help show whether each part is sustainable. Separation may also help contain certain risks, but it does not replace proper insurance, entity formalities, or review of personal guarantees.
This structure is not automatically the right answer for every business, and property should not be moved between entities without careful review. Existing loan documents, lender consent requirements, title issues, taxes and transfer costs, insurance coverage, permits, licenses, zoning requirements, environmental concerns, and existing contracts may all affect the analysis. The objective is not to create additional entities for their own sake. It is to determine whether separating ownership will make the eventual transition more flexible and the ongoing operation more stable.
Treat the Lease as a Core Continuity Document
When related parties own the real estate and operating business, the lease is sometimes treated as a formality. Rent, repairs, and improvements may be handled informally while one person controls both sides. That flexibility becomes much more difficult when ownership separates across family members or trusts.
A well-structured lease should address the term and renewal rights, how rent will be established and adjusted, responsibility for taxes and insurance, maintenance and repairs, capital improvements, alterations, casualty, default, assignment, and any purchase or renewal rights. It should also account for the particular demands of the property. In a hospitality business, the line between routine maintenance and a capital improvement is not always obvious. A roof, commercial kitchen system, septic system, heating plant, elevator, guest-room renovation, or accessibility upgrade can require a substantial investment and may be essential to continued operations.
Rent must also be approached realistically. Rent that is too high may deprive the operating business of the cash needed to retain employees, maintain the property, and respond to downturns. Rent that is too low may shift value to the operating family member at the expense of the property owners. A commercially supportable rent, coupled with a practical process for periodic review, can reduce future conflict. The lease should be followed in practice so that the arrangement remains understandable to family members, accountants, lenders, appraisers, and a future buyer.
Match Ownership and Control to Family Roles
Ownership does not need to mirror employment, and fairness does not always require each child to receive the same interest in every asset. The family member prepared to operate the business may need voting control of the operating company. Other family members may be better positioned as owners of the real estate, recipients of other assets, or trust beneficiaries without daily management responsibility.
Whatever structure is selected, the governing documents should address who manages each entity, what decisions require broader approval, how distributions are determined, whether interests may be transferred outside the family, and what happens if an owner dies, becomes disabled, divorces, wants to leave, or can no longer participate. Decisions involving a sale, refinancing, new debt, major capital project, change in use, or long-term lease should not depend on informal family understandings.
A trust can help preserve the property or protect beneficiaries who should not participate in management, but it still needs clear rules. It should identify who will make real estate decisions, how income and capital needs will be balanced, and whether beneficiaries will have meaningful exit or buyout rights. Otherwise, the trust may simply postpone the same conflict.
Plan for Capital Needs, Debt, and Personal Guarantees
Real estate and operations may be separately owned, but they remain economically connected. A lodging property may require room renovations or major building systems. A restaurant may need kitchen equipment or structural repairs. If necessary work cannot be funded, the business may deteriorate. If the operator can commit the property to projects without approval, the passive owners may face unexpected obligations.
The structure should establish how reserves will be funded, who can approve capital projects, how the operating company will contribute, and how debt will be authorized. Personal guarantees also require attention. A lender may have relied on the founder's financial strength, and the next generation may not assume the same obligations. Financing should be reviewed before the plan depends on credit that may disappear when the owner leaves.
Preserve the Operator's Access Without Trapping the Property
An operating business cannot be stable if its right to occupy the property can be withdrawn whenever family relationships become strained. A sufficiently long lease, renewal rights, and, in some cases, a right of first refusal or purchase option may give the operator the security needed to invest in the business and plan beyond the next year.
At the same time, the plan should not trap the property owners in an arrangement that no longer makes economic sense. Renewal and purchase rights should contain clear notice requirements, timelines, pricing mechanisms, and consequences if the business closes, defaults, or is sold. The family should also decide what should happen if an outside buyer wants only the business, only the real estate, or both. The plan should preserve options rather than assume the property and business must remain together forever.
Coordinate the Structure with the Estate Plan
The owner's will or revocable trust cannot be reviewed in isolation. The estate plan, governing agreements, lease, buy-sell provisions, loan documents, powers of attorney, insurance, and ownership records should point in the same direction. Conflicting transfer rights or a successor trustee without the authority or experience to manage an interest can defeat the intended plan.
Incapacity planning is just as important as planning for death. The documents should identify who can exercise voting rights, appoint managers, deal with lenders, approve repairs, and enforce the lease. The person best suited to administer a trust may not be the person best suited to run a restaurant or lodging property. Those roles can be separated, but authority must be clear.
Liquidity should also be considered. If estate expenses, debt, or equalization can be satisfied only by selling the property or drawing cash from the business, the structure may fail when needed most. Life insurance, other assets, staged buyouts, or payment terms may provide alternatives, but they must reflect the actual value and cash flow of the business and property.
Test the Plan Before It Is Needed
A useful succession plan should be tested against realistic scenarios. If the owner became unavailable tomorrow, who would control the operating company, who would manage the real estate, and could the lease continue? What happens if the active child leaves, the passive owners need liquidity, a major renovation is required, or a buyer wants only one part of the enterprise? These questions reveal gaps that are not apparent when the plan is viewed only as a transfer of ownership at death.
The process can begin with a simple map: who owns the land and operating entity, what debt and guarantees exist, what the lease provides, and how the estate plan disposes of each interest. From there, the family can identify the most significant risks and address them in stages. The goal is not to predict every event. It is to create enough clarity, authority, and flexibility for the business and property to remain stable when circumstances change.
Conclusion
Structuring real estate and operations across generations is not simply an exercise in dividing assets. It can protect the operating business, preserve the property's value, and reduce the risk that differing family roles will lead to conflict. When ownership, leasing, governance, financing, and estate planning are coordinated, the next generation receives a workable system, not just business interests.
This work should begin while the owner can explain the business, evaluate the next generation, negotiate fair arrangements, and make changes without the pressure of a crisis. A well-designed structure cannot eliminate every business risk or family disagreement. It can, however, give the enterprise a stronger chance of remaining operational, valuable, and capable of continuing across generations.
Sheehan Phinney's Estate Planning Group
Mark B. Bartram, Esq. is a Shareholder with Sheehan Phinney concentrating his practice in the area of Trusts and Estates, with a focus on integrating succession planning, risk management, and operational continuity to protect and enhance the long-term value of closely held businesses. Our Estate Planning team works closely with clients and their families, taking time to understand their wishes and tailor a plan. We strive to maximize the amount of assets passed on to heirs, while minimizing taxes and alleviating stress on executors and trustees. Our firm recently acquired a team highly focused in Special Needs Trusts, Medicaid and long term planning, making us experienced in all matters of estate planning