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Hotel sellers face higher costs in 2013
January 24 2013

The capital gains rate increased by 5 percentage points as part of the fiscal cliff package, but the tax increase isn’t likely to have a big impact on hotel transactions, sources said.

  • The capital gains rate increased to 20% from 15% on 1 January.
  • “If someone feels it is the right time to sell, they’ll sell,” The Lightstone Group’s Mitchell Hochberg said.
  • U.S. deal volume overall decreased by 35.6% during 2012 to $12.5 billion, according to STR Analytics.
By Shawn A. Turner
HNN contributor

REPORT FROM THE U.S.—Sellers of U.S. hotels will now have to dig a little deeper in their pockets when completing their deals.

As part of the fiscal cliff deal passed on 1 January by U.S. lawmakers, the capital gains rate that sellers pay on deals was increased by 5 percentage points to 20% from 15%. While there was an increased impetus on the part of sellers at the end of 2012 to offload properties before the tax rate jumped, sources said they don’t expect 2013 transaction volume to be impacted much by the new tax rate.

According to data tracked by’s sister company STR Analytics, deal flow during the fourth quarter of 2012 increased by 47.1% over Q4 2011 to $5 billion.

People aren’t likely to let the new tax law inhibit their ability to transact, said Mitchell Hochberg, president of The Lightstone Group, which owns a portfolio of 20 hotel assets. He said there might have been more of an impact on deal flow if there was a perception that the new rate was short-term or temporary, but because it isn’t, people are more apt to continue on with business as usual.

Mitchell Hochberg
The Lightstone Group

“If someone feels it is the right time to sell, they’ll sell,” Hochberg said.

John Balliett, CEO of Charter One Hotels & Resorts, which has 14 hotels in its portfolio, said buyers and sellers will take the new tax reality into consideration while they are at the negotiating table hammering out a deal.

He added that sellers are likely to try to bump up the price of the asset they have on the sales block in an effort to make up for the lower return.

Still, the transactions will end up costing the seller more than in the past. Hochberg said an asset previously purchased for $6 million that was set to be sold for $10 million would last year, before the revised capital gains rate, have left the seller with net proceeds of approximately $3.4 million.

But if the same deal were completed today, the net proceeds would be closer to $3 million, Hochberg said.

“It’s not going to make people happy, but it is what it is,” Balliett said.

Kevin Mallory, senior managing director and Americas practice leader for CBRE Hotels, agreed with Hochberg’s assessment that the increase in the capital gains rate will not stymie the hotel transactions market.

“The majority of the impact that I think we’re going to feel or have felt has occurred,” he said of the rush to strike deals before 2012 drew to a close.

If anything, Mallory said, deal flow was inhibited during the second, third and fourth quarters of 2012 because of all the uncertainty that surrounded the fiscal cliff talks. Now that at least some of that fog has lifted, people are likely to be more apt to deal.

“The uncertainty clearly affected us,” Mallory said. According to STR Analytics, U.S. deal volume during 2012 sank by 35.6% to $12.5 billion.

But now, Mallory said his company’s deal pipeline is robust. “All indications at this point in time are quite positive,” he said.

At the end of the day, Balliett said buyers and sellers will just have to get used to the new transactions environment. And this newest wrinkle to the hotel transactions environment isn’t likely to trip up many hotel buyers or sellers.

“I’m a conservative investor. I’ve been through a lot of cycles,” he said. “I know a lot of people get blown away when the busts come—and they always do.”


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