Real-estate taxes are one of the primary revenue sources used by municipalities to obtain funds for public expenditures such as parks, highways, interest on bonds and other government services. Based on the concept that the tax burden should be distributed in proportion to the value of all properties within a taxing jurisdiction, a system of assessments is established by a local assessor.
Theoretically, the assessed value placed on each parcel bears a relationship to its market value. Therefore, properties of equal market values should have similar assessments. Depending upon the taxing policy of a municipality, property taxes can be based on the value of real property (i.e. real-estate tax) and in many cases also on the value of personal property.
While the exact way in which property taxes are levied varies considerably, there are two commonalities amongst all tax jurisdictions. Property taxes are always an ad valorem tax, which is the amount of property taxes payable for any given property in any given period and is always based on the property’s value relative to other properties in the taxing jurisdiction. It is always calculated by multiplying the tax rate times the property’s assessed value.
Another commonality is that all property assessments feature some relationship to “market value” as of a certain date. Different tax jurisdictions might have different nomenclature for market value including: fair cash value, fair market value or fair value. The underlying definitions, however, are almost always identical to or similar to the concept of market value as it is defined by agencies that regulate federally insured financial institutions in the United States and is taken from the Uniform Standards of Professional Appraisal Practice.
What is the TAB philosophy?
During the past decade, a new and controversial theory referred to as Market Value of the Total Assets of the Business was created by a small but vocal group of property tax professionals. With a focus on challenging real-estate assessments, the TAB concept is an attempt to change, not the market, but instead the actions of appraisers whose mandate it is to reflect the market. Because of the fact that hotels inherently contain significant business and personal property components, the TAB hypothesis was originally formulated for application to hotel assets. The TAB philosophy and methodology was subsequently expanded to include additional forms of commercial property including: regional shopping centers and malls, convenience stores, senior housing, congregate care and retirement facilities, golf courses and country clubs, restaurants, theme parks, race tracks, recreational vehicle parks, marinas and billboards.
Essentially, the notion of TAB is that real estate must be valued as a residual of a business by first concluding to an opinion of the Market Value of the Total Assets of the Business. The relatively new-posited term and concept of Market Value of the TAB have never been substantiated by “the market” and are not generally accepted principles and/or methodologies. The TAB hypotheses are merely contrived academic hypothetical constructs without any market foundation that have been developed with the sole intent to obtain reduced hotel property tax burdens.
Analysis of the actions of hotel investors proves the purchase of a hotel property reflects the acquisition of real and personal property only. Hotel investors account for income attributable to the business through the deduction of management and franchise fee expenses. An investor purchasing a hotel “unencumbered” by a management agreement will not pay for a seller’s assembled work force, business name, patents, copyrights, working capital and cash, operating procedures and manuals, etc. A passive investment in a first-class hotel “encumbered” by a long-term hotel management agreement is riskier but no different than a passive investment in a Class A office building occupied by a long-term credit worthy tenant. Passive investment yields a risk-adjusted return on property and not on a business.
Hotel facilities are unique assets
No one disputes hotels are unique forms of assets. In addition to real estate, hotels inherently contain significant business and personal property components. Problems occur, however, when one considers hotels in the same breath as other real-estate properties that contain one or both of these components. Hotels cannot be considered as just another business enterprise. The positing of theories and methodologies relative to valuation issues of hotels that is unsupported by market evidence is fraught with danger.
The only arena in which the Market Value of the TAB methodology has been used is in real-estate tax assessment appeal matters. In cases that have been litigated, it has been soundly and overwhelmingly rejected by the courts as clearly illustrated in paragraphs 40 and 41 of the following decision: CGP Maine Mall LLC v. City of South Portland.
Hotel owners should be aware of any attempt to reduce their property assessments. While no proprietors should pay more than their fair share of taxes, given the clear rejection by courts, an uphill battle exists by those who engage legal counsel, property tax consultants and/or valuation experts who use Market Value of the TAB methodology in an effort to decrease their property values for ad valorem tax assessment purposes.
In addition to most likely losing such a challenge, hotel owners should carefully consider the ramifications of establishing a market value of their property that has the potential of reducing their mortgage asset security value that lenders rely upon when making new loans and/or providing refinancing proceeds. At any given point in time, there can only be one market value of a hotel property irrespective of the purpose for which such conclusion is being sought. A free market and the courts have proved time and again that the sale of an open and operating hotel reflects the transfer of real and personal property only. The terminology and created theory of Market Value of the Total Assets of the Business are unknown and foreign concepts to active market participants within the hotel real-estate investment arena.
Daniel H. Lesser is president & CEO of LW Hospitality Advisors, which provides services to corporate, institutional, and individual clients as well as public agencies on all facets of hospitality real estate including: litigation support and expert testimony, site evaluation, highest and best use analysis, appraisals for mortgage, acquisition, and portfolio management, workout strategies, operational analysis, property tax assessment appeal evaluations, economic impact studies, deal structuring, and fairness opinions. Mr. Lesser can be reached at 212.300.6684 x 101 or email@example.com.
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