Managing below the line: Hotel property taxes
 
Managing below the line: Hotel property taxes
27 FEBRUARY 2012 7:41 AM

There are five major types of property tax consultants. Do you know which to choose?

Local taxes and specialty assets: two things that do not necessarily go together very well in the property tax world. Managing property taxes is perceived by most institutional owners as something that is best left to the experts. But who are the experts? How should they be compensated? And should they be evaluated?

In a series of quarterly articles, we will examine some of the pros and cons of outsourcing the management of property taxes. Specifically, we will address issues with 1) consultants, 2) assets and 3) process for choosing, compensating and evaluating third-party consultants. The fourth and final article will be a synopsis of the prior articles that will provide owners with ideas and information to re-think how they manage property taxes and improve results.

Consultants
No one decides they want to be a property tax consultant when they grow up. Most property tax consultants started their careers somewhere else, ended up in property tax consulting and could not escape. The reason for that is that once the knowledge and experience is gained, it is very marketable and secure. Property taxation always has been the foundation of local government, and it is unlikely to change.

Therefore, when considering the lot of property tax consultants, most can be categorized in one of the following five categories:

1. Former tax assessors
2. Relationship sellers
3. Volume business operator
4. Attorneys
5. Industry experts

Let’s consider a few pros and cons of each of these categories. 

1. Former tax assessors
Former tax assessors seem like a logical choice to become property tax consultants. However, I can tell you from my own experience, as I started out in the assessment field, while it is helpful to have the inside knowledge of how assessors think/act/do, it is very difficult to get out of the assessor mindset and think like an owner. This could lead to a consultant who is not aggressive and basically offers what the assessor will accept.

2. Relationship sellers
The relationship seller takes advantage of the knowledge that many decision-makers think that local taxes should be handled by someone with local expertise. This type of consultant wants to “sell” the fact that he knows the assessor, plays golf with him and is “friends” with him. There are a few places left in the country where it would be absolutely beneficial to have a local person handling your taxes, but don’t be fooled by the idea that anyone who has a “special” relationship with the assessor will get any preferential treatment. The days of the government employee or elected official giving preferential treatment to their buddies are mostly gone. 

3. Volume business operator
The volume business consultant’s business model is based on the law of numbers. His modus operandi is to represent as many properties as possible without regard to property type. They file appeals on everything, often with little to no analysis. The way to do business is to take whatever you get, throw it up against the wall and see what sticks.

In most states, that is not a major problem as the risk of a tax increase is very small. However, there are states where that cannot be done. Virginia assessors, for example, do not hesitate to increase an assessment when reviewing the property under appeal. Local boards of equalization, likewise, have the authority to increase as well as decrease an assessment. So, owners of hospitality assets would be better-served in finding a consultant that will do some minimum level of analysis prior to filing an appeal. At a minimum the consultant should request the assessor’s worksheets to discern how they arrived at their value.

4. Attorneys
Attorneys are required in several states—Ohio, New Jersey, and Pennsylvania, for example—just to file a property tax appeal. In other states, attorneys are not needed until the final stage of appeal or litigation. Attorneys are obviously well-versed in the law but not necessarily in the valuation issues, especially for sophisticated hospitality assets. Also, some attorneys only tangentially work in property tax. Most real-estate attorneys are more involved in zoning and condemnation with the occasional property tax case. If you feel the need to use an attorney, be sure they are well-versed in property tax. 

Additionally, attorneys should be considered for the level of appeal that establishes the record for judicial review. For example, in California there is no trial de novo, so the record is set at the Board of Equalization level. Courts in California will only review the record established at the Board. Owners of institutional assets would be well-advised to consider having a property tax attorney present the case at the Board level in California.

5. Industry experts
Consultants with industry expertise have a background of working for large companies that own specific assets. For example, Marriott International and Hilton Worldwide, as well as most large institutional owners of hotels, have in-house tax departments. Additionally, some consultants started with Big Five accounting firms and gained industry knowledge from the client base of the accounting firm.

Learning the industry and having specific knowledge of the assets is a very strong foundation for a consultant. However, just as the assessor-turned-consultant must be able to translate the knowledge into the owner’s best interest, the former in-house-tax-employee-turned-consultant must be able to translate their asset knowledge into greater savings for their clients. This can be a difficult transition for someone from the corporate arena that might feel a certain level of superiority over the local government employee. Even owners demonstrate their astonishment at what the assessors do vis-à-vis reality. The industry expert’s job is to use the asset knowledge to achieve the result desired translated into the assessor’s language. That is easier said than done.

Next quarter, we will examine the assets in depth and discuss what distinguishes hospitality assets from all other real-estate investments and the specific issues that must be addressed with hospitality assets in managing property taxes.
 

Bernice T. Dowell is a Senior Managing Consultant for Paradigm Tax Group in Washington, D.C. A former Senior Manager of KPMG and President of Cynsur, LLC, she has focused her career in real estate transfer and property taxes on hospitality assets and the concept of removing the value of intangibles from a going concern. She began this endeavor as an employee in Marriott’s Tax Department in 1991. While at Marriott she was a member of the inaugural class at George Washington University for the Master’s of Science in Finance program and focused her senior thesis on the topic of hotel investment analysis and the contributory value of a trade-name to a going concern. Please visit our website for additional information on Paradigm Tax Group: www.paradigmtax.com or contact Lisa Story at (617) 517-3100 X 101 or lstory@paradigmtax.com.

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1 Comment

  • Hank Jones February 27, 2012 5:23 AM

    I found this article to be a very well-organized and insightful. As each of the five described consultant categories has its pros and cons, it may make sense for a hotel owner to work with a property tax appeal organization that combines expertise; for example, a former tax assessor working with a hotel industry expert.

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