Planning for real estate taxes takes care
13 DECEMBER 2013 7:05 AM
Attention to detail during the closing process is key for hotel owners when planning real estate taxes.
For most hotel owners, real estate tax planning means deciding who their consultants are going to be for the next year. That’s a reactive mindset; it’s not really planning. Real estate tax planning needs to be part of the acquisition process.
Owners have a golden opportunity when they acquire an operating hotel to mitigate exposure to real estate tax increases by papering their deals properly and disclosing only the portion of the price ascribed to real estate.
Much progress has been made during the past five years in educating buyers and sellers about the immediate and long-terms benefits of breaking down the price to the component parts: real estate, tangible personal property and intangible personal property. Once buyers and sellers understand and embrace the process, attention to this detail as part of closing is a no-brainer. Some are a little skeptical at first because, like anything that seems too good to be true, they wonder why they haven’t heard of it before.
Understand the closing process
The key to understanding the opportunity is to understand the closing process. Because real estate is a significant portion of an operating hotel, the closing process is usually handled as a basic real estate closing.
Deeds are recorded to effect the sale, and oftentimes there is paperwork that requires the disclosure of the price. Closing attorneys, absent any direction otherwise, typically tie this number to the price in the Purchase and Sale Agreement. Then what you have are documents reading, under oath, that the price disclosed was paid for real estate. Other documents are then signed at closing—bill of sale for the tangible personal property and assignments for intangible personal property—but the deed for real estate discloses the whole price as if nothing else transacted.
When the assessor’s offices research the deeds to maintain ownership records for taxes, they learn the date the transfer was recorded and the price disclosed in the deed. So, if care was not taken at closing, the information the assessor obtains is not precise, and it is left up to him or her to decide how to use that price.
Here is what happens: The assessor will take that entire price and make an allowance for tangible personal property, usually determined by the assessed value of the tangible personal property (if tangible personal property is assessed).
At this point it is difficult to “undo” what was done at closing. There is a psychological concept of “anchoring” in play. The assessor’s mindset is now anchored to the number that was recorded on the deed.
Remember the old adage, “Timing is everything.” That holds true for buyers of hotels. Closing a hotel acquisition is a detailed process. There are so many things to take care of to effect the transfer of the operating business. Therefore, taking the time to ensure prices are recorded properly and disclosing the best information available is more than worth the effort.
Analyzing the price after closing can be done, but it is so much more effective to have the owners’ actions demonstrate the importance of doing it right at closing. Forethought and precise information are key. Then, assessors can reflect these actions of buyers and sellers in the marketplace with the mindset now anchored to the real estate only price—as it should be.
Bernice T. Dowell is 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 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.
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