Owners seek relief from rising property taxes
02 JULY 2015 7:48 AM
Property taxes on hotels are on the rise throughout much of the United States. Owners and operators must be vigilant and proactive to ensure the assessments on their hotels are fair and accurate.
REPORT FROM THE U.S.—As hotel property values rise in the upward economic cycle so do property tax bills for owners. Higher taxes can be mitigated by paying close attention to comparable values, appealing unfair valuations and calling on tax consultants as needed, sources said.
“Property taxes might be the single largest line item on your (profit-and-loss statement),” said Thomas Dolan, managing partner of HVS Property Tax Service. “Payroll is typically broken apart in multiple categories within the hotel, whereas property taxes are one line item. It depends on where you’re located, such as a state like Alabama that has less than a 1% tax rate, to some places in New York, which have tax rates of 7% on the full value of a property.”
Public hotel companies are feeling the pinch of higher property taxes on their hotels. During an earnings call, RLJ Lodging Trust President and CEO Tom Baltimore said that the real estate investment trust’s tax bill increased $1.8 million in the first quarter of the year.
“We are seeing the municipalities really push to have their deficits and have their issues funded on the backs of the commercial property owners,” Baltimore told analysts on the call.
Increasing taxes are in part a function of the stronger national economy and the sustained health of the hotel industry, said Vicki Richman, COO and CFO of HVS Hotel Management.
“There’s no question, as hotels become stronger performers their taxes are going to go up and that’s more a function of the assessments than the tax rates increasing,” she said. “Assessors are a lot less flexible than they once were, such as following the crash (of the economy.) They really did help out then in part because when you appealed they had little (data) to go on to challenge the appeal in terms of your valuation.”
Pursuing tax relief
Developers of new hotels, particularly in center-city areas, sometimes seek city or state abatements as a way to lower their tax bills in the early years following a hotel’s opening.
Aparium Hotel Group, which is developing the 100-room Foundation Hotel in downtown Detroit, used a range of tax abatement options to get the adaptive-reuse project off the ground. The developers tapped into state and federal historic tax credits to provide some funding, but the companies also received a form of property tax abatement reserved for development in blighted or neglected areas.
“We pursued a brownfield incentive under the state’s (Obsolete Property Rehabilitation Act) that involves taking an obsolete property—in our case it’s two vacant historic buildings in the urban core—and developing a hotel from it,” said Michael Kitchen, VP of acquisitions and development for Aparium. “To gain the OPRA certificate, we had to commit to redeveloping the buildings under a certain timeline and to creating a certain number of jobs, including jobs for residents of Detroit.”
Aparium received a 12-year tax abatement, which allows the company to freeze the value of the two buildings to their values before project development started. One of the two buildings wasn’t on the city’s property tax rolls as it was the city’s abandoned former fire department headquarters.
“We had to make the case we couldn’t pursue the redevelopment without (the abatement), and that’s certainly true,” Kitchen said. “Detroit has a fairly high tax rate compared to other cities, so the tax bill on a $28-million project would be significant: perhaps as much as a half-million dollars in annual taxes on a hotel with 100 rooms, or about 25% or 30% of net operating income.”
Pay your fair share, and no more
Owners, operators and asset managers of operating hotels need to be vigilant to make sure their properties aren’t paying excessive taxes compared to similar competitive hotels. Sources offered a number of tips owners could use to keep tabs on the tax situation for their properties.
Property tax data is public record, so owners or operators should regularly check assessments of comparable hotels.
“You definitely need to stay on top of your comparative valuations,” Richman said. “You can get skewed in relation to other hotels, so you want to be constantly monitoring assessments of hotels comparable to yours in terms of facilities, location and other factors to make sure you’re not out of sync.”
Dolan suggested owners monitor news reports and keep in touch with local assessors to know when new valuations will be made.
“Keep an eye on it, but be proactive in speaking with (assessors),” he said. “Assessors aren’t bad guys, but if you’re not giving them the information they need your valuations might be higher than they should be.”
If a property valuation from an assessor is out of line, owners can appeal.
“It’s your right, but it’s important to understand the appeals process in each jurisdication in which you operate,” Richman said. “And don’t miss an appeals deadline or you might have no recourse.”
In most cases, owners or GMs can monitor and react to real estate tax issues for their properties, but the process takes time and diligence.
“Always try to do it yourself,” Richman said. “Make an appointment with the assessor and if you start the process early enough and find you’re not getting any results, you can then turn to professionals for help.”
She said owners should consider hiring tax consultants, especially ones with experience in the hotel industry, if they don’t have the time to pursue tax issues or if they believe their managers won’t be able to handle the process.
“A consultant can cut to the chase with (assessors), and they know how to communicate with them,” Richman said. “And assessors probably prefer to deal with consultants because they don’t have to explain the processes to them.”