A breakdown of hospitality property taxes
A breakdown of hospitality property taxes
03 DECEMBER 2012 7:08 AM

The process of choosing a property tax consultant should entail as much savvy as the process of acquiring the asset itself.

Over the past nine months, we’ve explored the world of hospitality property taxes, local taxes and specialty assets. The first article in this series discussed consultants; the second article discussed the hotel assets; and the third article discussed how to choose, compensate and evaluate property tax consultants. This article is a review.

Property tax consultants can be categorized in five categories. Each has pros and cons:

While many hospitality owners typically think in terms of these taxes being local and needing local expertise, there is an aspect to their particular assets that requires more than just any local representation. It behooves the hotel owner to consider their needs for managing property taxes to be more than simply local and more than “what’s the cheapest.”

All property tax consultants are not created equal. There are plenty of commodity service providers, but consider for a moment exactly what your needs are and how to best get what you need.

More than just real estate
Hotels are much more than just real estate. Yes, the real estate is a very important and very significant part of the investment, but what one pays for an operating hotel is an investment in real estate, tangible personal property and intangible personal property.

Most assessors are not particularly trained to value only the real estate component of an operating hotel. Many consultants are not particularly trained in that regard either.

When considering consultants to handle your hotel’s property tax matters, make sure they know what makes the hotel asset different from all other commercial property. Ask them how they handle removing the tangible and intangible personal property. Make sure they’ve included an appropriate reserve for replacement in their analysis, and ask them if they know what a STR report is and how to use it. (STR is the parent company of HotelNewsNow.com.)

When choosing a consultant, experience is first and foremost—both in the locality and with the asset type.

Because of the complexity of hotel assets, it might be the case that experience with the asset is more important than experience in the locality. However, there are jurisdictions where it is definitely to one’s advantage to be local. The best case would be to have experience in both the locality and with the assets.

Negotiating fees
Once you have decided on a consultant, you must negotiate the fees for the services.

Most property tax consultants work on a contingency fee basis. This works well for owners and for consultants as it requires no initial outlay from the owner. And because consultants directly participate in the results, they have an incentive to maximize benefits.

Typical contingency fees are 25% of tax savings for lower level cases—assessor, board and state boards. Consider the effective tax rate in the jurisdiction to determine if typical fees are lower or higher than 25%.

For example, if tax rates are relatively high, 2.5% to 3%, contingency fees lower than 25% might be appropriate. In jurisdictions where tax rates are low, 1% or less, contingency fees greater than 25% might be appropriate.

In some situations it might be more appropriate to consider a flat fee arrangement. For example, in recessionary times, the market value of hotels plummets, making it easier for the consultants to make the valuation arguments to get a reduction. The tax savings in this circumstance is like low hanging fruit. One might consider a flat fee of $5,000 in that situation.

Another tool in negotiating fees with property tax consultants is fee caps. The owner needs to determine an appropriate cap on the fees that would allow the consultant to have an incentive to work hard but not to unnecessarily benefit from the situation. Fee caps can range from $30,000 to $100,000 depending on the value of the property and the size of the opportunity.

Of course, the engagement can be structured in any manner—flat fee, contingency fee, contingency fee with a cap or all of the above. Any experienced consultant will work with you on fees, and you should be able to develop an engagement that will fairly compensate the consultant and incentivize hard work for the benefit of both parties.

Evaluating performance
Once you’ve engaged a consultant, be prepared to evaluate the performance beyond dollar amount of tax savings. The tax savings should be evaluated on a relative measure such as tax savings as a percentage of potential taxes.

For example, it might seem impressive to save $1 million in taxes, but if that only represents 2% of the potential tax savings, it is likely that there are still significant savings to achieve.

Another metric to consider is taxes as a percentage of gross revenue or gross operating profit. Owners should expect their property taxes to be at a certain level as a percentage of gross revenue. If the property’s tax burden is above that level, an in-depth review should be undertaken to evaluate what is causing the property taxes to be higher than expected. Sometimes it is simply accrual accounting, but it could be that the property’s assessment is too high and a successful appeal is needed.

Another possible way to evaluate the consultants is to review the final assessed value achieved through appeal versus the target value.

For example, if the owner and consultant have agreed that the target value for the appeal is $10 million and the final value achieved is $12 million, the result is 120% of the target value. If this method is the primary method of evaluating consultant results, the target value must be realistic and achievable. Then final results at or below the target value are very good. If target values are very aggressive, final results of 120% might be acceptable.

One other factor to consider when evaluating consultants is the timeliness of the completion of the appeals. For cash management purposes, it is in the owner’s best interests if the appeals are concluded prior to the issuance of tax bills. Otherwise the erroneous taxes must be paid, and when the appeal is complete refunds are issued. Most jurisdictions do not pay interest on refunds. If cash management is important, make the consultant aware of that and make time a key element in the process.

Property tax is not a fixed expense. It is manageable but often requires hiring someone experienced with these ad valorem taxes to assist. Hotel assets are very sophisticated investments and are typically left to those savvy investors who have specific knowledge of the operations. The process of choosing a property tax consultant to represent you should entail as much sophistication and savvy as the buying process.

In this article we’ve discussed who the consultants are and the pros and cons of each type; why hotel assets deserve more than just a local consultant; how to compensate the consultants; and how to evaluate their performance. Armed with all of this information, one should be ready to truly manage below the line.

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 orlstory@paradigmtax.com.

The opinions expressed in this column do not necessarily reflect the opinions of HotelNewsNow.com or its parent company, Smith Travel Research and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.

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