The ins and outs of hotel property taxes
The ins and outs of hotel property taxes
26 SEPTEMBER 2017 7:35 AM

The world of property tax consulting can be a bit confusing, especially when it comes to hotels. Here are a few things to keep in mind when looking at hotel-asset property taxes. 

In the world of property tax consulting, hotel assets are a preferred property type to work because they present so many opportunities for challenging the locality’s assessed value.

Unlike simpler forms of real estate, such as office buildings, which can be valued in about four lines—rent, expenses, cap rate and value—hotels have many lines of input. The Uniform System of Accounts has about 18 line items to get to net operating income. Then beyond that, hotels require a significant investment in tangible personal property as well as investment in numerous intangibles assets.

Most assessors and consultants focus on the 18 line items of input to derive net operating income and the value of tangible personal property. Most, essentially, do not deal with the intangible property component. Consultants are looking for the low-lying fruit or the shortest distance between two points—appeal resolution and fee.

Many property tax consultants have fallen into a routine of simply learning what the jurisdiction does to value a particular class of real estate, for example, how they value shopping centers, office buildings, and hotels, and then basically accepting how they do it and look for ways to prove one of their inputs incorrect. Perhaps it is because the appeal process is not a level playing field.

Assessors have the presumption of correctness and their manner of assessing a particular class of property is typically applied to properties in that class. In other words, the way they assess hotels, even if it is incorrect, is applied to all hotels. This satisfies one of their legal mandates—equitability. Jurisdictions have successfully upheld their valuation models on the basis of “we valued everyone the same,” so consultants see a challenge to the jurisdiction’s methodology as a losing proposition and do not focus much attention to the matter.

Owners seem to accept this approach from their consultants probably because these assets have so many areas that provide opportunity for differences in opinions and some level of savings may be achieved each year. “Savings” is typically the standard by which the consultants are measured. But what is left over on the table because of what the consultants aren’t doing?

For example, consultants will often not attempt to make an argument for quantification of intangible value because most jurisdictions have not included that in their methodology. Local assessors have embraced a technique, referred to as the management fee technique or “Rushmore Approach” that proffers that by deducting a management fee and a franchise fee from the income stream; they have “removed the business value” from the value derived by capitalization of net operating income. The jurisdictions do this for two reasons:

  1. It’s easy;
  2. they deem Rushmore as the authority on hotel appraisal; and
  3. there are no court rulings that strongly favor the taxpayer.

The effect of this is that all hotels that are operating at or above market are routinely overassessed by 20% to 30% more than they should be because the intangible value is included in the determination of the real estate value.

More and more owners are allocating their prices at acquisition and closing their deals consistent with the allocation. This allows appraisers and assessors who measure the market to observe better information and to observe directly what the parties to the transaction deem to be the price paid for real estate, tangible personal property and intangible property. So owners do indeed believe there is intangible value in an operating hotel beyond the deduction of management fee and franchise fees.

While it is incorrect for a jurisdiction to not make an adjustment for intangible value beyond a deduction of a management fee and franchise fee (expenses), the jurisdictions apply this methodology to all hotels, creating a situation wherein they feel they are protected even if they are wrong. Owners and consultants that do not challenge this are simply accepting a real estate tax that is 20% to 30% higher than it should be. And this is not just an overtaxation for one year, this is an overtaxation in perpetuity.

As stated previously, the process of allocating purchase prices and recording deeds more correctly will eventually aid in effecting change. Owners and consultants becoming more engaged in the appeal processes and making the arguments for intangible value to be explicitly excluded in the valuations is another step forward. Owners should encourage their consultants to make the intangibles argument and consultants should continue to partner with owners to find support for their arguments. Owners and consultants working closer together in trying to understand each other’s worlds can only increase understanding, which hopefully paves the way for progress. The day when intangible value is excluded from assessments are when a hotel’s real estate is taxed on the value of only the real estate.

Bernice T. Dowell is the president of Cynsur, LLC and a former senior manager of Paradigm Tax Group. 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 International’s tax department in 1991. While at Marriott, she was a member of the inaugural class at George Washington University for the masters of science in finance program and focused her senior thesis on the topic of hotel investment analysis and the contributory value of a tradename to a going concern.

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