Hotel owners need to have a renewed energy and get more involved in the fight against over-taxation and double taxation of their properties.
For the more than 30 years I’ve been involved with property tax issues specifically regarding hotels, the No. 1 issue facing owners is the over-taxation and double taxation of their property.
Most of this occurs because the local assessors who determine the value of the hotel’s real estate are not trained in how to tailor their mass appraisal valuation models to the specific issues presented by operating hotels. The biggest issue, which accounts for possible over-taxation by 20% to 30%, is how to address the issue of separating the real estate from the business.
I spoke recently with a few hotel real estate tax consultants, who both felt a sense of “business value” fatigue. Assessors feel they have been given guidelines that sufficiently address the issue. Local boards made up of citizens often side with the assessors, skeptical of the third-party consultants just trying to earn an easy fee. Seems like a lost cause.
While owners do not want to get into the weeds concerning the messy and imprecise world of ad valorem taxation, they should know that many consultants have tirelessly fought this issue. When owners do take the time to learn about these issues, they are flabbergasted. Trying to understand exactly what assessors do when valuing their hotels seems like a foreign language. No institutional buyer of hotels would ever analyze a potential investment like assessors do, yet these officials frequently quote the “actions of the buyers and sellers in the marketplace” to support a position they have taken on a cap rate or a reserve for replacement or even deducting a management fee and franchise fee to remove business value.
So how do we continue to move forward with the business value battle? As with most things, the key to success is information and knowledge. Tax consultants have been singing the same tune for many years now and progress has been made but to move forward, the tax consultants that represent hotel owners need better information from their clients to help them make and support their arguments. Owners need to acknowledge this situation and dedicate more time and resources to assist their consultants.
Here are a few steps that can improve the process:
- First and foremost, understand that real estate taxation should not include tangible personal property or business value (intangible value). If you do not believe that your operating hotel has intangible value, the assessor will accept that. Otherwise, help your consultant understand your beliefs about your assets and help them understand how to support those beliefs.
- For newly acquired assets, provide consultants with copies of the investment committee memoranda that supported the acquisition. This details all of the issues involved in making the decision to purchase the asset, and it helps the consultant to see the pro forma relied upon to determine the purchase price.
- If a third-party analysis was completed to allocate the price for closing, provide the tax consultant with a copy of the report and access to the report’s author, who can act as an independent expert if needed.
- Have someone knowledgeable about the asset—asset manager, deal-maker or GM—work with the consultant to identify the issues that need to be addressed with the assessor and provide information to help the consultant to support the claims. Keep in mind that the consultant needs to understand the asset from the owner’s point of view and not the manager’s or franchisor.
- Discuss with the consultant the idea of working proactively with the assessor to determine the assessment up front and avoid contentious, time-consuming and expensive appeals. Many assessors welcome the opportunity to work with owners/agents early in the revaluation process to determine the fair market value and avoid the necessity of the appeal processes. Success at this level not only avoids the expense of appeals but also has the added benefit of the time value of money.
- Consider having an asset-management-like resource to work with your property tax consultants. Often owners do not have internal resources that have time or knowledge to interact with the third-party consultants hired to manage property taxes. Depending on the size of the portfolio, consider hiring an internal resource to dedicate to property taxes. Alternatively, consider another consultant to work with and manage the property tax consultants on ownership’s behalf.
Assessors will change—when they consistently lose appeals, when they consistently lose Board of Equalization appeal hearings, and when they consistently lose lawsuits. To help effect those situations, assessors need to consistently hear the same arguments from hotel owners/agents concerning intangibles—namely that they exist, they are significant, and they must be properly accounted for in the valuation process.
There needs to be renewed energy around this battle, and it requires owners to be more involved, more knowledgeable about the ad valorem taxation process and more available to help consultants make winning intangibles arguments. What ownership has to offer is an understanding of these assets from ownership’s perspective, which is what assessors and consultants need to learn. Truly understanding the actions of buyers and sellers in the hotel marketplace is what is needed rather than owners accepting attempts at mimicking the marketplace with no foundational basis.
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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