5 Tips on Controlling Hotel Property Taxes
Property taxes are not always a high priority for
buyers and owners of hotels, and that can be a very costly mistake.
Hotels are generally recognized as one of the highest taxed
real estate assets. A property’s return on investment can be significantly
impacted by real and personal property taxes. One recent study estimated that
property taxes account for 40% of a hotel’s cost of occupancy. Still, property
taxes are not always a high priority for owners, and that can be a very costly
mistake. Below are five tips for controlling property taxes on a hotel.
Tip One: Do Your Due Diligence
Property taxes are a significant variable in an acquisition
and can be tricky for underwriting an asset. Thus, owners should always
understand what implications the purchase will have on the hotel’s future
property tax liability before acquiring or investing in a hotel. It means
researching historical tax rates and assessments of comparable properties in the
area. It also means understanding the local assessment office’s valuation
methodology and reassessment cycle. For instance, how will the sales price
affect the assessor’s valuation of the property? With major renovations or new
construction, what is the timing of supplemental assessments?
Understanding the local reassessment cycle — many take place
annually, while some can be every three, four or even eight years — can have a
very large tax impact on a property. To accurately budget for property tax
expenses, owners must educate themselves about the property tax system in that
state and how that tax system is implemented in the local jurisdiction.
Tip Two: Look for Errors and Opportunities
Local assessing authorities are charged with assessing
hundreds of thousands of parcels. Inevitably, there are errors made in the
county’s property records. A careful review of those records is important. For
instance, the assessor’s records may reflect mistakes in the building’s total
square footage, age, hotel occupancy (limited service, full service), as well as
many other key characteristics. Correcting these mistakes for a newly
constructed or a recently acquired hotel may significantly reduce a property’s
long-term tax liability. In addition, many jurisdictions give taxpayers specific
protest avenues to correct these common mistakes that may have existed on the
tax roll for years.
Tip Three: Investment Market Value Does Not Necessarily
Equate to Property Tax Value
Even if an investor believes the assessor’s valuation is
reasonable based on their understanding of investment market value, the hotel
may still be overvalued. This is because investment market value as commonly
understood differs from property tax value.
Appraisals completed for financing or due diligence purposes
measure the value of the total assets of the hotel as an operating business. On
the other hand, market value for property tax purposes is limited to just the
value of the real estate.
Most states prohibit taxing a hotel as a going concern,
meaning intangible value attributable to a brand, licenses, trained workforce,
proprietary technology ( such as reservation systems), hotel management, and
franchise agreements must be excluded from the assessor valuation. The Appraisal
Institute and other authorities have long recognized the existence of intangible
value in hotels, which by some measures can account for 20% to 30% of a hotel’s
To obtain a true property tax value for the real estate, the
income attributable to personal property and intangible property must be
excluded. For example, in a decision that has implications beyond California,
the California Court of Appeals, in SHC Half Moon Bay LLC v. County of San
Mateo, 226 Cal.App.4th 471 (2014), recognized that the assessor’s failure to
exclude all the intangible value violated California law.
SHC Half Moon Bay purchased the Ritz-Carlton Half Moon Bay
Hotel for approximately $124 million. The purchase price included the total
assets of the business. The assessor deducted the value of the personal property
and reduced the value to $117 million. SHC challenged the San Mateo assessment,
asserting that the intangible value was $16 million. The Court of Appeals held
that the assessor’s valuation methodology of accounting for intangible value by
deducting management and franchise fees from the cash flow was legally flawed.
The assessor’s method, which is typically used by assessing authorities
nationwide, did not fully account for the existence of intangible assets. The
lesson from SHC is not just that the assessor must identify and exclude
all intangible value, but also that the sales price does not necessarily equate
to market value for property tax purposes.
Tip Four: Real Estate Transfer Taxes
Investors acquiring a hotel should also be aware of whether
a real property transfer tax applies. Currently, 35 jurisdictions levy a tax on
the transfer of real property, but there is little uniformity among
The first step is to determine whether a hotel transaction
is subject to a real property transfer tax and, if so, what type of property is
subject to the tax. In most states, transfer tax applies only to the transfer of
real estate. Hotels, of course, involve the sale of substantial non-real estate
items. Investors should consider conducting a purchase price allocation to
segregate the real property, tangible personal property, and intangible personal
property. With careful planning, transfer taxes can be minimized. It is also
critical to understand the local jurisdiction’s reporting requirements, audit
procedures, and, if necessary, the process for obtaining refunds where the
property’s value has been misreported.
Tip Five: Understand the Assessment Laws and Procedures
in the Jurisdiction
To take advantage of the opportunities to lower property
taxes, investors must understand how and when they can appeal. Every state has a
process for disputing a property’s valuation and filing a formal appeal.
However, property tax appeal procedures vary greatly from jurisdiction to
jurisdiction, can be difficult to navigate, and often require perseverance.
Among other things an investor needs to know are:
the methods used by assessors to derive the initial value,
when values are annually noticed,
the deadlines to appeal,
where to file an appeal,
what evidence is necessary to be successful on appeal, and
what rights a taxpayer may have when appealing
Owners unfamiliar with the deadlines, procedures and
understanding of the valuation methods used to arrive at their assessment can
easily miss an opportunity to reduce their property’s valuation. Thus, it is
always prudent to review a hotel’s property tax value annually to maximize their
chances for success.