Discover why every hotelier should consider appealing their property taxes–and what information can help build a winning case–in this exclusive Hotel Investment Today webinar.
Editor’s note: This webinar on strategies for successful property tax appeals was sponsored by O’Connor & Associates. O’Connor & Associates participated in the curation of participants but had no influence on the final editorial content.
NATIONAL REPORT – Considering appealing a hotel’s property taxes should be a core business strategy for any hotelier targeting substantial cost cuts on their P&L, according to the industry thought leaders speaking on Hotel Investment Today’s exclusive May 22, 2024, webinar, “Score a bottom-line win with experts’ hotel property tax appeal tips.” Click here to watch it on-demand.
The “whys” are simple, noted panelists Abraham Tieh, director of national commercial property tax, O’Connor & Associates; David Walia, vice president, business development, Nath Companies, and David C. Wilkes, partner, Cullen and Dykman LLP.
“Insurance costs are through the roof. Utility rates are escalating. But, there’s no magic to change those rates. The bill is what the bill is, and you have to pay it to get the service,” said Wilkes. “Your property's taxable value is the one place you have a measure of control over your expenses, and the outcome of exerting that control can be very significant.”
Walia put the significance of a winning appeal into a top- and bottom-line perspective.
“If you have a business surviving on a 10% net profit margin and you can save $100,000 on property taxes by putting the right strategy together, that’s like growing $1 million in sales,” he said. “Do you know the hard work we do to grow $1 million in sales? Or the amount of labor and management it takes to add $1 million of revenue to our business? Before undertaking that, my view is: Let’s do the easy thing; let’s reduce our property taxes.”
What assessors need to know about hotels
Although the decision to appeal can be easy, the process is complex. Walia, who works for a hotel ownership and management firm, Wilkes, property tax and valuation strategy partner at the law firm and Tieh, a commercial property tax specialist, agreed that even veteran assessors may not understand how the distinct nature of the hotel business impacts valuation.
Access to that data is an essential resource for tax consultants and clients alike. “As tax consultants, we work with local governments to teach them how to assess hotels properly. That starts with the fundamental premise of The O’Connor Approach™ which focuses on the fact that the tax assessor can only tax tangible assets,” said Tieh. “Intangible factors such as your franchise agreement, reservation system, contract staffing ‒ things you can’t touch and feel that still bring revenue or added value to your property — are not taxable.”
Educating assessors goes beyond introducing them to a different method of valuation. Hoteliers need to be able to deliver a comprehensive package of asset-specific information and competitive market research. It also counters the possibility that cap rates will be based on broad institutional surveys. As Tieh noted, these surveys typically were not designed to apply to hotels and often result in incorrect valuation for hospitality’s unique asset type.
“We collect a massive amount of data on RevPAR and ADR for branded and independent hotels,” added Tieh. “Then, we measure the incremental differences between hotels that have brands and hotels that are independent to determine the extra value brands bring to their franchisees.”
"We also measure incremental differences between and among various hotel segments, said Tieh. “It’s all necessary to get a clear picture of the intangible aspects involved in a hotel property that do not impact tax valuation versus the tangible items that do.”
Those differences complicate the assessor’s job. As Wilkes pointed out, hotels are not usually a pure real estate play. “Most investors don’t buy a hotel because they want to be in the real estate business. They’re buying an ongoing concern which has a real estate component and a management component,” he said.
Your property's taxable value is the one place you have a measure of control over your expenses, and the outcome of exerting that control can be very significant.
David C. Wilkes
Learn the building blocks of a winning case
Walia suggested using data such as O’Connor & Associates’ research along with competitor benchmarking reports to create a matrix that gives the assessor a 360-degree view of your hotel’s competitive landscape. “You as the owner know best whom you compete against in the open market,” he said. It also helps you see the difference in a hotel that the assessor valued at $73,000 per guestroom in tax terms versus one valued at $105,000.”
“That information shows that you might be being taxed 30% more than your competitors,” he said. “If your hotel is competing in the same market, often on the same street, selling the same product to the same consumer, why should you have to pay 30% more on your property taxes?”
Tieh also cited the need to address the result of brand proliferation and segment creep, as well as micro-market conditions on valuation. “The assessor may only see other 4-star hotels as your competitors and use those rates to define value,” he said. “In reality, you may be competing against a select service extended stay property, a new mid-tier brand or a pricey lifestyle hotel. If you’re in a market like Houston, where I work, there are no zoning restrictions. Anybody can build anything, anywhere, so hoteliers face a terrible saturation problem. The assessor often does not take that into consideration. You may be in a downtrend, but they still think all 4-stars’ value is going up."
Paying close attention to the numbers can also help shine light on errors. For example, Wilkes said a major midtown New York City hotel he was working with was mistakenly misclassified as retail by the assessor. “Once they got the classification right, it meant a major reduction for the hotel,” he said.
If you have a business surviving on a 10% net profit margin and you can save yourself $100,000 on property taxes by putting the right strategy together, that’s like growing $1 million in sales.
David Walia
Tell your hotel’s story
Although data is a strategic necessity, Tieh also underscored the need to explore the individual hotel to find opportunities to justify a lower valuation. He and his team walk clients’ properties to find valuation errors, frequently including disused spaces being assessed as revenue-generating square footage.
“The assessor doesn’t know your operating conditions, so there are a lot of factors out there you can use to show the assessor that their valuation is wrong,” said Tieh. “Maybe you’ve done a PIP, which caused a temporary revenue disruption. Or perhaps more new construction is coming into your competitive set. Some assessors will keep values up if they go to an approach that figures construction cost minus depreciation plus land. That could raise your value 30% to 100% more than a nearby competitor that’s not in the same situation.”
He added, “That’s why you definitely need to use an equity approach so the per room value can even out.”
The individual asset is key part of the story, as well, said Walia. Is it facing a flood of new supply? Is it an older property?
“An older property’s fixed expenses to operate are a lot higher than those of the shiny new jewel that just opened down the street,” Walia said. “Our evidence that it’s not correct that the apple and the orange should have the same mill rate because they’re different real estate producing different income in different market segments proved to be a contributing strategy to winning an appeal.”
Wilkes added that it’s just as important to listen to the assessor’s story and understand how the city reached the numbers that they did in their assessment. “Line that up with your story,” he said, adding, “Knowing where the city got their numbers can help you.”
The assessor doesn’t know your operating conditions, so there are a lot of factors out there you can use to show the assessor that their valuation is wrong.
Abraham Tieh
Gain appeal expertise to future-proof your P&L
Prioritizing property tax appeals as part of a proactive business plan is likely to become even more critical as cities struggle to make their budgets. “In New York, where I work, about 47% of the total market value of all the real estate here is residential. But, residential only accounts for 15% of the taxes paid,” said Wilkes.
He added, “The bulk of the tax burden is sitting on the commercial class at a time when the office market is taking a nosedive—and that’s long term. New York has a very big hotel market, 79% of which comprises leisure destination hotels. That’s a big target for assessors right now. Hotels here are already paying 5.5% of their value every single year. I think it’s actually going to get worse.”
In many big cities, the combination of regulatory issues and factors such as “skyrocketing” construction costs fosters a supply-demand imbalance that’s pushing up pricing. “So, even when hotels are in a strong market, it doesn’t necessarily mean the assessor is getting the numbers right,” he added.
For example, the assessor may look at your property, see that it’s doing well and raise its value. The problem for the owner is that the property may not necessarily be doing as well as the assessor thinks it is. “That puts the onus on the owner and their tax consultants to use data and onsite asset reviews to prove why that’s not the case,” said Tieh.
Why the appeal process is not DIY
Using case-in-point examples, the speakers catalogued numerous appeals that averaged property tax savings around 30% and savings that represented five-to-six-figure reductions. Although bigger hotels with more levers to pull will post the most dramatic numbers, the panelists agreed that hotels in any segment and of any size would benefit from filing an appeal.
“The benefits of winning an appeal are in the magnitude. A small, select service hotel may see a reduction of $2 million instead of $100 million,” said Wilkes. “But what's important across the board is that the assessor recognizes the hotel’s real estate value without factoring in the income.”
Another thing no hotel owner should undertake is doing the appeal work alone, the panelists agreed. Because assessments can vary dramatically from place to place, it’s crucial for a hotel owner to have a partner who can help them gather all the data needed to file a winning appeal, Tieh said.
“Don’t go to a family doctor to have heart surgery,” he said.
The panelists said owners – who generally are not tax experts themselves – likely will cost themselves money if they choose to go solo. Many municipalities are strapped for cash today so it would be good for owners to have someone in their corner who will fight hard for them to get to the correct tax payment.
Calling on experts for help is also a sector- and budget-spanning solution. In most cases, Tieh and Wilkes said firms such as theirs will not charge fees unless the appeal succeeds. “It’s a win-win for hotel owners,” Tieh said.
Shawn Turner is a writer and editor based in Stow, Ohio.
The views and opinions expressed in this content do not necessarily reflect the opinions of Hotel Investment Today or Northstar Travel Group and its affiliated companies.