Hotel management companies are calling in property tax expert to stop overpayments, boost hotel owners’ bottom lines and create a new revenue source for themselves.
Hotel management companies handle almost all operating expenses of the hotels they manage. Most of them can solicit better prices from qualified vendors by leveraging their massive purchasing power. Yet, they fail to control one of the biggest hotel operating expense items: property taxes.
Hoteliers may not be aware that their management company does not have end-to-end scope regarding property tax oversight. They are not involved in helping owners reduce property taxes nor do they typically have the comprehensive expertise to do so successfully. Based on O’Connor and Associates’ experience, that disconnect means over 90% of hotels are overpaying on their property taxes.
... over 90% of hotels are overpaying on their property taxes.
Andrew Choy
Although the level of overpayment varies widely, it is typically a significant amount. Recent surveys of hotel valuation data collected regionally across the nation revealed that hotels represented by a tax agent consistently showed lower tax value per key. Conversely, the surveys found that most hotels managed by management companies paid much higher taxes – 20% to 30 higher on average.
Key points in building the case for property tax appeals center on these factors:
Market value and taxable value are not the same. Unlike other types of properties, valuation for hotel and lodging properties are unique and complicated for ad valorem taxation purposes. Most hotel owners and hotel management companies are not aware that there is a significant difference between market value and taxable value when it comes to ad valorem taxation.
Hoteliers believe that property taxes are taxed based on a hotel’s fair market value. This is perhaps one of the biggest misconceptions in the hotel industry. Fair market value is generally measured by net operating income or EBIDTA, divided by a capitalization rate.
For acquisition and financing purposes, there is no dispute on how the fair market value is determined. However, a significant portion of a hotel’s market value lies in its flag. The business value associated with a hotel’s flag, such as goodwill, trade name, license, loyalty program, quality control, etc. are intangible assets which are exempt from ad valorem taxation in all 50 states. Property tax can only be assessed on real and tangible properties, not intangible assets. Properly removing non-taxable components from market value can reduce property taxes drastically. Reducing property taxes will boost a hotel’s bottom-line dollar-for-dollar.
Determining a hotel’s intangible business value plays a major role in winning tax relief. Practitioners generally agree that intangible value exists in hotels. However, there is no general agreement regarding how to estimate the intangible value. Perhaps the most significant controversy in property tax law today is the dispute between taxpayers and tax authorities over the existence, quantification and allocation of business value versus tangible real and business personal property value of a going concern.
Most tax assessors allow the deduction of fees paid to the franchisors in their income approach model. Thus, they claim they have accounted for all intangible business value. Based on a tax assessor’s theory, there is a net zero gain to a hotel owner who purchases a franchise from major brand families such as Marriott, Hilton, IHG, Wyndham, Choice, etc.
Why would an owner purchase a hotel franchise if the gain is equal to the fees they paid the franchisor? Several courts have ruled that even if the methodology is widely used by tax assessors, it cannot be applied in such a way that violates the law. Their methodology has accounted for the “Return of Investment”; but failed to account for the “Return on Investment”. Many tax consultants have attempted to challenge assessed values of a hotel arguing intangible business value but often fail when they are unable to demonstrate how that value can be reasonably determined.
Andrew Choy, O'Connor and Associates
The O’Connor Approach© breakthrough delivers significant savings. O’Connor and Associates, the leading property tax consulting firm in the nation, asserted that the intangible business value of a hotel can be quantified and measured if adequate historical data is available. Even if such data is unavailable, properties can be assigned a value based upon the most comparable brands and classes where data is available.
After years of extensive research, O’Connor has developed a proprietary method, the O ‘Connor Approach©, which measures a brand’s contribution to a hotel’s performance by quantifying the change in revenue that occurs when a brand is added, removed or compared to other brands or classes of hotels. After deducting all incremental increases in expenses associated with fees paid to the franchisors, the net gain is the intangible business value.
Properly removing this non-taxable component can save a hotel owner a significant amount of property taxes each year. In the three years since the implementation of the O’Connor Approach©, the result has been overwhelmingly successful.
Using this approach, O’Connor delivered a total tax savings of more than $500 million over the past three years. That continually improving metric created $200 million in tax savings during the first eight months of 2023. Based on the current rate of growth, redefining the intangible business value is anticipated to create $1 billion tax savings for property owners by 2030.
Hotel management companies are teaming up with O'Connor to provide solutions
Heightened awareness of overpayment means more hoteliers are demanding professional help to reduce their property taxes. Powered by O’Connor’s revolutionary approach, many hotel management companies are offering owners an option to amend their management contract by adding property tax appeal services. It’s a win-win-win for the parties involved in the collaboration.
Owners who opt into this service will benefit from: Not having to seek tax professionals on their own; management companies’ volume purchasing power and the fact that no additional fees are paid to the management companies since O’Connor does not charge any fees without generating any tax savings. Their win means increasing the bottom line at no added cost.
Management companies may charge property tax specialists a fee for processing and coordinating such additional service on behalf of the owners, thus creating a new source of revenue for themselves. The win for the manager comes from showing high profits on hotels they manage.
Engaging property tax reduction experts can be key to controlling capital outlays, boosting bottom line of hotels increase ROI, market value, and financing ratios.
Andrew Choy is director of national hotel property taxes and the creator of the O’Connor Approach© at O’Connor & Associates.
The views and opinions expressed in this column do not necessarily reflect the opinions of Hotel Investment Today or Northstar Travel Group and its affiliated companies.