O’Connor & Associates’ Abraham Tieh weighs in on hoteliers’ most pressing tax question for extended-stay conversions.
HOUSTON, Texas — Whether it’s concerns about post-renovation increases in property tax valuation or questions about how to manage energy credits, hotel owners face a wide spectrum of “taxing” issues.
Hotel Investment Today compiled a list of some of hotel owners’ most frequently asked questions on property tax valuations based on feedback to recent webinars and roundtables sponsored by O’Connor & Associates, comments to tax-related features on the HIT website and conversations at The BHN Group’s ALIS events in the United States and HI-CAP conferences in Asia-Pacific.
In this first article in an exclusive series, Abraham Tieh, director of national commercial property tax, O’Connor & Associates, provides expert advice on how to get ahead of potential changes in tax rates for newly-converted extended-stay properties.
Owners ask: With so many transient hotels being converted to extended-stay, what recommendations do you have owners to make sure their newly assessed property tax rate is correct and that they listed all expenses (not just the obvious) needed to achieve that conversion?
Abraham Tieh: When converting transient hotels to extended-stay properties, it’s crucial for hotel owners to ensure their newly assessed property tax rate is correct and that all relevant expenses, including less obvious ones, are considered in the conversion process. Here are some key recommendations:
Ensure the correct valuation method is used
Recommendation: Ensure that the appropriate income-based approach is used for the new property type. Extended-stay hotels often have lower daily rates and longer occupancy periods compared to transient hotels, leading to different revenue dynamics. Property assessors should adjust the income model to reflect:
Longer stays with lower turnover.
Reduced reliance on ancillary revenue (e.g., from events, restaurants).
Lower overall ADR (Average Daily Rate) compared to transient hotels.
Action: Work with a property tax consultant to provide accurate financial projections based on the extended-stay model. This ensures that assessors have the right data to reflect the property’s true earning potential, helping to avoid overvaluation.
Include all relevant conversion expenses in the appeal
Recommendation: Document all capital expenditures related to the conversion, including both obvious and less apparent costs. These expenses are critical in supporting an argument for reduced tax liability based on the financial burden of the conversion.
Key Expenses to List:
HVAC & electrical system upgrades: Necessary for converting the property to comply with long-term occupancy codes (if reclassified to R-2).
Plumbing & water systems: Long-term stays may require improved water systems, such as increased hot water capacity or efficiency upgrades.
Furnishings and appliance installations: Many extended-stay properties require in-room kitchenettes, including ovens, microwaves, fridges, and more substantial furniture.
Fire safety and code compliance: Extended-stay units might need additional fire safety measures (e.g., sprinklers, fire alarms), as long-term occupancy can demand higher safety standards.
Soundproofing and insulation: These upgrades might be necessary to accommodate longer-term residents who expect more residential-like living conditions, which might not be present in transient hotels.
Extended-stay amenities: Include costs related to adding features like laundry rooms, workout facilities, and more residential-focused services.
Significant marketing and rebranding costs: A full rebrand to reflect the new business model (signage, digital presence, marketing materials) can be a notable expense.
Action: Keep detailed records of all direct and indirect costs of the conversion, and ensure these are factored into the financial picture presented to tax assessors.
Review and Prepare for Changes in Classification (R-1 to R-2)
Recommendation: If the property is reclassified from R-1 (transient) to R-2 (extended-stay/permanent occupancy), assess how this change impacts both the valuation and operating expenses. Local jurisdictions might apply a different tax rate to R-2 properties or use a different valuation method.
R-2 properties typically have more stringent building code requirements, as discussed, but this could also lead to additional property tax assessments if not carefully appealed.
Once the conversion is complete, request a formal post-conversion assessment review to ensure the new property tax assessment accurately reflects the extended-stay model.
Abraham Tieh
Action: Consult with local assessors and your tax consultant to understand how the classification change affects your tax rate and be prepared to negotiate for fair treatment based on the unique characteristics of extended-stay operations.
Factor in lower vacancy and revenue changes
Recommendation: Understand and document how your vacancy rates, income per unit, and revenue structure will change post-conversion. Extended-stay hotels typically have lower vacancy rates than transient hotels, but they may generate lower overall revenue due to extended, discounted stays.
Action: Present your updated revenue model to tax assessors, showing:
Lower turnover: Long-term guests result in fewer bookings but more consistent occupancy.
Reduced operational expenses: While you may have fewer housekeeping and maintenance cycles, some costs—like utilities and services—may increase due to prolonged occupancy.
Use this information to adjust your operating income and cap rate in appeals, ensuring a fair valuation reflective of the extended-stay model.
Identify opportunities for tax incentives and abatements
Recommendation: Explore local and federal programs that may provide tax incentives or abatements for hotel conversions, particularly if the property is being upgraded for energy efficiency, adaptive reuse, or housing relief.
Potential programs to explore:
Energy efficiency credits (e.g., 179D for commercial buildings).
Adaptive reuse programs: Some cities offer tax incentives for converting underutilized hotels into long-term housing or extended-stay models.
Local tax abatement programs: Particularly in areas encouraging mixed-use or workforce housing.
Action: Work with a tax consultant to identify and apply for any available incentives that can offset the cost of upgrades and reduce the long-term property tax burden.
Perform a Post-Conversion Assessment Review
Recommendation: Once the conversion is complete, request a formal post-conversion assessment review to ensure the new property tax assessment accurately reflects the extended-stay model. Engage with a property tax consultant to verify the valuation is based on current market conditions and operational metrics, ensuring it doesn’t reflect a valuation inflated by prior transient hotel metrics.
Action: Prepare a comprehensive report showing all expenses, changes in operating income, and evidence of the market impact of transitioning to an extended-stay property. This report should be submitted as part of any property tax appeal to argue for a fair assessment.
By thoroughly documenting all conversion-related expenses, presenting the correct income model, understanding classification changes, and exploring tax abatements, hotel owners can ensure that their newly assessed property tax rate is accurate and appeal any overvaluation. Engaging a seasoned property tax consultant is crucial to navigating these complexities and maximizing savings.
Abraham Tieh is director of national commercial property tax at O’Connor & Associates.
The views and opinions expressed in this content do not necessarily reflect the opinions of Hotel Investment Today by Northstar or Northstar Travel Group and its affiliates.