The property tax appeal process is complex, but it gives tax consultants and their hotel clients a powerful tool to cut improperly calculated valuation and dramatically improve their bottom lines.
Valuation for hotel and lodging properties is both unique and challenging if the purpose of valuation is for ad valorem taxation. Tax assessors rely on mass appraisal methods to estimate property values as if the process is one-size-fits-all. Such concepts have resulted in most hotel property owners overpaying on their real estate taxes.
Fortunately, the government is aware of the flaws in the system. Officials have incorporated many rounds of appeals to give property owners the opportunity to make proper adjustments. It is of the utmost importance for all property owners to understand and evaluate their property assessment values and file appeals to reduce their taxes.
The property tax appeal process is complicated, especially for hotel properties. However, with a proper approach and comprehension of the process, hoteliers can reduce their property taxes significantly. Property tax is a major component of a hotel’s operating expenses. Reducing property taxes improves a hotel’s bottom-line dollar-for-dollar which, in turn, boosts the market value for acquisition or financing purposes.
…always file an appeal…it costs you nothing if there is no tax savings, so there is no reason not to appeal.”
Andrew Choy
Market value is not the same as taxable value
The market value of a property consists of real property, tangible personal property and intangible personal property. Property tax can only be applied to real property and tangible personal property.
What makes hotel properties unique and complicated is the fact that a sizable portion of a hotel’s value lies in its flag. The business value associated with a hotel’s brand includes goodwill, trade name, license, loyalty program, quality control, etc. The property tax codes define such value as intangible assets, and they are exempt from ad valorem taxation in all 50 US states and Canada.
Intangible assets are regarded as something you cannot see, touch or smell, although they contribute a significant value to the real property asset. The biggest challenge for property owners, tax consultants, tax attorneys and even tax assessors is how to measure the value of intangible assets. When the non-taxable portion of the market value is properly removed, the taxable value can be significantly lower.
The O’Connor Approach ™
After years of extensive research, O’Connor & Associates has developed a breakthrough method, the O’Connor Approach ™. This revolutionary approach measures a brand's contribution to a hotel's performance by quantifying the revenue change that occurs when a brand is added, removed or compared to other brands or classes. After deducting all incremental increases in expenses associated with fees paid to the franchisors, the net gain is the intangible business value.
One of the largest tax consulting firms in the nation, O’Connor is the leading advocate for the hotel industry. Thousands of hotel owners have benefited from the O’Connor Approach™, enjoying far more success in their tax appeals than ever before. O’Connor collaborates with hotel associations, management companies and franchisors to reshape how tax assessors value hotels. Canadian hotel associations are now partnering with O’Connor to assist that country’s hotel owners reduce property taxes.
Andrew Choy, O’Connor & Associates
Tangible personal property
While most of the focus for hoteliers is on intangible personal property values, it is important to point out that the tangible personal properties in a hotel, such as furniture, fixtures and equipment (FF&E), cannot be separated from the income approach valuation. In essence, what would be the value or income of a hotel without furniture?
People can lease an unfurnished apartment, but no hotel room can be rented unfurnished. If a tax assessor assesses a hotel's FF&E separately, that value should be zero or should be subtracted from the hotel's assessed value to prevent double taxation of FF&E. In addition, the resale value of a hotel’s FF&E is significantly lower than the depreciated value set by the tax assessors.
Uniform and Equal Approach
Most states require properties of similar class and quality in the same market area to be valued uniformly and equally. This may be the most powerful method to make sure your property is being valued fairly. However, to present a strong Uniform and Equal argument, you must have ample data of comparable properties available so you can select the lower ones to challenge the tax assessor’s high value.
Market Approach
Market Approach valuation is commonly used by tax assessors to set your assessed value based on recent comparable sales. However, tax assessors are known to select only high sales to justify a high assessed value. You will need reliable sales data resources to assist you at tax appeal hearings to be successful.
Fact check these skill sets before choosing a tax consultant
Since hotels are unique and valuation requires expertise, choosing the right tax consultant could mean significant difference in tax savings. Here are tips on how to evaluate a potential tax consultant.
• Taxable value. It has been proven that the O’Connor Approach ™ makes a significant difference in lowering hotel property tax bills by removing non-taxable intangible values from the market value. Consultants who are authorized to use the O’Connor Approach™ may provide you a better chance of success.
• Data resources. Consultants with massive valuation and sales data resources will provide stronger Uniform & Equal and Market approach arguments. Ask your consultant to show you samples of comparable data or sales for verification.
• Experience. How many hotel tax appeals has your consultant done?
• Comparative results. Consultants are not likely to tell you about their “bad jobs.” Weigh results against those of other hotels in your area. Keep in mind that simply getting a refund is not an indication of success. What if you deserve a much bigger refund?
But the one must-ask question is whether you should file an appeal. An expert tax consultant will tell you to always file an appeal before the deadline. If your tax consultant recommends not filing an appeal on any account, stay away. It costs you nothing if there is no tax savings, so there is no reason not to appeal.
Andrew Choy 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 or Northstar Travel Group and its affiliates.