Navigate impact of hotel upgrades on property tax assessed value

HOUSTON, Texas ‒ Appealing property taxes for a hotel can be a complex process. It requires a thorough understanding of how hotel properties are assessed and how various factors, such as renovations, PIPs and new-construction enhancements, influence the property’s assessed value.

The latter is particularly important now, when financing for greenfield development is constrained and many hotel owners are choosing to upgrade their assets to build market share, rate and overall performance. Minimizing the impact of your asset’s newly assessed value will play a key role in strategizing the property tax appeal and ensuring correct the taxable value for your hotel.

Here’s a guide to help you navigate this process effectively.

How assessors calculate the hotel’s assessed value

Hotels are unique in that their value is not solely based on physical attributes but also on their income-generating potential.

When assessing a hotel's value, assessors typically consider:

• Income approach: This method calculates value based on the hotel’s ability to generate income, considering factors like occupancy rates, average daily rates (ADR), and overall revenue.

• Cost approach: This method estimates the value based on the cost to replace the hotel with a similar one, accounting for depreciation.

• Sales comparison approach: This method compares the hotel to similar properties that have recently sold, adjusting for differences in size, location and amenities.

Prepare to present your case…which may involve providing testimony, presenting evidence and answering questions from the review board.

Abraham Tieh

Impact of renovation and construction

Renovations, PIPs and new construction can significantly impact your hotel's assessed value. Here’s how:

Renovations

• Cosmetic updates: Improvements such as new paint, carpeting or updated furnishings may not substantially increase assessed value but can impact perceived market value.

• Major renovations: Structural changes, new amenities or significant upgrades can increase the assessed value, as they enhance the property’s income potential and market appeal.

New construction

• Additions: Adding new rooms, conference facilities or other amenities will likely increase the assessed value due to the potential for increased revenue.

• Compliance with building codes: Any construction to bring the hotel up to current building codes can also impact the assessed value, especially if it improves safety, accessibility or energy efficiency. Since the assessor’s office is linked to the city building permit office. The assessor adds assessment value when their office receives the permit value from the building permit department.

Steps to appeal your property tax

A solid grasp of how your property’s taxable value is assessed and what aspects of renovation and construction do ‒ and do not – contribute to a newly assessed value is an essential starting point for a property tax appeal.

Abraham Tieh, O'Connor & Associates

Next steps to build your case include:

1. Review the assessment: Obtain and carefully review your property’s assessment notice. Ensure all details are accurate, including property size, number of rooms and amenities. Review the assessor’s valuation analysis after filing the protest to identify any errors in that valuation analysis.

2. Gather evidence:

• Comparable properties: Collect data on similar hotels in your area. Look for discrepancies between your assessed value and those of comparable properties.

• Income statements: Prepare financial statements to show actual income, expenses and occupancy rates. Compare past assessment value and the difference in income and expenses used for the current tax year to find if there are disproportional income/expense ratios to the previous assessment values. .

• Renovation, PIP and/or construction records: Document all recent renovations or construction, including costs and the impact on revenue.

3. Consult a property tax consultant: Engaging a seasoned property tax consultant can provide significant advantages, including:

• Access to data: Consultants have access to comprehensive and up-to-date tax roll data.

• Market insight: They are attuned to local market conditions and can identify the best comparable properties for equity arguments.

• Strategic appeal: They can develop a compelling case and handle negotiations with assessors effectively.

4. File the appeal: Follow the proper procedures to file an appeal within the required timeframe. Include all gathered evidence and a detailed explanation of why you believe the assessment is incorrect.

5. Attend the hearing: Prepare to present your case at the appeal hearing, which may involve providing testimony, presenting evidence and answering questions from the review board. Your presentation must be clear and convincing.

Proactive planning

Navigating a hotel property tax appeal requires a deep understanding of how hotels are assessed and the impact of any renovations or construction on the property's value. By carefully reviewing your assessment, gathering strong evidence and consulting with a property tax professional, you can increase your chances of a successful appeal. This proactive approach can lead to a more favorable assessment and potentially significant tax savings for your hotel.It is one of the fastest ways to improve your hotel’s bottom line.

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 or Northstar Travel Group and its affiliates.