Hidden profit lever: property tax strategy

NATIONAL REPORT – Most hotel owners assume their biggest operating costs are immovable. Labor rates rise with the market. Insurance premiums continue climbing. Utilities fluctuate with little predictability. In a margin-tight environment like 2026, owners feel they have limited control over the forces shaping their bottom line.

But there is one major expense that is far more controllable—and far more profitable to manage—than most owners realize: property taxes.

Property taxes are appealable, adjustable, and frequently misaligned with a hotel’s true market value. More importantly, they represent one of the only remaining levers that can meaningfully and directly increase NOI in a cooling performance cycle.

And unlike most operational initiatives, a successful property tax strategy doesn’t require additional guests, additional labor, or capital reinvestment. It delivers pure profit.

Hotels make less—but pay more

CBRE’s U.S. Hotel Monthly Trends dataset for September 2025 shows a clear pattern emerging across U.S. hotels:

• Occupancy declined 3.3% year-over-year
• EBITDA fell –3.7%
• Gross Operating Profit declined –2.3%
• Total operating revenue increased only +0.4%
• During the same period, property taxes increased +3.1%.

With ADR nearly flat (+0.3%) and RevPAR suppressed due to weakened occupancy, many hotels are producing lower income than their assessments imply.

This widening gap—falling profitability versus rising property taxes—creates immediate NOI pressure. But it also creates a powerful opportunity. When expenses move in the wrong direction while performance softens, owners finally have a strong basis to challenge their assessments.

Why property taxes drift

To understand why taxes rise during downturns, owners must understand the assessment cycle. Hotel assessments rarely move simultaneously with real performance. Instead, they are updated on multi-year cycles, and many jurisdictions rely on outdated financials, mass appraisal techniques, or valuation models that unintentionally include non-taxable components.

Hotels experience material income volatility tied to seasonality, ADR shifts, group cycles, and management turnover, yet assessments often fail to reflect these real-time variations.

Two things happen as a result:

1. Assessments lag real-world performance
When occupancy drops or gross operating profit (GOP) shrinks, assessments frequently don't adjust downward fast enough. That’s exactly what’s happening today. Assessment models often overlook mandated FF&E reserves, which reduce net operating income and should be incorporated into valuation for tax purposes.

2. Intangible hotel value often gets mistakenly taxed
State courts repeatedly affirm that intangible business value cannot be taxed. Yet, hotel assessments frequently include:

• Brand/flag value
• Management agreements
• Workforce in place
• Reservation systems
• Operating systems
• Franchise fees

Flag changes, management contract renegotiations, and operator transitions create intangible business value that must be removed from taxable assessments.

None of these are taxable real estate. These inclusions can inflate assessed values by a significant double-digit percentage.

For an owner, this isn’t an academic issue—it translates directly into a tax bill that is higher than it should be.

Revenue decline creates opportunity

The September 2025 data also shows that hotel performance differs sharply by property type:

• Resort hotels: GOP +17.5%
• Convention hotels: GOP +0.6%
• Full-service hotels: GOP –3.9%
• All-suite hotels: GOP –2.2%
• Extended-stay hotels: GOP –5.2%
• Limited-service hotels: GOP –9.0%

(CBRE Monthly Trends, September 2025)

These mixed results mean many properties—especially in limited-service, midscale, and extended-stay segments—are experiencing NOI deterioration that may not be reflected in current assessments. Owners in these categories are often paying taxes based on pre-decline valuations.

This mismatch is exactly where appeals win.

How this actually increases NOI

Here is where the conversation stops sounding like “homework” and starts sounding like money.

A 20% reduction is not uncommon when intangible business value has been mistakenly included in the assessment—and it delivers a direct NOI increase.

Here’s an example: A 200-room full-service hotel with $15 million in annual revenue has a $1.8 million annual property tax bill. A 20% reduction equals $360,000 in NOI added back, every year. Capitalized at an 8% cap rate equals a $4.5 million increase in asset value.

There is no operational initiative with that level of impact and that low of a cost.

And for owners preparing to refinance, market their property for sale, or stabilize margins, this NOI lift can materially change financial outcomes.

From compliance to arbitrage

Successful tax management at the portfolio level moves beyond simple compliance. It requires a Valuation Arbitrage approach—proving that the assessor’s underwriting assumptions differ from market reality.

1. The “Intangibles” Defense
The strongest appeals rigorously separate the Business Enterprise Value (BEV) from the real estate. This requires isolating income attributable to the flag, the management team, and the franchise agreement. If your jurisdiction is taxing your business income rather than your building’s rent potential, the assessment is flawed.

2. Cap Rate Correction
Assessors often use “safe” capitalization rates that lag the current cost of capital. In the current high-interest environment, a hotel’s true cap rate is likely higher than the assessor’s model. Arguing for a market-appropriate cap rate—backed by recent transaction data—can significantly lower the taxable value even if the NOI remains constant.

3. Expense Ratio Benchmarking
Mass appraisal models often standardize expense ratios (e.g., assuming 70% expenses). If your portfolio is facing rising insurance or labor costs that push expenses to 75%, that delta represents lost value. Presenting audited financials that prove your actual expense load is higher than the market standard is a defensible, data-driven reduction strategy.

Why market intelligence wins

In property tax appeals, information asymmetry determines the winner.

Local assessors operate with limited data—often relying on outdated sales disclosures or generic market surveys. The most effective counterstrategy leverages Institutional Data Scale.

The 2025 operating environment is defined by rising costs and softening demand. In this cycle, yield must be manufactured, not just managed.

Property tax strategy is a controllable, high-impact lever. It is appealable. It is scalable across a portfolio. And, with the right data, it is highly winnable.

In a market where revenue growth is hard to come by, property tax reduction is the “hidden profit center” waiting to be captured by investors who treat tax liabilities as a variable, not a fixed, cost.

Contributed by Mona Govahi, director of Property Tax Practice & National Business Development, CBRE, Houston

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 affiliated companies.