Learn how property tax reduction drives significant bottom-line improvement

Editor’s note: This webinar about successful tax reduction strategies and what that came mean in reducing a major expense was sponsored by O’Connor & Associates. The firm had no influence on the final editorial content.

HOUSTON – Property taxes already rank among the top three-to-five expenses for most hotel owners. But, while owners, brands and industry leaders have mounted major initiatives to combat other big-ticket costs such as rising labor, utility, insurance and, in some cases, marketing, escalating tax rates are viewed as inevitable. That misconception could be adding tens or hundreds of thousands or even millions of dollars in unnecessary outlays to the P&L, cautioned Abraham Tieh, director of national commercial property tax, O’Connor & Associates.

Fixing this discrepancy is one of the surest ways to boost the bottom line, he said in a live webinar for Hotel Investment Today held Dec. 14, 2023 (now available on demand here). Using data gathered from hotels nationwide and expertise built on experience in all 50 states, Tieh outlined essential ways hotel owners in all segments can reduce this expense and improve performance.

The key, according to Tieh, is using the breakthrough O’Connor Approach to calculate valuation, which can lead to significant reductions in a hotel’s expense column. He also provided tips for owners detailing how to prevent and successfully appeal tax overpayments.

“Hotels are a very specialized asset from a valuation and assessment perspective…different than most other forms of commercial real estate,” said Tieh. “However, many owners, management companies, assessors and tax consultants don’t understand the differences.”

Building a better calculator

The issue lies primarily in the failure of tax assessors to factor in the intangible value associated with a hotel’s flag and associated business elements, which are exempt from ad valorem taxation in every state. Independent hotels also have certain intangible business aspects of their operations, he pointed out. Intangible properties can include franchise licenses, permits, goodwill, quality control training, reservations systems, staffing, loyalty programs and more.

“Since they're part of your hotel operations, these components cannot be felt or touched, but bring extra value to your property,” explained Tieh. “So, the extra value part is not taxable.”

The firm’s copyrighted and trademarked O’Connor Approach—which has been used to argue cases in both the assessment and appeals processes—is used for calculating this intangible business value. The firm’s proprietary method has been tested in 40-plus states, with successful outcomes that resulted in larger reductions across the board for hotels.

The O’Connor Approach collects ADR & RevPAR data for all hotels in the U.S., then compares RevPAR data of hotels of the same class with and without a flag, in order to calculate the incremental revenue increase from the flag. Total franchise fees are deducted, and the resulting net gain is the untaxable intangible business value, expressed as a percentage. This process is a significant divergence from the venerable Rushmore Method, which doesn’t account for the intangible business value.

“This is how we’ve come up with our methodology, to be easily understood in the court system or in the appeal system by people or judges who are not familiar with the hotel business,” said Tieh. “And the same thing with independent hotels: We have a way to come up with a business value that's intangible for independent hotels, too. For example, upper midscale hotels typically see an average $15.06 revenue increase with a flag, at 21.53% of total revenue. After deducting an $8.54 franchise fee (12.2% of revenue), the net gain – and nontaxable intangible business value -- is $6.52 (9.33% of revenue). When applied to a hotel with $5 million in revenue, taxable EBITDA is reduced by nearly $500k, resulting in a tax savings of roundly $131k, or 31%."

Enlist Help

Coming up with a new valuation model is one thing; arguing for its acceptance is another. Thus, it’s crucial to partner with the right tax consultant who has significant legal resources, as a core area of improvement lies within the assessment process itself, which at the county level especially, can often favor the opinion of the assessor. In these cases, legal action will be necessary.

There’s also a numbers game at play that’s best left to the experts. The Market Approach is typically applied by tax assessors, who use high sales in a market to justify higher values for their own evaluations. This puts owners and agents in the position of needing massive amounts of sales data – which they may not have -- to challenge these high assessments. Enter the tax consultant.

“No tax assessor knows how to remove intangible business value,” said Tieh. “We teach them how to do it and do a better job for you, as a taxpayer.”

In most states, tax assessors are required by law to value similar properties uniformly and equally, so tax consultants are permitted to challenge values and assure a hotel is being valued fairly. Again, considerable sales data and other resources are needed, in order to discover lower valued comparable properties.

“Remember, the assessor does not have your internal operating data for your property,” noted Tieh. “They can only guesstimate what you're doing, therefore they randomly pick the highest possible sale in your market to justify the increase, or they artificially decrease the cap rate, or decrease the expense ratio on their income model… They will just put in the model what the occupancy and rate should be, and come up with a perspective revenue for your hotel. So, you have to challenge them. If you don't, you're missing the boat.”

Your friend, the appeal

Tieh urged that the most important action to take is to file an appeal to lower your hotel’s property taxes. Multiple rounds of appeals are built into the process, from the county and state level to judicial appeals even at the Supreme Court level. There is no risk in filing an appeal; only reward. Many tax specialists will work on a contingency basis, only earning a fee if taxes are saved.

“You have nothing to lose by filing an appeal, and you need to file appeal regardless of what kind of valuation you received,” said Tieh. “Because the tax assessors don’t have your revenue and don’t have your expenses. They’re estimating how to tax you. It’s important to file the appeal just to really make sure they’ve done a good job of assessing your hotel’s value. I can tell you that 90% of the time they are wrong, because they don't know your business.”

Brendan Manley is a writer, editor and digital marketer specializing in hospitality content creation based in Warrensburg, New York

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.