hotel lodging PROPERTY TAX CONSULTING
Only Tangible Portion Is Taxable if Hotel or Business Property
A hotel business relies on much more than the combination of daily room rentals and other business departmental income to generate income. Understanding this fact is critical to achieving a fair and accurate property tax assessment, because only the tangible portion of the hotel operation is taxable.
Existence of Intangible Assets
The assessor’s method, which is typically used by assessing authorities nationwide, did not fully account for the existence of intangible assets.
Parsing out the income streams attributable to the taxable and non-taxable assets is an absolute requirement when an assessor applies the income approach to a hotel’s property tax assessment. Tax assessors routinely ignore this task, however. If they recognize the concept of intangibles at all, many simply deduct a standard percentage – say 20 percent – to reflect the hotel’s non-taxable assets (we need to find out communicating with the assigned appraiser). Some assessors have embraced a technique, referred to as the management fee technique or “Rushmore Approach” that proffers that by deducting a management fee and a franchise fee from the income stream; they have “removed the business value” from the value derived by capitalization of net operating income. The effect of this is that all hotels that are operating at or above market are routinely over-assessed by 20% to 30% more than they should be because the intangible value is included in the determination of the real estate value.
Flags, Franchise, Management, Income Approach
Owners of hotels know that Flags bring value to the real estate and they know that different Flags bring different value. The difficulty is that owners generally lack evidence of the effect of Flags on hotels. As a result, they often believe that it may be difficult to convince tax authorities of what they know.
When valuing a hotel for property tax purposes, most assessors will attempt to utilize the income approach: They simply deduct the expenses from the hotel’s revenue and divide the resulting net operating income by a capitalization rate, just as they would if appraising an office building or an apartment complex. The resulting value is meant to mirror what the property would sell for under prevailing market conditions. The problem with this analysis, of course, is that it fails to recognize the significant portion of hotel income that flows from non-taxable intangible assets. These non-taxable assets are present in nearly every hotel transaction, but should not be incorporated into a property tax
assessment.
Imprecise Sales Comparison & Market Approach
Several factors account for tax assessor’s willingness and need to allow sales prices to impact them (commonly known as sales comparison approach). All hotel properties are judged by the sales of a few properties. The sales approach has become a fundamental basis of property valuation (such as value per room, RevPAR comparison); however, it must be used with caution when applied to a complicated hotel property that includes several property value components especially to the full-service hotels. The phenomenon of the many judged by the few results in hotel properties tending to be valued at greater than market. This cause them to be saddled with assessments higher than their competitors.
What We Can Do
Beyond our expertise of Cost Segregation Study (IRS income tax reduction), Purchase Price Allocation (proper accounting & tax savings), we are experts to allocate the hotel property to tangible portions and intangible portions that ultimately help you to reduce the property taxes. Please contact us for free consultation at david@myaacg.com.