Strategies to Prevent Overpaying on Property Taxes for Hotel and Lodging Properties

The hotel, motel, and lodging market (a.k.a. the hospitality market) has almost completely rebounded from COVID-19. With pent-up travel demand, people are again booking accommodations for business trips, vacations, and weekend getaways.

According to the 2024 Global Hotels Outlook by CBRE, revenue per available room (RevPar) was up 3.2% year over year in 2023, boosted by a 2.7% increase in average daily rate (ADR) and a .5% year-over-year increase in occupancy.

However, challenges still exist for the hospitality market, which will only continue to grow in the upcoming quarters. Operating costs continue to increase, and rising interest rates are hindering new construction of hotel properties. CBRE expects margins to remain under pressure as cost increases will outpace RevPar growth.¹

Because of these continuing challenges, property owners in the hospitality market must ensure that local jurisdictions accurately value hotel and lodging properties for real estate and business personal property assessments.

By doing so, property owners will ensure they are not overpaying on property taxes.

How is Real Estate Valued?

Hospitality properties are challenging to value accurately because they require valuing only real estate without including business and intangible value. Assessors use one of three approaches to value hospitality properties: income, cost, or market.

• Income Approach: The income approach converts an income stream into a market value for the property.
• Cost Approach: The cost approach estimates the price a buyer should pay for a piece of property based on the cost of building an equivalent property (cost of the land, plus cost of construction, minus depreciation).
• Market Approach: The market approach estimates the property's value based on recent sales of similar properties.

Why would an assessor use one valuation method versus another?

Every jurisdiction varies in its approach, but assessors generally use the income approach for this property type. The problem with this approach is that a lot of business value is associated with hospitality properties. If this business value – the intangible value of business operations – is not removed, then an overvaluation likely exists.

Sometimes, an assessor will use the income approach but wrongly value business income. This commonly occurs through the capitalization of food and beverage income when a hospitality property also has a restaurant. In this scenario, an assessor wrongly values hotel restaurant business operations by capitalizing the income derived from their sales. They should instead apply rent per square foot to this space and capitalize on that as income attributable to the real estate.

Another important piece of valuing real estate for hospitality properties is the hotel flag. The "flag" is the operating brand of the hotel property, like Courtyard by Marriott. There is definitely value in having systems from the hotel flag to operate the hotel, provide rewards programs, and offer reservation sites. An assessor would need to consider the value of the flag when assessing the property and should extract this intangible value from the capitalized value of the property.

How to Prevent Overpaying on Real Estate Taxes

You may be thinking, “Valuing the real estate of my hospitality property seems very complicated.” And you’d be right. With all the different aspects contributing to the value of a hospitality property, it’s challenging to ensure it is appropriately valued.

The tax assessor is responsible for only valuing the real estate portion, but many other layers of value exist that must be extracted. If these layers are not taken out, a double taxation may exist.

And that means you may be overpaying on real estate taxes.

To prevent overpaying on your real estate taxes, use the “Three A’s” approach:

• Analyze the assessor’s worksheets
• Analyze the property’s market
• Appeal

Analyze the Assessor’s Worksheets

Property owners must proactively analyze the assessor’s worksheets to see how the property is valued.

When reviewing the worksheets, consider the following questions:

• Did the assessor capitalize the business income from the food and beverage?
• Did the assessor adjust for the value of the “flag” associated with your asset?
• Did the assessor deduct the value of the personal property from the capitalized value?

It’s also important to know if the assessor considered all three valuation methods and what adjustments were made to each method for each unique property. If the appropriate non-realty items were not addressed in the valuation, or the incorrect valuation method was relied upon, it may be time to appeal.

“We saved one client thousands of dollars because of a simple mistake we found on the assessor’s worksheets, many times mistakes concerning the room count.”

“We saved one client thousands of dollars because of a simple mistake we found on the assessor’s worksheets, many times mistakes concerning the room count,” said Bo Vicendese, Principal at Clearview Group. “These mistakes, which were then corrected, saved thousands into perpetuity for the client.”

Analyze the Property’s Market

Research the value of similar and competing properties in the same area or jurisdiction. How does your property compare to competing properties in the same area? Is your property in line with other property values?

Property owners will also need to research recent sales information. How do recent sales compare to your property’s value? How do the recent sales compare to the assessor's value of your property?

Lastly, property owners should research market capitalization rates and vacancy rates. How does your research compare to what the assessor used to value their property?

“Upon analyzing the market and recent sales for a client, we concluded that a capitalization rate of 8% should be used instead of the assessor’s rate of 6%,” said Vicendese. “This brought the value down by over $10 million and tax savings of over $420,000 over a three-year cycle.”

“This brought the value down by over $10 million and tax savings of over $420,000 over a three-year cycle.”

Appeal

After all that research, does it appear your property was valued incorrectly? Then, it’s time to appeal your assessment.

Work with a state and local tax expert to gather the necessary forms to appeal at the first level – the assessor’s review level.

Present your findings, then amicably work with your assessor. Assessment departments use mass appraisal techniques to value the properties in their jurisdiction. So, as the property owner, it is your responsibility or your advocate’s job to present property specifics to help the assessor make necessary corrections.

Still unhappy with the results? Property owners can then appeal to the next levels – board level or tax court.

How is Business Personal Property Valued?

Once you understand how hospitality real estate is valued, you must then consider how the valuation method affects business personal property.

If the income approach was used to value the real estate, then generally, the value of the business personal property is deducted from that calculation. If the value of the business personal property is significantly increased or reduced (through an audit or appeal), that would subsequently impact the real estate value.

Suppose the cost approach was used to value the real estate. In that case, property owners need to ensure that improvements to the building are not being double-assessed in both the real estate and the business personal property assessments. It’s also important to consider whether the owner of the real estate and the owner of the tangible personal property are the same (versus a tenant and a separate owner).

If the market approach was used to value real estate (which is unlikely for hospitality properties), it generally does not impact the related business personal property assessment.

How to Prevent Overpaying on Business Personal Property Taxes

Property owners can use the following strategies to determine if you’re overpaying on your business personal property taxes.

Determine Valuation Method

Start by determining the valuation method used on the associated real estate – cost, income, or market approach.  

If the real estate owner is also the owner of the business personal property, you need to ensure the same property is not being assessed to that same owner, under both taxes.  

Suppose the owner of the real estate is unrelated to the owner of the business personal property. In that case, it may be a little trickier to determine if any overlap or double assessment exists.  

Ensure you review both in detail annually to ensure the appropriate valuation methods are being used for this property type.

Besides the real estate valuation method, there are many factors that can affect business personal property value.

Review Your Fixed Assets

Fixed assets significantly impact personal property returns. In fact, they are the basis for filings. Hospitality property owners must ensure that all fixed assets are correctly recorded, tracked, disposed of, and ultimately listed on accounting records so they can be filed appropriately.  

Property owners can take the following steps when reviewing their fixed assets:

• Record assets at a detailed level in the fixed asset system, not in a lump sum, so that costs can be appropriated and categorized on the return.
• Maintain the tracking of fixed assets, including assets with high turnover (mattresses, technology, etc.), disposals of assets (especially during a remodel), and assets that transfer to other locations.
• Track and appropriately report short-lived assets like utensils, kitchenware, and linens.
• Record improvements to the building and review them to ensure they are not already included in the real estate assessment.

Conduct Physical Inventory

In addition, if a physical inventory of the fixed assets was completed when the hotel was purchased or after a remodel, property owners need to ensure that the results of that physical inventory are reconciled to the fixed asset ledger.  

This is very important for hospitality properties, as partial remodels often occur, and carrying years of historical assets on your fixed asset ledger without confirming their existence, can cost thousands of dollars annually.

Evaluate Acquisition Method of the Property

Finally, other factors need to be considered, such as whether you acquired your property through an acquisition or it was a new build.

Here are a few scenarios that are often present with acquisitions of existing hospitality properties:

• If a purchase price allocation (PPA) was completed, you need to determine if using that PPA is acceptable in the taxing jurisdiction (or if they require historical cost to be reported).
• If an appraisal of the fixed assets is completed, determine the value definition used and the intended purpose of the appraisal (for tax or other reasons).

For a new build of a hospitality property, ensure that fixed asset purchases are appropriately recorded in the fixed asset ledger, not in a lump, to ensure they can be appropriately tracked and classified on the business personal property returns.

“Your fixed asset ledger is the basis for all of your business personal property filings, and hence, the basis for your assessment and associated tax liability.”

“Your fixed asset ledger is the basis for all of your business personal property filings, and hence, the basis for your assessment and associated tax liability,” said Megan Lusby, Director at Clearview Group. “Ensure you’re allocating proper time and expertise to review and maintain that asset listing regularly.”

Like real estate, sometimes you need to appeal your business personal property assessment to ensure you are fairly and accurately assessed.

Ultimately, property owners should review real estate and business personal property assessments together. By examining the assessments in tandem for accuracy, you can better understand the valuation method used for the real estate assessment and how that may impact the business personal property assessment.

Our State and Local Tax experts are here to help you with all your real estate and business personal property needs. Let’s start by reviewing your assessments and determining the need for an appeal. Talk to our experts today!

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