Rising hotel market values are resulting in increasing property taxes that are based on the value of real property (land and building(s)). In many cases taxes are also levied on the value of personal property. Property assessments feature some relationship to “market value” as of a certain date. Different tax jurisdictions may use varying nomenclature for market value, including fair cash value, fair market value or fair value. The underlying definitions, however, are almost always identical to or similar to the concept of market value as defined by agencies that regulate federally insured financial institutions.
In addition to real estate, hotels inherently contain significant business and personal property components. Analysis of the actions of hotel investors proves the purchase of a hotel property reflects the acquisition of real and personal property only. Hotel investors account for income attributable to the business through the deduction of management and franchise fee expenses. An investor purchasing a hotel “unencumbered” by a management agreement will not pay for a seller’s assembled workforce, business name, patents, copyrights, working capital and cash, operating procedures and manuals etc. A passive investment in a first-class hotel “encumbered” by a long-term hotel management agreement is riskier but no different than a passive investment in a Class A office building occupied by a long-term credit-worthy tenant. Passive investment yields a risk-adjusted return on property and not on a business.
While no proprietors should pay more than their fair share of taxes, an uphill battle exists for those who engage legal counsel, property tax consultants and/or valuation experts who utilize unsubstantiated non-market-based theories and methodologies in an effort to merely decrease their property values for ad valorem tax purposes. At any given point in time, there can only be one market value of a hotel property irrespective of the purpose for which such conclusion is being sought. Hotel owners must consider the ramifications of establishing an artificially low market value for property-tax purposes, which in turn has the potential of reducing mortgage asset security value that lenders rely upon for financing and/or refinancing proceeds.