The real estate property assessor is overworked and under stress. He or she is looking for the most convenient way to do a job that in many taxing jurisdictions must be done annually to assure quick reaction to market trends, as well as comply with state and local laws and court decisions.
But the difference between convenience and best practices can be oceans vast, and those oceans can drown the performance of a hotel in abuse when assessors put their spin on the three-legged stool – income, expenses, capitalization rate – that is the starting point of a valuation. Assessors can see a hotel as a building that rents space, and lump it with office and apartment complexes and even shopping malls. But the office building and mall rent by square footage in multi-year contracts to ensure a steady revenue stream. An apartment is rented by the month or year, with adjustments coming at the end of the lease.
A hotel is leased by the night, and cost of a Wednesday stay is probably going to be different than one on Saturday. A winter room in Florida could well command multiples of the summer rate. A Mardi Gras night stay in New Orleans could cost the same as a week in November.
For that matter, Room 202 and 204, both with king-size beds, and identical furniture and footprint, can command different rates if one has an incredible view of the water, is part of a group sale, or is being rented by a member of the military or government, or if the guest is a member of AAA, AARP or another organization that is offered discounts.
When an assessor calls the hotel for the price of a room that night, believing the effort has gone a mile beyond looking up the Internet-published rate, in fact it’s only an extra foot. Taking the phone-call quote of $200 per night, multiplying it by the number of rooms in the hotel, then multiplying that by 365 days in a year is not going to generate a meaningful estimate of hotel revenue.
As absurd as this might sound, it happens in more tax jurisdictions than you might think – especially where the numbers of hotels make up only a small part of the commercial assessment base. It’s only the first of what can be a list of abuses that corrupts the picture of the value of the hotel: its performance. It’s also one of a list of challenges some assessors undertake in compiling a report that has immediate effect in determining a tax bill, but potential long-term effect on a package for investors or hotel buyers.
Revenue per available room (REVPAR) is a better barometer for income performance. If in January, you’re getting an average of US$130 per room in a 200-room hotel that is 75% occupied, your income per day is $19,500, or US$97.50 in revenue per available room. Compare that to the taxes you would have to pay because an assessor called the front desk in April to learn that a room is US$200 per night (or US$30,000 per day with a US$150 RevPAR).
That’s why hoteliers should examine assessors’ work papers to see how they have arrived at their figures. It’s also why hotel operators should argue for hotel-specific forms on which to report income and expenses to assessors. It’s the only way to provide meaningful information now, rather than in an appeals process. Hoteliers don’t want to have to go through appeals to get tax fairness, and jurisdictions don’t want to have to defend their actions. Getting facts right in the first place is also the best way for any hotel to present a complete picture of its operations, separating it from other property types.
The second leg of the assessment stool is expenses – and it’s also rife for abuse. Often an assessor has a market rate for allowable expenses as a percentage of income, and that rate is influenced by the local hotels, or by regional publications. But all hotels aren’t created equal, nor are all regions.
A full-service venue is going to incur a greater ratio of expenses to income than a limited-service facility, but often an assessor discounts the 70% the upscale hotel claims to a market rate of 50% or less because of the influence of less costly competitors. “We’re not going to pay for your bad management,” the assessor implied.
In effect, the assessor is also “ordering” income from column A of a menu and expenses from column B to fashion an inaccurate net income result. To defend against this practice, the hotel’s operating history can be used to demonstrate that 70% is the historical expense ratio. If the trend is consistent, that information must be considered.
A capitalization (or “cap”) rate is the most difficult of the stool’s three legs to determine. In its simplest terms, the cap rate is the sales price of a property, divided by its income, but this a gross oversimplification.
So why are hotels different?
For one thing, a hotel is often sold in a portfolio that may include facilities in higher-priced markets. Should the cap rate of a facility in a small Midwestern city be influenced by the price of a New York City hotel? Should it be driven by a foreign investor willing to pay more for a U.S. presence?
Additionally, the value of the flag on a hotel should not be dismissed. An office or apartment building doesn’t attribute a part of its value to the name emblazoned on it. A hotel gets its reservations system, its rewards systems and other parts of its success from its flag – but remember, property tax assessment should value the real property only, not the flag. The two should be separated.
Assessors should do research to determine the real value of a hospitality facility for tax purposes. It’s a lot to ask of someone who is also tasked to value factories, apartment buildings and department stores, but it’s important to ask – and, if necessary, to help – because of the impact the assessment has now and can have on future tax expenditures. It’s a way to span the divide between abuses and best practices of assessing hospitality venues.
Contributed by David J. Chitlik, Altus Group, Tysons, Virginia