Taxes for U.S. hotel owners have continued to rise over the past few years, according to research from STR:
• $10.2 billion was the estimated property tax burden for U.S. hotels in 2014
• U.S. hotels experienced a 20 percent increase in property taxes per room from 2012 to 2014
• 3.4 percent represents property tax’s approximate share of U.S. hotel revenue in 2014
With this in mind, it’s critical to ensure you are evaluating property taxes on a regular basis to minimize costs. The following five factors should be considered when challenging hotel property taxes:
1. Evolving market dynamics
While deteriorating economic conditions offer the most obvious grounds for hotel property tax appeals, other evolving market dynamics can also provide ample justification for a property tax reduction, even in an environment of healthy economic growth. For instance, new supply, whether recent or looming, may have a material impact on a property’s future cash flow potential and, therefore, its fair market value. The entry, exit, or relocation of a principal demand generator within a particular market may also impact a property’s positioning with respect to its competitors, thus altering its fair market value.
2. Brand suitability and sustainability
The franchise and/or management agreement by which a hotel property is encumbered may have a material impact on its marketability. If a hotel’s brand is not well suited to the demographics of its market or if that brand is less desirable in the investment market, as demonstrated by prevailing capitalization rates for similarly branded hotels, then a case may be made for a reduction in the hotel’s fair market value. Alternatively, the expiration of a value-enhancing franchise and/or management agreement may be on the horizon for a hotel, in which case its fair market value is likely to be negatively affected as well.
3. Capital requirements
Hotel operations can be highly capital intensive, and at times, hotels may face capital requirements that far exceed typical deductions for replacement reserves. Hotels with franchise agreements that are subject to renewal frequently require multi-million dollar Property Improvement Plans (PIPs), and hotels in markets where new supply is prevalent may also be required to make substantial capital expenditures simply to defend existing cash flow from new market competition. The fair market value of a hotel should appropriately reflect such capital deductions.
4. Personal property and intangibles
Depending upon whether personal property is subject to a lower tax rate or excluded from taxation altogether, deducting a higher value for personal property from a hotel’s value as an operating asset to determine its real property value may yield net tax savings. Additionally, the value of intangibles, such as a property’s going-concern status or reputational attributes, are typically not taxable, and to the extent such value components are not deducted from a hotel’s assessment, its real property value may be overstated. Such deductions also have potentially significant repercussions for transfer tax liabilities.
5. Portfolio allocations
In the event that a property is sold in the context of a portfolio transaction and located in a jurisdiction where a sale triggers a corresponding value reassessment, the allocation of the portfolio’s sales proceeds among its component properties can have significant property and transfer tax implications. To the extent an individual property’s assessment reflects an inappropriate allocation of proceeds, its property tax burden may be deemed to be too high.
Learn more about JLL’s Hotels and Hospitality property tax services
Louis Breeding and David Calverley of JLL have been working in the property tax services industry for more than 25 years.