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Dec
21

Beware of Double Taxation on Personal Property

While Texas solved the problem, your state may not have addressed the issue.

Many states tax business personal property, a classification that includes furniture, fixtures, equipment, machinery and, in some states, inventory. Whatever the jurisdiction, the values of business personal property and real estate can easily be conflated in ad valorem taxation, unfairly burdening the taxpayer with an additional appraisal and/or taxation.

If you live and work in a state that doesn't tax business personal property, it may be included with the taxes on your real estate anyway. If you are in a state that taxes personal property, you might be taxed for it twice. While it seems contrary to acceptable appraisal practice to include personal property in the real estate value and then to additionally appraise and/or tax the same items, it does happen.

The Texas Legislature wrestled with this problem of additional valuation and taxation for more than a decade. That process and the resulting tax law offer important lessons that may help taxpayers and lawmakers in other states.

Texas gets personal

In 1999, the Texas Legislature enacted Section 23.24, titled "Furniture, Fixtures and Equipment," as a new statute in the State Tax Code. Prior to its enactment, furniture, fixtures and equipment were often included in the appraised value of income-producing real estate for ad valorem taxation. They were also subject to a separate business personal property tax. Section 23.24 eliminates this double taxation as long as the method used to value the real estate takes the business personal property into account.

There are many different kinds of property but only a few approaches to valuation. When the values of real property and personal property are mixed, it is usually because they are being assessed as components of an operating business using the income approach. Hotels and motels, nursing homes, restaurants and convenience stores are among the property types at greatest risk of having real estate and personal property values combined.

An assessor valuing the real estate component of an operating business will likely use the income approach. This method bases value on the income stream a business can generate using the real estate and personal property as components of a business enterprise.

A hotel doesn't have a business without beds, and a restaurant doesn't have a business without tables and chairs. As such, a value determined using the income approach is going to include the value of the real estate and the personal property, as both contribute value to the enterprise's income stream. It's clear to see how using the income approach can conflate real and personal property value into one.

The cost approach keeps those values separate. Using this method, an assessor or appraiser looks only at the value of the land as if it were vacant, then adds the value of improvements based on the cost to construct those improvements minus any depreciation. There is no accounting for, nor any risk of conflating, the business personal property within the real estate while using this approach.

In many instances, however, appraisal districts that were not using the cost approach – or had switched from the cost approach to the income approach from one year to the next – were still additionally appraising and even maintaining a separate account for the business personal property. This would seemingly violate Section 23.24.

Many appraisal districts disagreed, claiming that a separate account for business personal property enabled them to deduct that amount from the real estate. In doing so, they believed that there would be no additional burden on the owner, who would only be paying taxes once on the personal property.

While the tax liability may not be increased, an appraisal district with a separate account for personal property still creates burdens for the owner. The taxpayer is required to file a rendition on the personal property stating either "the property owner's good faith estimate of market value of the property or, at the option of the property owner, the historical cost when new and the year of the acquisition of the property."

If owners fail to file this rendition on personal property already being accounted for in the value of the real estate, they are subject to a penalty that increases their tax liability by 10 percent. It hardly seemed fair that the taxpayer should have these obligations and liabilities regarding property that was already intertwined with the value and tax for the real estate. Two consecutive legislatures agreed.

In 2009, lawmakers created a subsection to Section 23.24. This statute intended to exorcise the appraisal districts' method of having a second account for the personal property and/or attempting to separate or subtract the value of the personal from the real when both values had already been combined in the real estate. Some appraisal districts were still requiring renditions (and seeking penalties for failure to do so) on property value already captured with the real estate.

In 2011, the next legislature removed the additional and needless burden to render business personal property that is not to be appraised separately from real property in the first place. The law now says that if business personal property is being appraised under Section 23.24, then the owner is not required to render anything.

Implications for other states

Check your state's laws regarding the taxation of personal property and make sure you're not already paying those taxes on the real estate.

Texas and Oklahoma tax inventory as well as business personal property, and not only is the tax present, it's prevalent. In 2016, personal property tax made up 12 percent of the property tax base in Texas and nearly 23 percent of Oklahoma's property tax base.

Whether personal property tax is present and/or prevalent in your state, make sure you are not paying personal property taxes where it isn't taxable, or paying it twice in jurisdictions where it is taxable.

Greg Hart is an attorney in the Austin law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Oct
10

Beware of RevPAR in Property Tax Valuations

When comparing hotels for valuation purposes, a common method of making adjustments for the difference between properties is to examine revenue per available room (RevPAR), a measurement of hotel performance.  If executed poorly, these calculations can distort property value and lead to unfairly heavy tax burdens on hospitality owners.

There are two different ways to calculate RevPAR.  The first is to multiply the average rental income per room by the number of rooms occupied, then divide by the number of days in the period.  The other method is to divide total guestroom revenue by the number of available rooms and divide that figure by the number of days in the period.

In an article titled “Using RevPAR as a Basis for Adjusting Comparable Sales,” published in February 2002 by HospitalityNet.org, appraiser Erich Baum voiced a common argument shared by appraisers who advocate for RevPAR adjustments.  Baum contends that the adjustments are appropriate because the revenue a hotel generates is tied to its location and the quality of its product.

The question in valuation for property taxation is whether or not RevPAR incorporates additional, non-real estate values such as quality of brand, management, goodwill, etc., and whether or not the RevPAR adjustment reflects those non-real estate items.

If the appraiser’s purpose is to compare values of hotels as a going concern, including all tangible and intangible items, this adjustment may make sense.  If, however, the purpose is only to value the tangible real estate and exclude intangible business value, as in an ad valorem tax valuation, a RevPAR adjustment may be inappropriate.

Appraisers generally accept that there is intangible value associated with the going concern value of a hotel.  The Appraisal Institute discusses this concept further in the 14th edition of The Appraisal of Real Estate (2013) Chapter 35, “Valuation of Real Property with Related Personal Property or Intangible Property.”  This is important in the world of ad valorem tax valuations because intangibles are not taxable.

Determining Values

To understand whether RevPAR adjustments are appropriate in a property tax setting, consider a nationally branded hotel that loses its brand.  Compare the hotel to its closest competitors using a RevPAR adjustment both with and without its flag.  Conversely, look at a non-branded hotel that becomes a nationally branded hotel and adjust its competitors’ RevPAR -using the same metrics.

Source Strategies produced a study to determine brand values by tracking the subsequent difference in revenue realized by hotels in Texas that gained or lost a nationally branded flag.  A detailed examination of the study appeared in the summer 2012 edition of The Appraisal Journal.

Researchers compared hotels on the basis of their RevPAR index, which measures a hotel’s performance relative to its competitive set.  An index of 100 indicates that a subject hotel is get-ting its fair share of revenue in comparison to its competitors.  An index higher than 100 indicates the subject is realizing more than its fair share of revenue and an index below 100 indicates the subject is realizing less.

Gaining or Losing a Brand

The study tracked five different brands of hotels in Texas between 1990 and 2010 and found that properties which gained or lost a national brand saw a respective drop or increase in their RevPAR index by as much as 40 percent.  Two hotels from the brand study provide an opportunity to test the utility and appropriateness of RevPAR adjustments.

One of the hotels studied was a Hampton Inn in San Antonio.  In 2004, its second-to-last year as a Hampton, the hotel was outperforming its competitive set.  This is indicated by a RevPAR index of 109.  The hotel’s average daily rate (ADR) was $55.60, or 9.4 percent higher than its competitors’ average of $50.82.

The year after the hotel lost its Hampton Inn brand, it operated as a non-branded hotel.  That year the same competitive set outperformed the now non-branded hotel.  The subject saw its RevPAR Index drop to 64, and its average daily rate fall to $39.89, or 35.7 percent lower than the $62.12 average in its competitive set.

Using a RevPAR adjustment would require a positive adjustment of 9.4 percent in one year and a 35.7 negative adjustment just two years later for the same real estate.

Now consider the effects of a RevPAR adjustment to a hotel that starts out as an independent hotel and then becomes nationally branded.  The study showed that one such hotel in Houston went from unbranded to being a Holiday Inn Express.  In 2004, its last year as an independent, this hotel generated less revenue than its competitors, as evidenced by the subject’s RevPAR index of 51.  The competitors’ average daily rate was $29.52, or twice that of the subject’s $14.72 ADR.

The year after the subject became a Holiday Inn Express it outperformed the same competitive set, as evidenced by the increase in its RevPAR index to 129.  As a nationally branded hotel, the subject’s ADR was $40.76, or 29.7 percent higher than the competing set’s $31.43 ADR.

In both cases the RevPAR index changed significantly for the subject properties, while the real estate remained unchanged.  The comps and methods of comparison remained the same.  The only change was the removal or addition of the brand and its resultant change in revenue.

These results indicate that the revenue shift reflects the change in brand and possibly management or goodwill, none of which are a part of the real estate.  Rather, they are separate and intangible components of the going concern.  Because these items are tied to RevPAR, a RevPAR adjustment will entail adjustments to the differences in both the tangible real estate and intangible items such as brand, management and goodwill.  RevPAR adjustments are therefore inappropriate when calculating only the tangible real estate value of a hotel. 

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Greg Hart is an attorney and tax consultant at the Austin, Texas law firm of Popp Hutcheson, PLLC, and Kevin Sullivan is an appraiser and tax consultant with the firm.  Popp Hutcheson PLLC represents taxpayers in property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Hart can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Sullivan at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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