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Property Tax Resources

Jan
16

Reducing Hotel Property Taxes By Properly Valuing Intangible Assets

Most, but not all, taxing authorities acknowledge that hotels include intangible and tangible assets. Reducing property tax costs by removing intangible value has long been controversial due to the challenging task of valuing intangible assets. Intangibles include items such as the assembled workforce, service contracts, reservations systems, web presence and hotel management and franchise agreements.

Most, but not all, taxing authorities acknowledge that hotels include intangible and tangible assets. Reducing property tax costs by removing intangible value has long been controversial due to the challenging task of valuing intangible assets. Intangibles include items such as the assembled workforce, service contracts, reservations systems, web presence and hotel management and franchise agreements.

Fortunately for hotel owners, a recent decision by the California Court of Appeals makes clear that measuring a hotel’s intangible value solely by deducting franchise fees and management fees understates a hotel’s intangible value. Assessors must exclude all intangible value to tax the hotel’s real property properly. Proper exclusion of intangible value will necessarily result in lower taxes.

The debate
It is axiomatic that investors buy operating hotels based on the income generated by the hotel’s business. The income is generated by the combination of the property’s real estate, tangible personal property, and intangible personal property. All of these components are essential and the absence of any of these elements severely compromises a hotel’s ability to generate revenue.

Ad valorem taxing authorities are not investors or lenders. They are charged with valuing only the real estate component of a hotel for tax purposes. Isolating a hotel’s taxable value requires that the assessor remove from the hotel’s overall value both the value of tangible personal property and the value of the intangible personal property used in conjunction with the operating business.

Valuing the hotel’s tangible personal property, such as beds, furniture and the like, is relatively easy. Valuing intangible assets poses a far greater challenge. How should the assessor separate the value of intangible assets from the hotel’s overall value? The answer to that question has been the subject of heated debate.

Evolving methodology
The Appraisal Institute’s current curriculum recognizes the presence of intangible value in hotels but avoids the issue of how to calculate this value. This omission implicitly acknowledges that the value of an operating hotel lies at the intersection of real property appraisal and business valuation, and both skill sets are required to value a hotel property appropriately.

Stephen Rushmore developed the initial approach to the problem over 30 years ago. To account for a hotel property’s intangible value, the Rushmore Approach simply subtracts management fees and franchise fees from the hotel’s revenue and capitalizes the remaining revenue to determine real estate value.

The debate about valuing intangible property in a hotel has been long, loud and heated. While revolutionary at the time, the Rushmore Approach has been criticized for years. Rushmore’s defenders have responded to the criticism on several fronts.

Critics argue the Rushmore Approach offers the attraction of simplicity at the expense of understating the contribution made by intangible personal property to the hotel’s revenue. Critics further argue that the Rushmore Approach’s assumption that the deduction of management and franchise fees effectively accounts for a hotel’s entire intangible value is contrary to the experience of market participants in owning and operating a hotel. Rushmore’s detractors often advocate an alternative method known as the business enterprise approach, which casts a wider net to account for intangibles.

Rushmore’s supporters note the absence of hard data to quantify sales of a hotel’s individual components. The absence of this data, however, is unsurprising, considering investors buy and sell hotels based on income generated rather than on the value of individual components.

Rushmore’s advocates also suggest that alternative approaches overstate intangible value, thereby reducing the mortgage-asset-secured value lenders rely upon for hotel financing.

Courts weigh in
The Rushmore Approach certainly accounts for some intangible value, but, does it reveal the full intangible value associated with a hotel such as licenses to use software and websites?

Until recently, Glen Pointe Associates vs. Township of Teaneck, a 1989 New Jersey opinion, was the seminal hotel property tax decision that adopted the Rushmore Approach to extract the real estate value of an operating hotel. A May 2014 California Court of Appeals opinion, however, suggests the tide may be turning against the Rushmore Approach and in favor of the business enterprise approach.

In SHC Half Moon Bay vs. County of San Mateo, the California Court of Appeals held that “the deduction of the management and franchise fee from the hotel’s projected revenue stream pursuant to the income approach did not - as required by California Law - identify and exclude intangible assets” such as an assembled workforce and other intangibles.

In overturning the taxing authority’s methodology as a matter of law, the appellate court held that the taxing authority had failed to explain how the deduction of the management and franchise fee, i.e. the Rushmore Approach, captures the value of all of the hotel’s intangible property. Considering that consumers increasingly make hotel reservations online instead of using a flag’s reservation system, it is increasingly difficult to argue that the Rushmore Approach sufficiently captures the value of the hotel’s website or its relationship to on-line providers outside of the flags.

The arrival of Airbnb in the market also provides food for thought. Airbnb is a controversial web platform where an apartment owner advertises an apartment online for overnight paying guests. The platform boasts over 800,000 listings in 33,000 cities in 192 countries. Many local governments argue Airbnb allows apartment owners to avoid hospitality taxes or other hotel regulations.

Airbnb’s success demonstrates the difficulty of isolating a hotel’s real estate value by only excluding management and franchise fees. Airbnb doesn’t charge management or franchise fees, yet the service allows owners to increase the income potential of their apartments far beyond market rent.

The debate between advocates and critics of the Rushmore Approach rages on. The challenge for valuing hotel real estate remains. The beauty of the Rushmore Approach is its simplicity, but in the days of the Internet and Airbnb, simplicity may not equate to accuracy. In the wake of the decision from California, the tide may be running out on the Rushmore Approach.

ellison mMorris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Dec
02

Beware the Income Approach to Property Tax Assessments

A hotel business relies on much more than the combination of daily room rentals to generate income. Understanding this fact is critical to achieving a fair and accurate property tax assessment, because only the tangible portion of the hotel operation is taxable.

A fundamental issue in virtually every hotel property tax case is the question of how to allocate value among the taxable tangible assets and non-taxable intangible assets. Tangible assets include the land, building, furniture, fixtures and equipment. The intangible assets generally include the hotel brand or franchise, the management team, the assembled work force, contracts with vendors and customers, and any goodwill stemming from the hotel’s operations. The appraisal community has debated how to allocate among these assets for the last 30 years, yet significant divisions remain.

When valuing a hotel for property tax purposes, most assessors will attempt to utilize the income approach: They simply deduct the expenses from the hotel’s revenue and divide the resulting net operating income by a capitalization rate, just as they would if appraising an office building or an apartment complex. The resulting value is meant to mirror what the property would sell for under prevailing market conditions.

The problem with this analysis, of course, is that it fails to recognize the significant portion of hotel income that flows from non-taxable intangible assets. These non­taxable assets are present in nearly every hotel transaction, but should not be incorporated into a property tax assessment.

To understand this misapplication of the income approach, it is helpful to view the relationship between a business’ income and the real estate the business happens to occupy. On one end of the spectrum are office buildings and apartment complexes. These commercial enterprises derive almost 100 percent of revenue from the direct rental of real estate.

On the other end of the range are service oriented businesses like law firms. A law firm’s revenue derives purely from services rendered, and bears almost no relationship to the rent paid to occupy office space. As a result, an appraiser would never determine the value of a law firm’s office space by capitalizing the firm’s net operating income. Yet this is exactly how many assessors value hotels.

This is not to suggest that hotels are pure service businesses like a law firm. Hotels are hybrid businesses that fall somewhere in the middle of the range between these two extremes. While a hotel’s revenue is not limited to rent, there are certainly portions of the income which are directly attributable to the hotel’s real estate and taxable personal property. The key is to differentiate, if possible, how the income is derived from the different classes of assets.

Parsing out the income streams attributable to the taxable and non-taxable assets is an absolute requirement when an assessor applies the income approach to a hotel’s property tax assessment. Tax assessors routinely ignore this task, however. If they recognize the concept of intangibles at all, many simply deduct a standard percentage – say 20 percent – to reflect the hotel’s non-taxable assets.

The taxpayer must demand more. If the assessor is using the same methodology to value your hotel as he or she uses to value an office building, there is a problem. Engage an expert who understands the allocation of intangible assets, and ensure that your hotel’s property tax value is limited to the value of your taxable assets.

Mark_Hutcheson90Mark Hutcheson is a partner with the Austin, Texas law firm of Popp Hutcheson PLLC. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Hutcheson can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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Nov
19

Property Taxes Are Not A Fixed Expense

If you have taken an accounting class, your professor likely explained that property taxes are one of the fixed expenses on real estate financial statements. While your professor was technically correct that property taxes are considered a fixed expense in accounting, many property owners, asset managers and investors are finding out that "fixed" certainly doesn't mean always consistent or predictable.

In a recent third quarter earnings call of a large, publicly traded hotel REIT, the discussion contained all the typical metrics on financial performance and forward-looking guidance. The call was overall very positive; however, one particular comment from the chief financial officer raised a critical issue. The REIT had significantly missed its pro forma expenses on property taxes, which had negatively impacted actual earnings. The REIT's miscue on projecting property taxes and the sizable impact on its financial results indicated that planning for this expense item can be particularly difficult, especially during an upswing in the current real estate cycle.

Hotel performance has bounced back from a cyclical low in late 2008, and many U.S. markets are approaching the peak performance levels last reached in 2006. Additionally, investment capital in-flows into the hotel sector are at record highs for public and private REITs, private equity funds and other investors. All these factors have led to record investment volume and investors chasing after a limited number of deals (especially in top-tier markets) and subsequently are driving up hotel asset pricing.

While all this is good news for existing hotel owners and investors, it often creates a budgeting challenge for changes in property taxes. With strong market fundamentals, improving performance metrics and sales volume on the rise, assessors have been quick to increase tax valuations on hotels. Many assessors are recouping much of the value lost during the downturn and have typically been more aggressive than in past cycles.

For example, in late 2013, a mid-sized hotel investor had just acquired its first Texas hotel. The investor had done its own due diligence and projected property taxes to increase by 3 percent ever year of ownership — sound familiar? In early 2014, after closing on the acquisition, the investor reached out for help when the hotel's tax valuation notice had increased 100 percent, almost whiping out projected cash flow. Had the investor called for help prior to closing he could have been warned about the possibility of an increase and properly budgeted for the future tax years.

So, what can owners and investors do to help identify pitfalls in underwriting for property taxes? Here are a few budgeting points that will help to avoid surprises:

Understand the assessment laws and practices in the jurisdiction. All states and many assessors within the same state operate differently, so get the facts straight on local practices. For example, some assessors reappraise at the time of transaction and others only revalue on a set cycle that could vary dramatically from every year to multiple years between a revaluation.

Is there a disclosure requirement? And to what degree will it be used to establish future tax valuations? In Texas, sales disclosure is not required by law. Therefore, a deal with non-disclosure agreements between the parties can be an important aid to budgeting.

Get to know the local political landscape and legislative undercurrents. Any proposed law changes or political pressures on a specific property classes can be a major influence on a prudent budget. Recently, there has been a push in a few areas around the country to increase taxes on commercial properties to try to reduce the escalating tax burden on residential properties.

Find out what is taxable. Hotels are a truly unique asset class and present a major appraisal challenge that could significantly impact property tax projection. Hotels contain real estate, business personal property and intangible value. Some states don't tax personal property (furniture, fixtures and equipment) and others don't tax business intangibles, value associated with a business operation and related to the brand affiliation, contracts, trained workforce, loyalty programs, etc.

Make reasonable assumptions. Using a standard 3 percent growth rate or some other unsupported assumption "just to push the deal through" almost always comes back to haunt budgets later.

Enlist help from a local and knowledgeable expert. If you are budgeting for an acquisition then make sure to consult the experts prior to going under contract on a deal. Make sure the expert understands hotel taxation and valuation. Ask about the specific valuation models and techniques employed by local assessors. If your expert doesn't know those answers, then find an expert who does. Taxpayers managing an existing hotel should seek expert tax advice every budget season.

While no list is exhaustive for every situation, these points will make sure you are on the right path to proper and more accurate budgeting for property taxes.

michael-shalley-activeMichael Shalley is a principal in the Austin, Texas law firm of Popp Hutcheson PLLC, which focuses representation of taxpayers in property tax disputes and is the Texas Member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Shalley can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jul
24

Is the Current Use the Highest & Best Use?

"Appraisers seem conditioned to accept the property's current status, and it is almost politically incorrect to challenge it..."

By Elliott B. Pollack, Esq., as published by Hotel News Resource - July 2010

The first step a real estate appraiser must take before valuing a property is to identify its highest and best use (HBU). Indeed, it is a truism that everything in an appraisal flows from this determination.

HBU is "the reasonable, probable and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible and that results in the highest value." That being said, appraisers rarely conclude that the HBU of a property is different from the current use. Why? Appraisers seem conditioned to accept the property's current status, and it is almost politically incorrect to challenge it. Moreover, the fee structure under which many appraisers function discourages them from taking on this often expansive mission.

Nevertheless, the horrible economic conditions of the last two-plus years have severely undermined the viability of many hospitality properties. As more operations become marginal, appraisers should question whether the profitable years of a particular hotel may be in its past. This is true even if it wouldn't make sense to immediately demolish and construct some other use, or to simply turn the property into a parking lot.

Take the case of a tired, decades-old, un-flagged property that suffers from deferred maintenance. Is it reasonable to conclude that a buyer, or even the current owner, would make the necessary investment to prolong its life much longer? If not, then the appraiser should consider whether the amount of physical, functional and economic obsolescence inherent in the property has numbered its days. Even though operations may continue for another few years, given the lack of alternative uses presently, the effect on appraised value is the same.

With properties struggling to remain viable, the appraiser should research whether or not current hospitality HBU will likely come to an end in the foreseeable future. If that outcome is likely, the appraiser should consider developing a discounted cash flow that incorporates demolition costs and future revenues as a surface parking lot or some other improved use. If similar properties in the area have been demolished or converted to alternate uses, such as housing for senior citizens, then support for a new HBU becomes even stronger.

The appraiser who fails to grapple with the sort of fact pattern set forth above will be doing his client a disservice, and may generate an excessive valuation and an unduly heavy ad valorem tax burden for her client.

Pollack_Headshot150pxElliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley, LLC. The firm is the Connecticut member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
28

Going Green Shouldn't Increase Property Taxes

"Most experts suggest that the hard costs to go 'green' have come down significantly in the past couple of years, but in hotels, 'green' start-up costs (operational training and certification process) still present a financial challenge."

By Michael J. Shalley, Esq., as published in Hotel News Resource, April 28th, 2008

A key question remains: do the added start-up costs of going 'green' translate into higher property taxes for hotels? The answer is they can and here's how you can prevent it.

Eco-friendly operations and design have moved into the mainstream of real estate and changed the way the market approaches renovation and new development. Hotel owners and operators are now fully engaged in the 'green' movement, as they have witnessed the positive market response to these initiatives in other areas of real estate. Most experts suggest that the hard costs to go 'green' have come down significantly in the past couple of years, but in hotels, 'green' start-up costs (operational training and certification process) still present a financial challenge. A key question remains: do the added start-up costs of going 'green' translate into higher property taxes for hotels? The answer is they can and here's how you can prevent it.

The wider availability of 'green' materials, improvements in recycling, and additional experience in 'green' construction methods have resulted in a decrease in hard costs. Industry experts indicate that the actual hard costs for 'green' construction today just about equal conventional construction costs. However, the operation of 'green' hotels cause an increase in soft costs and raise numerous operational issues not found in 'non-green' hotels.

For example, experienced and certified 'green' consultants can be costly and need to be retained to guide the project through the dizzying array of 'green' credits required for proper accreditation.

On the operational side, managing a 'green' hotel takes a special skill set not found in most management companies, and those companies possessing the necessary skills cost more money. The additional costs to operate and maintain special mechanical systems such as water recycling systems, eco-friendly grounds and solar power create operational challenges for a 'green' hotel. These operational issues require specific training, marketing and documentation, all of which drive start-up costs higher.

From a property tax perspective, three components comprise a hotel property: the real estate, the tangible personal property (furniture, fixtures and equipment), and the operating business. The real estate and tangible personal property are the two components, and the only two components, that by law are subject to property taxation in most states.

Many tax assessors use the income approach to value hotels, and most recognize that certain income adjustments must be made in order to remove the value of the hotel's business for property tax purposes. Once specific business start-up costs for a 'green' hotel are established, appropriate adjustments should be made to the income model to remove: 1.) the costs associated with the 'green' business initiatives and 2.) the expected rate of return on the 'green' investments. When owners fail to remove these items from their hotel's valuation, the eco-initiatives that drive additional business value for the 'green' hotel can be inadvertently taxed as real estate value.

ShalleyMichael Shalley is Director of Appeals is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Shalley can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
11

Mass Appraisals May Lead to High Taxes

"Hotel owners and managers should resist attempts by the taxing authority to use short-cut methods to derive their valuation for property tax purposes."

By Mark S. Hutcheson, Esq., as published by Hotel News Resource, March 11th, 2008

Every year, most assessors across the nation face the daunting task of determining market value for every property in their jurisdiction. By virtue of necessity, they are required to use 'mass appraisal' techniques to value thousands of properties within a very short time frame.

When these mass appraisal short-cuts are used to value hotels, however, the results often yield widely inaccurate valuations for property tax purposes.

Wide-spread agreement exists within the appraisal industry that determining the tangible (taxable) value of a hotel is one of the most difficult tasks. The best minds in the appraisal community differ greatly on the proper way to segregate non-taxable intangibles in hotel valuations.

  • Capitalizing the trailing 12-months net income, but subtracting management and franchise fees as expenses.
  • Capitalizing net income and subtracting a percentage, usually between 20% and 30%, for 'business value.'
  • Applying a standard gross room revenue multiplier (GRRM) for each hotel type.
  • And, most simplistically, taking the year-end RevPar multiplied by 1,000, multiplied by the room count.

If these approaches yield a proper assessment, it is just by coincidence. Applying a standard adjustment for business value or a GRRM may yield acceptable values. But, an owner who accepts this kind of short-cut method in one year may face totally unacceptable values in future years when market conditions change.

Hotel owners and managers should resist attempts by the taxing authority to use short-cut methods to derive their valuation for property tax purposes. This calls for owners to perform an independent analysis every year by using market income, adjusting for the return on and of start-up costs and business personal property and employing appropriately determined capitalization rates. Such an analysis provides owners with the necessary data to begin discussions with the assessor for more accurate and equitable tax assessments on their hotels.

MarkHutcheson140Mark S. Hutcheson is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Hutcheson can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
08

New Approach Produces Hotel Property Tax Reductions

"Generally, the fee simple income approach has not been explicitly applied to hotel properties."

By Jim Popp, Esq., as published by Hotel News Resource, January 9th, 2008

A two step process has become the most common method used to value a hotel for property tax purposes. The first step calls for applying the income approach, which values the total assets of a hotel's business. The next step requires an allocation of the total assets of the business to segregate the real property, personal property and business enterprise components. Although this approach is well accepted in the appraisal community and the appraisal literature, it often draws opposition from property tax authorities. To address this opposition, the following alternative valuation method has been employed successfully in negotiations with tax authorities. Its success results from the fact that the approach is similar to the methodology tax authorities frequently use on less complex properties. That makes it easy to explain and tax authorities are comfortable with its use.

The key issue in this alternative valuation method involves the use of fee simple principles applied to the income approach. A distinction exists in the application of the income approach generally used for property tax purposes (the fee simple approach) and the application used for acquisitions, due diligence or financing considerations (leased fee approach).

In using fee simple, income parameters are developed from the overall market rather than from the specific parameters of the property being assessed. Specifically, the fee simple approach determines market rent/income and occupancy and utilizes these factors in developing market values. Conversely, the leased fee approach uses the actual rent/income of the property and the actual occupancy. The differences in resulting value may be significant.

The concept of the fee simple income approach has been generally applied and accepted with regard to office buildings, apartments, retail centers and similar properties and is uniformly used by tax authorities. They are familiar with its application and derivation. Generally, the fee simple income approach has not been explicitly applied to hotel properties.

However, several hotel owners and appraisers have successfully applied the approach to hotel properties. They determined the fee simple characteristics of the hotel in comparison to its leased fee characteristics and then made an adjustment to deduct the business enterprise component from the income stream.

Of course, the first step requires the taxpayer to determine the hotel's competitive set. Then, a review of the income attributes of the competitive set is conducted to determine such components as REVPAR, room rates and occupancy. The market place rate for these components should be determined and then applied to the taxpayer's hotel. For example, if the REVPAR of the competitive set equals $100 and the REVPAR of the hotel property comes in at $120, the income stream of the hotel for purposes of the property tax income approach should be adjusted to the market REVPAR of $100.

The result of this adjustment process produces the fee simple income approach value attributable to the total assets of the hotel's business. The next step calls for subtracting the remaining business enterprise value portion. The hotel's brand name represents the most significant business value component. Some, but not all of this was subtracted in the REVPAR analysis. The remainder of the brand name is removed in this step. In addition, deductions should be made for such business intangibles as work force in place, working capital and profit centers.

This alternative approach has been used successfully in the property tax trial of a major brand full service hotel. In point of fact, a most practical use of the approach lies in negotiations with tax authorities. The breaking of the process into steps provides tax authorities with a more understandable and comfortable approach under which to evaluate possible tax reductions.

JimPopp140Jim Popp is a partner with the Austin, Texas law firm of Popp Hutcheson PLLC. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Popp can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Dec
07

New Opportunity for Hotel Property Tax Reductions

"In 2001, the Appraisal Institute developed Course 800, to provide the theoretical and analytical framework for separating the tangible and intangible assets of operating properties."

By Raymond Gray, Esq., as published by Hotel News Resource, December 7th, 2007

Disputes over hotel property taxes continue to mount all across the country and basically for one reason. Taxing authorities attempt to include both the real estate and the non-real estate values in developing their tax assessments when the law states that property taxes can be levied against only the real estate.

The appraisal profession established standards requiring that real estate must be separated from non-real estate interests for valuation purposes. Although the message is abundantly clear, the separation and measurement of the value of the tangible and intangible assets of operating properties, such as hotels, has been a challenge.

In 2001, the Appraisal Institute developed Course 800, to provide the theoretical and analytical framework for separating the tangible and intangible assets of operating properties. In 2005, Course 800 was slated for updating by the Institute and should have returned to the Institute education schedule in short order.

However, it appears that the course was lost in the rush to redevelop the entire Appraisal Institute curriculum due to the significant change in required hours for licensing and certification mandated by the Appraisal Foundation. Thus, the course was not offered by the Institute, leading a number of taxing jurisdictions and their experts to claim that Course 800 had been repudiated by the Institute and that the principles of the course were inapplicable to hotel valuation. The key underlying principles included economic and business value concepts such as:

  1. Defining and describing the 'total assets of the business' as distinguished from the 'going concern' concept,
  2. Providing a methodology to segregate and value individual income streams associated with a business enterprise, and
  3. Defining and describing the concept of 'capitalized economic profit'.

The Appraisal Institute has recently contracted with several members of the original development team, plus a couple of new contributors, to update Course 800. The preliminary outline suggests much of the original content will be incorporated in the update, especially the economic principles and business value concepts. There will be more real property case studies - highlighting the fact that this is not a 'hotel valuation course', but a course on valuing each of the value components of an operating property. The new course, anticipated to hit the market in mid-to-late 2008, is likely to take the form of a two-day seminar.

Hotel owners and managers will benefit greatly from the 'new Course 800'. As the appraising and assessing community become better educated on the principles espoused in this updated course, property owners and managers will find even greater success in appealing tax valuations that include anything other than tangible property.

raymondgray154x231pxRaymond Gray is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Gray can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Nov
01

Reduce Property Taxes By Using the Cost Approach

"The use of the income approach in the face of increasing sales prices generated considerable push-back from tax assessors because of their discomfort with the resulting allocation of ever increasing amounts to the business enterprise portion of the going concern."

By Mark S. Hutcheson, Esq., as published by Hotel News Resource, November 1st, 2007

The valuation of hotels for property taxes has always been a difficult process. The increasing sales prices of hotel properties and increasing hotel REVPARs over the past several years have made the process even more difficult. The tax assessor response to these increases has resulted in ever increasing value for property taxes purposes and, thus, ever increasing tax bills. Hotel owners traditionally addressed property tax valuations through the use of the income approach. This calls for capitalizing the net income produced by the operating property and then allocating the value among the real estate, personal property and business enterprise components. The use of the income approach in the face of increasing sales prices generated considerable push-back from tax assessors because of their discomfort with the resulting allocation of ever increasing amounts to the business enterprise portion of the going concern.

Thus, many owners now find it useful to step back and approach the issue from a different valuation perspective. They often employ the cost approach, which has proven to be a useful tool in discussions with tax assessors. Over the last 10 to 15 years, the cost approach fell into disuse for valuing hotels for property taxes. Two factors influenced the decision not to use the cost approach: 1) Investors do not give much consideration to the cost approach in determining the purchase prices of hotel properties and 2) It is difficult to measure economic obsolescence attributable to the real estate. While both of these factors are correct, they do not negate the potential use of the cost approach.

A quick review of basic hotel cost information from Marshall & Swift (a recognized source of cost information for appraisers and tax authorities) may indicate whether the cost approach will be useful. This information shows that construction cost ranges from $84 to $139 per square foot for Class A limited service hotels to $99 to $195 per square foot for Class A full service hotels.

If the preliminary review of Marshall & Swift data reveals a potential for the use of the cost approach, a more detailed cost analysis may be in order. The cost approach is one of the three generally accepted approaches to value.

A traditional cost approach involves the following steps:

  1. Estimate hard and soft costs of the improvements.
  2. Estimate entrepreneurial incentive.
  3. Estimate accrued depreciation involving physical deterioration, functional obsolescence and external obsolescence.
  4. Estimate contributory value of land and site improvements.

These steps result in an estimate of the market value of the real estate portion of the hotel business's total assets. Generally, the cost approach is considered to represent the upper-end of value when appraising real property.

The following example demonstrates the usefulness of the cost approach as provided by a property tax appraisal of a full service convention type hotel. The appraisal valued the total assets of the business at $200 million and the cost prior to depreciation at $150 million. The appraiser ascertained that due to the size and location of the hotel, there were a limited number of potential operators. Consequently, his appraisal determined economic obsolescence at over $50 million. This resulted in significant tax savings for the owner.

Thus, owners should give careful consideration to the use of the cost approach for valuing hotels for property tax purposes. With profits at record levels and sales at historically low cap rates, the income and sales comparison approaches create difficulties for assessors. Since tax authorities are comfortable with the cost approach, which they use regularly on other properties, this approach is very useful, especially because a hotel's profitability is not a consideration under the cost approach and the approach necessarily excludes intangible business value.

MarkHutcheson140Mark S. Hutcheson is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Hutcheson can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Aug
02

Equal and Uniform Arguments Reduce Hotel Taxes

"Many state constitutions include language calling for equal and uniform property tax valuation. Unfortunately, only a few states actually have a statutory remedy to implement this goal."

By Jim Popp, Esq., as published by Hotel News Resource, August 2nd, 2007

The strong hotel market has resulted in a significant number of hotel sales at levels much higher than in recent memory. These high sales prices dramatically affected property tax officials, encouraging them to raise hotel assessments to ever increasing levels. Of course, the sales price of these properties result from a combination of real estate, personal property and business intangibles values. Knowledgeable owners, appraisers and property tax lawyers and even some tax officials understand that these sales prices do not represent market value for property tax purposes. However, tax officials often give in to the pressure of high sales prices and arguments relating to real estate market value fall on deaf ears.

Sales Activity Inflates Property Tax Values

Several factors account for tax officials' willingness and need to allow sales prices to impact them (commonly known as sales chasing). The first is that all hotel properties are judged by the sales of a few properties. The sales approach has become a fundamental basis of property valuation; however, it must be used with caution when applied to a complicated hotel property that includes several property value components. The phenomenon of the many judged by the few results in hotel properties tending to be valued at greater than market. The second factor relates to tax officials tendency to single out sold properties, causing them to be saddled with assessments higher than their competitors.

Taxpayers often experience difficulty addressing either of these problems directly using solely a market approach to property valuation. Overall this means recent sales activity tends to inflate property tax values.

Remedying the Impact of Sales Prices

Several states with more taxpayer friendly systems addressed sales price chasing by passing remedial legislation that focuses on the equality of property tax valuation. Many state constitutions include language calling for equal and uniform property tax valuation. Unfortunately, only a few states actually have a statutory remedy to implement this goal.

Texas for example enacted such a remedy. The legislation enables Texas taxpayers to challenge a tax valuation based on the traditional tax value in excess of market value. More importantly, they may also challenge based on the contention that the property is unequally appraised. Specifically, the statute provides that a property shall be valued for property taxes based upon the median level of appraisal of a reasonable number of properties appropriately adjusted. The appropriate adjustments are made to account for physical differences between the properties. The application of this remedy may produce a dramatic effect on property taxes.

For example, a hotel property recently sold in the range of $60 million. The tax official, in recognition of business value, appraised the property for tax purposes at approximately $50 million. This may have been some indication of the real estate's market value. The difficulty for the taxpayer came about because a competitive set of hotel properties were valued on a per key basis or per square foot basis at less than half of his property. The application of an equality remedy generated a 50% reduction in tax value, down to $25 million, which was comparable to the competition.

Testing for Tax Equality

Several tests of equality exist, which may prove useful to hotel owners in presenting their case for property tax reduction:

  1. The most basic test compares the per key value of the hotel with comparable properties in its competitive set. Tax authorities generally understand this approach. It makes sense, for example, that adjacent limited service properties that have similar physical characteristics should be valued on the same per room basis.
  2. The next test compares the tax value of the property on a per square foot value allocated among the components of the property. The square footage attributable to rooms, banquet and restaurant facilities, health club and spa and parking facilities is determined. The purpose here is to measure and compare the economic impact of various profit centers. For example, if two properties have an equal room square footage but one has a significantly larger banquet facility, the property with the larger banquet facility will be more valuable. The tax authority inclination to focus on per room values ignores this reality.
  3. Another very useful test is the ratio of taxable value to room revenue. Since many tax officials value property on an income approach using uniform deductions for business value across flags, this allows comparison of the property to the competitive set based on income. It should be noted, however, that this comparison does little to address the effect of flag affiliation on revenue.

These tests have proven effective in states with a specific equality remedy and often are at least considered in states without such a remedy.

Conclusion

The comparison of tax values on an equality basis is a very effective remedy. It addresses the practice of sales chasing. It holds in check the propensity to use high sales prices to raise property taxes across the entire market. It offers an understandable alternative to a purely excess market value argument. If your state has such a remedy, use it. If it does not have such a remedy, a legislative effort to obtain one will prove beneficial.

JimPopp140Jim Popp is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Popp can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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